Energy-related commodities moved sharply lower during the broad market sell-off in early February, but recent price action is now suggesting that traders are starting to take notice again and that a sharp move higher could be in the cards. In this article, we take a close look at energy-related exchange-traded funds (ETFs) and a top holding to determine how traders will likely look to position themselves over the weeks ahead. (For a quick refresher, check out: 3 Charts Pointing to Higher Commodity Prices.)
With the rise in popularity of exchange-traded products, it is now possible for retail investors to gain exposure to commodities such as West Texas Intermediate (WTI) crude oil without the requirement of having a futures trading account. One of the most popular products for trading WTI is the iPath S&P GSCI Crude Oil Total Return Index ETN, which was designed to track the performance of an unleveraged WTI futures contract.
Taking a look at the chart below, you can see that the price tested the support of a key ascending trendline, and the resultant bounce was confirmation that the bulls are in control of the long-term trend and that a move toward the previous high near $7.50 would be likely. Active traders will also be taking note of the bullish crossover between the moving average convergence divergence (MACD) and its signal line because this common buy signal will likely trigger a surge in momentum and lead to a break above the resistance and generate a further run higher. (For more on this topic, see: Top 4 Oil Stocks for February 2018.)
Another popular energy-related exchange-traded product that retail investors tend to follow when it comes adding exposure to companies in the oil, gas and consumable fuel as well as the energy equipment and services industries is the Energy Select Sector SPDR Fund. From a fundamental perspective, this fund carries a gross expense ratio of 0.13%, has total net assets of $17.8 billion and has 32 holdings in its portfolio.
Taking a look at its chart, it is interesting to note that the price is currently trading near the support of its 200-day moving average, which is one of the key levels of long-term support that traders use when gauging the conviction of the long-term trend. Given how the price action has managed to stay above the support level, it suggests that the bulls are interested in taking a position to make the best of a risk/reward scenario that has not been possible for months. Traders will also use the bullish crossover between the MACD and its signal line to act as confirmation of a move higher, and most of them will likely set their stop-loss orders below $67.15 in case of a sudden reversal. (For more on this topic, check out: Energy Stocks Rise From the Ashes on Oil's Surge.)
When it comes to energy investments, the 800-pound gorilla is undoubtedly Exxon Mobil. With a dividend of approximately 4% and a retracement toward a key long-term level of support such as the 200-day moving average, some position traders are looking at the recent sell-off as one of the best opportunities to buy since late summer 2017. It is clear from the chart that the sharp drop that occurred in early February over a short few days erased the gains that were made in slow steps for months prior. The rise in fear offered strategic traders with an ideal entry point, and the recent crossover between the MACD and its signal line is now suggesting that the price could be poised to retake more of the losses. (For more, see: Exxon Mobil May Rise 20% on the Back of Surging Oil.)
The Bottom Line
Energy was a sector that was thrown out with the bath water in early February. The sharp declines offered active traders with ideal entry points near key long-term levels of support. In recent days, the bounce off of the support has triggered a buy signal on the MACD indicators, and many traders are looking to these signs as catalysts for continued moves higher. (For more, see: 5 High-Quality Oil Companies to Consider Right Now.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.