Energy bulls have been missing in action on Wall Street over the past 12 months amid slumping oil and gas prices. They reentered the arena in early June as fears of slowing global economic growth were somewhat alleviated when Federal Reserve Chairman Jerome Powell hinted that the central bank was prepared to cut interest rates if needed to offset trade war damage.

The red flag causing a stampede was finally waved on Thursday, June 20, when reports surfaced that Iran – one of the world's largest oil producers – shot down a U.S. drone, escalating tension between the two countries, which already sit on a knife edge after Washington earlier this month blamed Tehran for an attack on two oil tankers near the Persian Gulf.

As a result, crude oil for July delivery (CL=F) jumped 6% to trade just shy of $57 per barrel, up roughly 35% from its late-December 52-week low of $42.36. After the incident, U.S. president Donald Trump tweeted, "Iran made a very big mistake," adding fuel to the oil rally, per Barron's.

Traders can gain exposure to soaring energy prices using these three exchange-traded funds (ETFs). Each broke above a short-term downtrend line in yesterday’s trading session, suggesting that the bulls may have plans to take prices higher as tensions between the United States and Iran continue to mount. Let's discuss each fund in more detail and work through some trading ideas.

First Trust Energy AlphaDEX Fund (FXN)

With assets under management (AUM) of $136 million, the First Trust Energy AlphaDEX Fund (FXN) aims to provide similar returns to the StrataQuant Energy Index. To achieve this, the ETF invests at least 90% of its assets in components of the underlying index. The fund tries to pick winning stocks by employing a quant-based model and tiered weighting scheme. FXN offers overweight exposure to exploration and drilling companies, allocating 51% of its portfolio to the industry. Integrated oil and gas firms receive an underweight weighting of 4.86%. The ETF keeps trading costs down with a narrow 0.09% average spread and daily trading volume of over 130,000 shares. As of June 21, 2019, FXN charges a 0.63% management fee, issues a 1.46% dividend yield, and has fallen nearly 11% over the past month.

Although FXN remains entrenched in a long-term downtrend, recent price action indicates the formation of a possible double bottom. The bears couldn't keep prices locked beneath the late-December 2018 low, which now makes this area on the chart a significant support level. In another sign of waning seller momentum, a bearish divergence has formed between price and the relative strength index (RSI); i.e., the price made a lower low while the indicator made a shallower low. Thursday's breakout above a two-month trendline may act as a catalyst for further upside. Traders should anticipate a move up to the downtrend line at $12.75. Those who take an entry should place a stop-loss order under the June 18 low at $10.76.

Chart depicting the share price of the First Trust Energy AlphaDEX Fund (FXN)
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Invesco Dynamic Energy Exploration & Production ETF (PXE)

Launched in 2005, the Invesco Dynamic Energy Exploration & Production ETF (PXE) seeks to return comparable investment results to the Dynamic Energy Exploration & Production Intellidex Index. The tracked benchmark selects components from the U.S. energy exploration and production industry using a tiered weighting methodology. The $33.73 million fund's top three allocations include Valero Energy Corporation (VLO) at 5.42%, EOG Resources, Inc. (EOG) at 5.33%, and Marathon Petroleum Corporation (MPC) at 5.32%. An average spread of 0.31% may be a little wide for trying to catch small intraday moves but shouldn't be an issue for swing traders who can let profits run to cover slightly higher trading costs. PXE offers a 1.40% dividend yield, controls net assets of $33.73 million, and has slumped 10.30% over the past month. Investors pay an annual management fee of 0.65%.

Like FXN, PXE appears to be forming a double bottom. The fund's price has rallied from major support at $16, breaking above a short-term downtrend line in the process. A recent bullish cross of the moving average convergence divergence (MACD) line above the signal line confirms upside momentum. Further, the RSI shows a reading below 50 that gives price ample room to test higher levels. Those who take a long position should set a profit target near $19, where the fund may encounter resistance from a long-term downtrend line that extends back to October 2018. Set a stop under yesterday's low, or this month’s low, depending on risk tolerance.

Chart depicting the share price of the Invesco Dynamic Energy Exploration & Production ETF (PXE)
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Invesco DWA Energy Momentum ETF (PXI)

The Invesco DWA Energy Momentum ETF (PXI) attempts to follow the performance of the Dorsey Wright Energy Technical Leaders Index – a benchmark that comprises U.S. energy firms selected and weighted by price momentum. The fund, which gives traders a smart-beta option for tackling the oil and gas space, tilts toward large- and small-cap exploration, refining, and drilling stocks. PXI's top 10 allocations carry a cumulative weighting of 35% in a portfolio of 40 holdings. The ETF has average dollar-volume liquidity of $171,000 and minimizes slippage with a 0.10% spread most days. As of June 21, 2019, PXI has AUM of $41.1 million, pays a 1.29% dividend yield, and is down 6.04% over the past month.

After drifting sideways between February and April, the PXI share price recommenced its downtrend through May, giving in to lower energy prices brought about by fears of slowing global economic growth. The fund's price started to recover in early June, gathering further momentum in Thursday's trading session as news of the shooting down of a U.S. drone by Iran hit news wires. Traders who buy yesterday's breakout should consider taking profits around $33, where the price finds a confluence of resistance from a horizontal trendline and the 200-day simple moving average (SMA). Position a stop below $27.50 to protect against a sudden reversal in price.

Chart depicting the share price of the Invesco DWA Energy Momentum ETF (PXI)
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