The Commodity Surging Nearly 10% Gain This Week Alone
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The uptrend continues as the market looks to notch another week of gains, building off the run that has taken place over the past week or two. However, the sectors that were on top yesterday may surprise you, as these are typically the sector you’d expect to see topping the market when we are in a downtrend. Energy and Health Care both were up over 1% with energy stealing the show, up 4%.
With all that is going on in the sector we thought this sector has a little bit more in the tank, so we want to be sure to capitalize on anymore gains this sector could see. After the news dropped that OPEC plans to cut production by 1.16 million barrels a day, the energy market soared as the market expects higher prices for oil purchased by oil companies, and ultimately, higher prices for those at the pump.
Let’s dive in a bit more into this possible trade.
Energy Select Sector SPDR ETF (XLE)
The price of oil has continued to climb from its March low near $75 per barrel. Now, the price of oil is sitting just above a resistance level of $80 per barrel. If this price can hold and act as support, the price of oil should resume its trek higher, as the supply of oil is going to be cut as we approach the summer months, where demand usually increases.
With supply decreasing and demand increasing we would expect prices to rise. Bad for the consumer, good for us who are looking to go long oil.
Looking at the chart of /CL (ticker for crude oil futures), we can see that a clear channel has been formed with the price bouncing off the bottom trendline in what could be viewed as a reversal bounce. After approaching and breaking through a major resistance level, we were made to believe that this reversal could have some leg with the news from OPEC fueling the rally higher.
Since the rally looks solid and set to continue, we decide to look for a liquid Energy ETF to trade, the XLE is the perfect candidate. When looking for ETFs to trade, we often use some of the same funds each time based on what sector we are making a trade on. The reason for this is simple, we want to be trading an ETF that moves and that there are a good amount of other trades trading as well. So looking for an ETF with the most volume and liquidity is key to our style of trading.
The XLE is up nearly 10% in the past 5 days, so we should be patient with this trade, anticipating a potential pullback. However, if this trend remains strong and intact, a dip and rip type of scenario could be in the cards. This is what we refer to a price that has exceed a resistance level, but then temporarily comes back down to that resistance to test as support before surging higher.
From here on XLE, resistance should come at the exact price we are trading now, 87-87.50. Be mindful of this area and watch patiently to see what we do here. Remember, we could be in the early stages of this uptrend, but be mindful of a fake out. Do not just take a trade because you think the price is breaking out. Create a plan for your trade, determine your risk, and then enter the trade when you see two or more confirmations, this is how you set yourself up for long-term success in trading.
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I look forward to trading with you, but until then, as always…
