Energy sector trade update: So far so good

The article ‘Energy sector provides decent trading opportunity’, published last week, outlined a potential trading opportunity in the energy sector ETF XLE. The fund had broken out above a key resistance level and established a well defined uptrend. Now however, the fund has begun to advance strongly and it’s time to safe-guard our profit.

From the middle of February to the middle of April the energy sector lagged behind the wider S&P 500 stock index. However, it has since begun to outperform the S&P, and recently broke out above previous overhead resistance.

Last week’s article showed the following chart, noting that, “the technical setup suggests that it (XLE) now provides a decent trading opportunity with a defined exit point should the trade fail to work out”.

A 3 month (2 hour) chart of Energy Select Sector ETF (XLE) (Click on the chart for a larger version)

A 3 month (2 hour) chart of Energy Select Sector ETF (XLE) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

As the latest chart below shows, for a couple of days following the publication of the article the fund drifted sideways until it tested the lower blue trend line (circled). Beginning on Friday however, it then began to rally strongly.

A 3 month (2 hour) chart of Energy Select Sector ETF (XLE) (Click on the chart for a larger version)

A 3 month (2 hour) chart of Energy Select Sector ETF (XLE) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The fund, which holds companies such as Exxon Mobil, Chevron and Conocophillips, looks to have benefitted from the recent rebound in the price of oil. However, regardless of the catalyst, the strong bounce off the lower trend line reinforces the bullish trend and makes this a prudent time to raise stops and safe-guard our profit.

This trend following style of trading does not use price targets or other predetermined exit points, and rather stays with the trend until it reverses. A short-term, minor dip below the lower blue trend line would not trigger an exit from the trade, however a decisive break of the trend line would. A drop in the price below the 45-day moving average (red line), would also mean that the trend was over.

With this in mind, a sensible place to move the stop loss to is around 80.70.

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