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Energy Stocks Are Defining a Base. Here are Three Tickers for Traders

By:Christopher Vecchio - CFA

Fundamental and technical indicators imply an imminent uptrend in two energy ETFs and one well-positioned oil refining stock

  • Both /CL and /NG have been exhibiting atypical price action relative to the past few months of range-bound trading.
  • Stability and strength in energy commodities should translate into a favorable environment for related equities.
  • CRAK, XLE and XOP are all showing signs of basing, potentially signaling the start of an uptrend through the remainder of 2023.

Year-to-date price percent change chart for /CL, XLE, XOP, and CRAK
Year-to-date price percent change chart for /CL, XLE, XOP, and CRAK

Market Update: XLE down 3.85% year-to-date

Conditions in energy markets are changing. Price ranges that have been reliable for large portions of 2023 appear to be breaking. This may be due, in part, to shifting fundamentals of the supply/demand dynamic underlying oil prices: The crude oil prompt spread has reached its highest level since November 2022. And with the fewest net-longs held by speculators in the futures market since 2001, there is ample room for traders to pile into positions to push prices higher.

Yet, if crude oil prices are getting ready to move higher, /CL may not be the best way to express this view. Instead, turning to the equities market may be more appropriate. After all, as crude oil prices rallied over +70% to their 2022 highs last year, they finished up by only 6.71%. But XLE, the Energy Select Sector exchange-traded fund (ETF), closed out last year with a 57.6% gain.

Energy bulls vs. bears

If you’re an energy bull, the individual stocks and ETFs have been more reliable to the upside, whereas if you’re an energy bear, the commodity itself has been a better vehicle over the past year. And now that crude oil prices are exhibiting signs of breaking out higher, it may be time to turn our attention back to XLE, XOP and CRAK. In other words, it may be time to be an "oil man” again.

XLE Price Technical Analysis: Daily Chart (July 2022 to July 2023)

XLE chart

XLE has been consolidating into a symmetrical triangle for the past 12 months. The start of July produced a breakout from the downtrend off of the January and April swing highs, and the subsequent pullback saw the former trendline resistance hold up as support. The momentum profile has improved, with moving average convergence/divergence (MACD) trending higher above its signal line while slow stochastics have moved back into overbought territory. A return to the April high at 87.74 is the next hurdle to clear.

XOP Price Technical Analysis: Daily Chart (July 2022 to July 2023)

XOP chart

XOP has a similar technical structure to XLE, but due to weighting differences between the two exchange-traded funds (ETFs), similar does not mean the same: XOP has already achieved its April high at 135.90, following its symmetrical triangle breakout. If anything, this serves as contemporaneous evidence that energy sector ETFs are well positioned in the near-term. The momentum structure is a bullish flush (MACD, slow stochastics and moving averages all in bullish order); clearing 135.90 opens the door for a move above 140 in the near-term.

CRAK Price Technical Analysis: Daily Chart (April 2022 to July 2023)

CRAK chart

A symmetrical triangle

CRAK tracks refiners, not producers, like XLE and XOP. Nevertheless, as with its two energy sector ETF brethren, the technical signposts are suggesting the path of least resistance is to the upside. CRAK is racing toward its April high at 32.55, beyond which the March high at 32.66 comes into focus. Big picture: CRAK remains in a symmetrical triangle that began in June 2022, and triangle resistance comes in closer to 33.75-34 over the coming weeks. Should CRAK overtake this zone before the end of August, a return to the all-time highs near 36 would become the key focal point through the remainder of 2023.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multi-national firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx 

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