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Talking Technicals On This Energy ETF

ETF Professor

The Energy Select Sector SPDR (NYSE: XLE), the largest equity-based energy exchange traded fund, is up almost 4% this month and ahead of the sector's big-name earnings reports, some traders see opportunity with the bellwether energy ETF.

What Happened

The $12.44 billion XLE holds 29 stocks and follows the Energy Select Sector Index. XLE “seeks to provide precise exposure to companies in the oil, gas and consumable fuel, energy equipment and services industries,” according to State Street.

What investors are getting with XLE is a proxy on Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX). The two largest U.S. oil companies combine for nearly 43% of XLE's weight, according to issuer data.

Why It's Allure

If XLE can rally another 2.1% to get back to the $65 area, the fund would reclaim its 200-day moving average, a positive technical sign, and it's the ETF's technicals that have some market participants acknowledging the fund's near-term potential.

“This is a technical setup, nothing more,” said Rareview Macro founder Neil Azous in a recent note. “The dominant classical charting pattern for the S&P 500 energy sector is an 8-week reverse head & shoulder pattern on the daily chart.”

Month to date, XLE is trailing the VanEck Vectors Oil Services ETF (NYSE: OIH), but is beating the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP). Azous points out that XLE is a more compelling technical story than either of those ETFs.

“Numerous interlocking technical patterns with the reverse H&S pattern include a symmetrical triangle dating back to the October 2018 high and the 100- and 200-day moving averages,” said Azous. “Note, these same observations do not exist in XOP or OIH. The technical setup is confined to the integrated large cap space.”

What's Next

While the talk is about XLE's technicals, what's next is an epic fundamental test in the form of Exxon and Chevron's second-quarter earnings reports, both of which will be delivered on Friday, Aug. 2. Year to date, investors have pulled $2.67 billion from XLE.

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