There’s a big move higher brewing in the energy sector, according to the charts
Any time the State Street Energy Select Sector SPDR Fund (XLE) rallies, three questions arise: Is this move more than a short-term bounce? If so, how long can XLE outperform the S & P 500? If relative strength versus the S & P 500 persists, does that imply broader equity market weakness? We’ll address each of these today, while also highlighting one of the potentially largest and most important pattern breakouts in the energy sector of the last 50 years — in one of the most recognizable stocks in the market. XLE Energy: testing channel resistance First, let’s look at the daily chart. As shown here, XLE has rallied strongly since mid-December and has now pushed back up to — and through — the upper boundary of its rising trading channel. If XLE can stay above that prior resistance zone, it would mark a clear change in character. All prior rallies since the April low failed to clear this same line. In fact, every short-term consolidation was used as an opportunity to sell or take profits. If investors now demonstrate a willingness to buy at higher prices, this most recent bounce has the potential to last longer than previous failed attempts. Breaking above a two-year downtrend line Turning to the weekly chart, this latest bounce has pushed XLE above a key downtrend line drawn from the early-April all-time highs. The last time this trendline was tested was in late 2024, when it clearly marked a top. With price now decisively above that line, this provides another piece of evidence that the current rally attempt is more constructive at this stage. XLE vs SPX: just the start The question now is whether the recent performance can turn into something more material. As this relative chart vs. the S & P 500 shows, energy has been consistently underperforming the S & P 500 since late 2022. Highlighted in green is the most recent bounce to start the year, which is barely detectable within the context of this long-term downtrend. In fact, there have been at least four prior periods over the last two-plus years that lasted longer and delivered better relative gains. As a result, there is still a lot to prove before concluding that this time is truly different. XLE vs SPX: two long periods of outperformance Going all the way back to the start of 2000, there are two distinct periods when Energy delivered extended stretches of outperformance. The first ran from late 2003 through early 2008, and the second from late 2020 through late 2022. Needless to say, 2008 and 2022 were both difficult years for the S & P 500, which helps explain why Energy was able to stand out on a relative basis during those periods. However, that’s not the full story. XLE vs SPX: the SPX can still advance when XLE leads The most important point is this: Bear markets did not occur until much later in both of those periods when XLE outperformed the S & P 500. In fact, during the 2003-2008 stretch, XLE leadership coincided with the S & P 500 being in a persistent uptrend for the majority of that run. More recently, XLE’s outperformance versus the S & P 500 began in late 2020, while the S & P 500 itself continued to rally through the end of 2021. The takeaway is that if XLE is indeed on the verge of another extended period of outperformance, it does not automatically imply that the S & P 500 must decline as a result. Every cycle is different, but it remains a thought-provoking historical perspective. The biggest pattern breakout of the last 50 years Lastly, the largest component within XLE is Exxon Mobil (XOM) . As shown on the quarterly chart, XOM had been stuck in a broad trading range for roughly three years before breaking out to new all-time highs this week. From this longer-term perspective, this breakout now makes the past several years look like one, big continuation pattern, rather than a topping process. Importantly, this breakout is significant on a multi-decade basis, as shown on the 50-year chart. Historically, when XOM has broken out to new highs, it has seen immediate upside follow-through, with those prior extensions often lasting for years. Given the size of the base that formed from 2007 through 2021—by far the largest of its kind—the case can be made that XOM is in the very early stages of a multiyear advance, rather than experiencing a short-lived breakout. — Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: None. 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