XOP in Focus as Oil Climbs

| About: SPDR S&P (XOP)
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By Stoyan Bojinov

Wall Street soared higher yesterday, thanks in part to a broad rally in the tech sector fueled by positive earnings reports from industry leaders. Investors were happy to see existing-home sales climb just past expectations for March and U.S. construction data also showed a better-than-expected increase in new building permits. Intel (NASDAQ:INTC) reported stellar earnings and shares jumped more than 6% after the tech-giant reported a huge jump in PC microchip sales when the industry was surely expecting a decline. A weak dollar in the currency markets coupled with disrupted production in the Middle East sent oil futures past $110 a barrel. Gold surged higher past the $1,500 level and silver joined along for the ride with futures prices topping $45 an ounce. Grains advanced broadly higher as well with soybeans leading the way, while cotton surprisingly shed over 1% during trading.

Oil currently presents an interesting opportunity after prices took a quick plunge earlier this month on April 11th, dropping from a recent high of $113.46 to just above $105 a barrel. Since then light sweet crude oil futures for May 2011 have established support above the $105 level, and yesterday they broke out past $110. Short term technical indicators are suggesting that oil prices will likely climb back to their recent high and even top $115 in the coming weeks.

Technical Analysis: S&P Oil and Gas Exploration and Production ETF (NYSEARCA:XOP)

Investors interested in gaining exposure to energy equities should take a look to a State Street product offering exposure to exploration and production companies. The Oil and Gas Exploration and Production ETF (XOP) tracks the S&P Oil and Gas Exploration and Production Select Industry Index, a benchmark comprised of about 70 companies diversified across small, mid and large market-cap levels and primarily based in the United States. While this fund’s performance is by no means perfectly correlated with the price of oil, it still serves as a great proxy and it makes for an excellent investment vehicle for those interested in establishing long exposure within the energy sector. Consider the one-year daily chart of XOP below.

Click to enlarge

Notice how the fund triple-bottomed right above $37 a share at the end of May, beginning of July, and at the end of August in 2010. Since then this ETF has climbed higher and higher, only dipping occasionally to take a breather. The fund's last significant correction was in March of 2011 (2/28-3/11), during which the price peaked at $62 and retracted back down to just below $57 a share. Notice how the Fibonacci retracement drawn from the last trend “peak-to-low” almost perfectly predicted the top for this most recent uptrend. The 161.8% retracement level was projecting for the fund to hit $65.81 a share, while it actually hit $65.76.

Since falling from its recent high of $65.76 a share, XOP appears to have established support above the $60 level. The fund has also jumped back over its 50 day moving average (blue line) suggesting its back on track to climb higher, just as it bounced off its moving average after the last correction on March 11th.

Technical Outlook

Applying the same Fibonacci retracement technique used in the chart above, we can project the levels that XOP will likely climb to assuming that its current uptrend remains intact. The retracement starts at $65.76 (April 6th) and extends down to $59.44 (April 12th).

As you can see, the first level of resistance comes in at the previous high just under $66 a share. It likely that XOP will retest this high in the coming weeks and if it manages to break out above it, the next probable level of resistance is the 161.8% retracement level just under the $70 mark. Those who are conservative can wait for another green bar on the daily chart, which would give them a two-day confirmation that XOP is in fact resuming its uptrend above the 50 day simple moving average. Also, the fund’s 200 and 50 day moving averages are both sloping higher and Stochastic Momentum Index is signaling that XOP is due to rebound from current oversold level.

A daily close below the previous low of $59.44 a share would call for re-assessment of the current uptrend. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

Disclosure: Author holds June 65 Call.

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