What's Next For U.S. Energy Sector?

While energy continues to outperform on a YTD basis, the past week has seen the sector fall back along with the broader market. 

There are, of course, any number of ongoing risk scenarios for this, but the event that has been singled out as causing the latest swoon is Fed Chair Jay Powell’s comments that a half percent rise in interest rates is ‘on the table’ for the May meeting.

However, given the strength of the energy sector as reflected in the Energy Select Sector SPDR Fund (NYSE:XLE), I thought this would be a good time to consider the charts from a volume price analysis perspective to see whether the sector has reached a technical pause point or whether a deeper correction is on the horizon. 

And for this, we need to consider the VPA picture in the slower timeframes.

XLE Daily Chart

The first chart I want to consider is the daily, where we can see clearly the index climb higher.

I have drawn in some trend lines to capture the price channel and highlight how volume validates the price action. However, the markers can also help to confirm whether the trend is likely to continue higher at significant support levels and zones.

The down candle we see on the chart is the result of Powell’s comments. The markets have since continued to fall heavily. For the XLE, this has meant the price action is moving towards the volume point of control, which sits at the $76 region, a strong support level where it had paused at the time of writing.

XLE Weekly Chart

Moving to the weekly chart: the trend higher is even more pronounced. Once again, we have substantial volume coming in at the intersection/confluence of the trend line, the volume point of control and the Camarilla pivots. Still, it will be the volume at the close that will determine whether the current pullback turns into a full-blown reversal.

XLE Monthly Chart

But it is the monthly chart that is the most interesting from a VPA perspective, which I have annotated accordingly and is self-explanatory.

In summary, this is the current technical picture for the XLE, to which we should also add some fundamental points to see if they will influence whether the XLE breaks high and hold above that obstinate $80 level.

• First, will increasing inflation keep driving the XLE higher as the energy sector often does well in an inflationary environment and is also used as a hedge?
• Second, given the heavy weighting of oil producers in the XLE, will the proposed increase of supply in May by OPEC, along with the release of 1 million barrels a day of oil from the U.S. Strategic Reserve cap or reduce gas and energy costs, ease the inflation burden for consumers?
• Third, the lack of progress may be that traders and investors are simply on the sidelines, waiting to see whether this additional supply has the desired effect.