Energy stocks have been a whack-a-mole game lately – every time they start to bounce, they get whacked back down again. This has been going on throughout 2017, as oil-related exchange-traded funds (ETFs) continually meet stiff selling pressure on rallies. The downtrends continue, and lower prices are currently expected. Based on the technicals, let’s look at the downside price targets as well as what it will take to break these ETFs (and the oil stocks they track) out of the downtrend.
The Energy Select Sector SPDR Fund (XLE), which invests in energy-related stocks included in the S&P 500 index, is down 13.64% year to date (YTD). The price has been dropping in a descending channel, and in June and July, it dropped below major swing lows from last June. These are bearish signals, pointing to further declines. In 2017, the price has been bouncing off the bottom of the descending channel, currently intersecting near $62. That’s the next downside price target. (For more, see: Energy Funds Testing 2017 Downtrends.)
Prices of $67.55 to $67 have acted as a short-term resistance area for XLE over the past two months. If the price can rally above that, it will have definitively broken the descending channel, and a short-term rally is possible. A rally back above $78 isn’t likely (before a drop below $63) at this point, but an upside target at $71.75 is reasonable, and with a strong push, a very aggressive target could be placed at $75. While a rally is likely at some point, XLE is more likely to give way to selling rather than push to new highs. In other words, a lot of caution on the longs is warranted.
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is down 25.59% YTD, and the ETF is also dropping in a descending channel. The price tested channel resistance between $33 and $33.68 multiple times in June and July, which ultimately gave way to selling pressure in early August. Based on the descending channel, the price is likely to continue dropping below short-term support at $30. The next downside target is $28. (See also: An Energy ETF Draws Negative Attention.)
XOP’s price will need to break above, and close above, channel resistance ($33.68) in order to indicate any sort of bullishness. A short-term upside target, if that situation develops, is $37. A very aggressive target, which would require oil and the other energy ETFs to see a strong rally as well, is up near $40. However, even if a rally does develop, XOP is currently in a long-term downtrend overall, meaning that it likely won’t rally to new highs before dropping lower again.
The VanEck Vectors Oil Services ETF (OIH) is down 30.13% YTD and is nearing its 2016 lows. Even with the selling that has already taken place in July and August, the ETF still has a ways to fall before reaching the price target at $22 to $21.75 (bottom of the descending channel). The 2016 low was $20.46. That 2016 low could act as a support area, so taking profits on short positions just above that level (or implementing a trailing stop-loss) may be prudent. (For more, see: Decent Oil Services Earnings Fail to Perk Up ETFs.)
As with the other ETFs mentioned, there isn’t much to be bullish about regarding OIH. It will take an uptick, and closing prices, above $26.38 to signal that a short-term rally is commencing. In that scenario, traders should look to take profits at $29, and if the price keeps moving above that, then the next target would be at $31. This ETF is in a downtrend, so the next rally is likely just a reprieve that will ultimately give way to more selling.
The Bottom Line
These energy equity ETFs are still looking grim. While a trend can change at any time, given the strong selling that these ETFs have been experiencing, it is unlikely that they will be able to bounce back quickly. There are a lot of scared buyers in these stocks and ETFs that are taking any opportunity (a bounce) they can to sell. Even if rallies do occur, they are likely to be followed by another wave of selling. The technicals indicate that it will take several months or more for these ETFs to build bases from which they can start a meaningful rise. (For additional reading, check out: These 3 Energy ETFs Are Starting to Look Bullish.)
Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the ETFs mentioned.