The Energy Select Sector SPDR ETF (XLE) was the worst performing sector ETF in September. This is nothing new, as it’s also the worst performing sector year-to-date (up just 7.8%). Those two bearish stats alone are enough to cause many investors to look elsewhere for potential trades. Indeed, buying stocks and ETFs that have been breaking out to new highs has been rewarded often in 2024. Case in point, of the top 20 stocks in the S & P 500 this year, only one of them currently is more than 3% below its 52-week high (Nvidia). Conversely, 14 of 22 energy names are more than 10% below their respective 52-week highs. Indeed, looking for relative strength by scanning the new high list has worked well, but ignoring the rest of the market could cause us to miss potential opportunities elsewhere. The XLE ETF (and many of its holdings) has been trying to etch out a bottom for a number of weeks, and the charts we’re reviewing today suggest that momentum finally could be turning positive. Testing the trendline Let’s first look at this daily chart. XLE has been making lower lows and lower highs since peaking in March. It’s made a few solid attempts at breaking the pictured trendline, but each effort has been prematurely snuffed out. Thus, XLE’s downtrend has persisted. We’ve seen this before. In fact, two other downtrends pictured here look extremely similar to the current one. Both prior times, eventually logging a higher low gave XLE the firepower it needed to finally punch through a key downtrend line. XLE then extended both breakouts for multiple months . XLE, again, now has formed a necessary higher low. The strong start this week has put XLE right at the line. The next step, of course, would be puncturing the line. Once that happens, it will be important to watch how its 14-day RSI reacts. If the indicator finally can extend beyond the mid-range near 50, it would tell us that momentum is confirming the move. That happened during the past two rallies, as well. Multi-year uptrend Considering the erratic movement since 2023, it feels like XLE has been stuck in one big trading range. That’s true but zooming out shows us a much different picture. XLE actually has been making higher lows ever since bottoming at the COVID lows in 2020. Recently, the higher lows have been marginal, but considering that we haven’t seen a material lower low in nearly five years, it’s noteworthy. Said differently, buying weakness in an uptrend has been rewarded eight prior times. Thus, if it were to work again this time, it wouldn’t be anything new. That increases our conviction in wanting to buy XLE. Impending two-decade breakout The (very) big picture shows us just how significant the next rally could be for XLE. Despite finishing lower in September, XLE bounced 5% from its monthly low. That low point was near the trendline that is part of this potential three-year ascending triangle pattern. The ETF tried to break out from this same pattern this past spring, but that effort ultimately failed. We can see why – the area between $90 and $100 houses its last two all-time highs from May 2008 and June 2014. If/when XLE can make it through that range, it will start popping up on screens that are searching for breakouts to new highs. Given the shorter-term setup discussed above, we’re now aware of how that could happen and how significant it would be. -Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
