Entering XLE (Energy)

So the XLE has gotten back above an important resistance level and is poised to close at multi-year weekly highs. If you recall, during the recent market correction, I closed our position in the XLE due to what I felt were higher risk circumstances. However since that time, oil has broken out from a multi-year triangle formation and has been steadily moving higher, lifting the entire energy sector along with it. Now some may say that oil has run too far and we are buying into a hot run in Energy. While there is some truth to those statements, we are not in the business of trying to guess the future, we simply follow what price is telling us; right now price is saying that Energy is ready to make new recovery highs very soon.

This is what we like about the XLE. Steady uptrend and lots of higher lows. A breakdown of that pattern would be our signal to exit. This was also my primary road map in our previous trade, except I tried to get to cute and anticipate a move lower (thats why we should always do our best to stick to our stops and not make emotional decisions). I said it in a previous post that, its ok to be wrong, ITS NOT OK TO STAY WRONG. Energy is showing us that our sale was wrong and that its time to right our wrong.

Now this entry is not without some risk. A couple things that I will need to see resolved to be more comfortable with this position will be a stronger move by the Relative Strength to prove its outperformance vs. the SP500. I would also prefer to see a little more volume on a potential breakout like we are seeing today. But price leads and we will defer to that for our initial entry here.

The Relative Strength has broken out of its long-term downtrend, but shorter term its been meandering around just below the downtrend line shown above. If this were to weaken significantly from here we would be inclined to exit. Also you can see the volume that is coming in on this move today...Not very impressive, and potentially hinting at a lack of conviction. But price has rallied back above the prior lower high and has broken the downtrend. With such a defined uptrend in place, I feel that its worth a buy and has a reasonable risk/reward.