Energy & A Catalyst

If you’ve studied any technical analysis, you are likely familiar with the concept of relative strength. Just in case you are not familiar with it, the concept is just how strong is one stock or ETF relative to another. There are multiple ways to gauge relative strength. One of the quick ways I do that is through a simple weighted rate of return. My watchlists display the weighted return so I can easily sort the list. When sorted by weighted return, I’ve sorted by one measure of relative strength.

The first chart today is a longer-term view for XLE, the SPDR Energy Select ETF. When I sort the 11 sectors of the S&P 500, tech is the clear winner. Energy sits in that #2 spot. So, I want to explore that further.

Dating back to at least 2023, the energy sector has really gone nowhere. There’s been some short periods of volatility but look at the black line. The black line is the 200-day moving average and it’s pretty flat. So, generally speaking, the energy sector has been trendless for several years.

On the right side of the chart, I’ve added a circle. Clearly there was a catalyst. Now there’s a trend.

Sponsor Message From Author, C. Theodore Hicks II, CFP, CKA, CMT:

Energy Opportunity Ready?

Now, let’s zoom in and look examine XLE a little closer.

After the catalyst (the war with Iran), XLE rocketed higher. If you are buying merely based on relative strength, you might hop on that trend. However, in our view, the trend needs to establish itself a little first. A strong month does not mean we have a strong trend. Nor do two strong months. So, how long do you wait until you buy that trend?

Had you bought into this on the first trading day of March due to the recent strength, where are you at now? A close look at the chart and you’ll see you are up about 2.4% since March’s open ... but you’ve experienced a lot of volatility with that blind relative strength purchase.

Coiling Up

If memory serves me correctly, I started my CMT training 10 years ago. So, forgive me if I don’t remember which CMT curriculum taught this, and I know the curriculum has changed since.

[Quick side note, the fact that the CMT Association is changing their curriculum is an excellent sign. In my book, Evidence-Based Investing, I spend some time walking the reader through some of the leading financial theories that still govern our industry ... but those theories do not work. So, why are they still being taught? So, my hats off to the CMT Association for constantly tweaking the content to teach what’s relevant.]

On the right side of the chart, you should see what I believe my CMT studies called “coiling”. Others – notably Mark Minervini – calls this a Volatility Contraction Pattern. Same concept. Price is “coiling” tighter and tighter. Think of a spring that you are compressing.

From March 30th to April 17th, the price action varied ~16%. That’s pretty wide. Then, from the highs of April 30th to May 7th, price action varied only ~8%. That’s getting a little tighter. As XLE approached the April 30th highs again, we were watching but we did not buy. We felt the price needed to contract at least one more time. But initially, it looked like we may have missed it.

Nope. From May 19th to May 29th, price contracted about 9%. Currently, we are looking at a width of about 4%. That’s pretty tight. You see the price alert (green dashed line). If price hits that level, we might be buyers. In this high volatility environment, we might also just let it pass. But XLE will definitely be on the Investment Committee agenda this morning.

Supply & Demand

Our fourth chart for the day is one last look at XLE.

If you’ve studied economics, you should know the basic laws of supply and demand. Those laws are irrefutable. The laws of supply and demand are like the laws of gravity. You may not like those laws, but you need to learn to live with them.

When XLE was trendless from 2023 through 2025, the bulls and bears were fairly evenly matched. That’s why XLE was trendless. But after the catalyst of the war with Iran, the demand clearly outstripped supply and XLE moved higher. The bulls clearly overran the bears.

But since the March 30 high, we see the bulls have gotten tired out and the bears started winning. The resulting price action swings are nothing more than the bulls and bears skirmishing. That battle is a battle of supply (bears) and demand (bulls).

When you look at the chart and price is clearly moving higher, that’s your indication of demand. That’s easy.

But how do you see supply? Draw a line and look to the left. Anything above that line is overhead supply.

Therefore, if we were to buy XLE at the green dashed price alert, the overhead supply is represented by the blue rectangle. If, however, we wait a little longer, and buy at the horizontal black trend line, that overhead supply is represented by the yellow rectangle. It’s definitely not perfect, but waiting for that level might be the better spot to buy as there is less overhead supply.

The flip side of the argument is the green-dashed price alert is a lower entry and therefore a lower risk. One option we might employ is to start a position at this first spot and then bump the size of the position if it hits the second level.

In this high-risk environment, it’s far from guaranteed to work. So, do your own analysis and draw your own conclusion. But that’s generally what I’m looking for: relative strength plus a low-risk entry to hop on that trend.

---

Shared content and posted charts are intended to be used for informational and educational purposes only. CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. CMT Association does not accept liability for any financial loss or damage our audience may incur.

---