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SUPPORT & RESISTANCE


XLE Resistance Obstructs Rallies In Equities

11/02/09 02:05:52 PM
by Chaitali Mohile

The individual equities of the Energy Select Sector fund move in a depressing mood.

Security:   XLE, PXD, MEE
Position:   N/A

After a long struggle, the Energy Select Sector SPDR (XLE) reached the 200-day moving average (MA) resistance. The rally took almost eight months to reach this major resistance level. A bullish engulfing candlestick pattern that occured in March 2009 was a sign that the chances of an upward rally are very high. The relative strength index (RSI) (14) has traveled a long way from an oversold region to a healthy overbought region. The average directional movement index (ADX) (14) is weak below the 20 levels, although buying pressure is high. Thus, it will be difficult for XLE to breach the 200-day MA resistance.

FIGURE 1: XLE, WEEKLY
Graphic provided by: StockCharts.com.
 
Pioneer Natural Resources Co. (PXD) and Massey Energy Co. (MEE) are two stocks that make up XLE. PXD formed a cup with handle formation during the recovery. Since the pattern breakout and the 50-day moving average (MA) breakout occurred at similar levels, the bullish rally moved with a robust strength. With the newly formed support, PXD rushed toward another major hurdle, the 200-day MA. The size of the bullish candles are comparatively larger than the bearish candles. This reflects the bullish force in the rally. Gradually, PXD broke upward and established strong support at the 200-day MA. But we can see two doji candlesticks in Figure 2. The RSI (14) has enough room for a bullish rally and the ADX (14) is indicating a developing uptrend. Therefore, technically there was no valid reason for the doji formation. However, the 200-day MA resistance of XLE obstructed the strong bullish rally. Since PXD has sustained over the MA support, the sideways movements would not harm the future rally.

FIGURE 2: PXD, WEEKLY
Graphic provided by: StockCharts.com.
 
But traders need to wait for a bullish breakout for XLE before initiating any long trade for PXD.

Similarly, an upward movement of MEE turned volatile near the 200-day MA. The RSI (14) and ADX (14) are bullish; therefore, MEE was more likely to undergo a bullish consolidation. But we can see in Figure 3 that the stock is reluctant to sustain above the 200-day MA support. The XLE resistance unnerved the current rally of MEE. However, the bullish indicator would not allow MEE to retrace more but could add volatility.

FIGURE 3: MEE, WEEKLY
Graphic provided by: StockCharts.com.
 
Thus, the resistance of XLE has obstructed the ongoing bullish rallies of PXD and MEE. These two stocks are just examples to explain the strength of resistance. There could be many such stocks from the same sector group that would have changed their directions temporarily.



Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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Date: 11/03/09Rank: 1Comment: 
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