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Energy Sector Trading At Lower Range

06/09/10 01:55:29 PM
by Chaitali Mohile

Due to the weak trend, the bullish rally of XLE gradually plunged below its major support levels. The range-bound movement of the sector index is likely to affect the breakout of Chesapeake Energy Corp.

Security:   XLE, CHK
Position:   N/A

In early 2010, the Energy Select Sector (XLE) initiated a volatile bullish rally. XLE converted the 50- and 200-day moving averages (MA) resistance to support, however, and these new support levels were frequently challenged during the upward move. There was a struggle between buyers and sellers which is indicated by the volatility in the sector. In Figure 1, the average directional movement index (ADX) (14) was below 20 levels, while the positive (+DI) and negative directional index (-DI) witnessed snaky moves. This shows that the trend was weak with equal buying and selling pressure. As a result, the price rally could not sustain in either direction. The full stochastic (14,3,3) retraced from the overbought region. Therefore, XLE failed to establish MA support.

Graphic provided by:
CHK is the second-largest producer of natural gas and most active drillers of new wells in the US. However, the volatility in the XLE had a negative impact on the technical chart of CHK. The stock has been lowering with the series of lower lows and lower highs, forming a descending channel. Recently, the rally that was initiated from the lower trendline has breached the channel upward. The two long bullish candles reflected the bullish strength, indicating possibility of a robust breakout. However, CHK failed to break the 200-day MA resistance. We can see red bearish candles with a long upper shadow in Figure 2, suggesting reluctance to breach the resistance. Apart from unstable stochastic in the overbought zone, the rally was terminated due to the ranging XLE in Figure 1. Unless the sector index undergoes the robust bullish moves, CHK would lack the required strength to initiate a fresh upward rally.

Graphic provided by:
Under these circumstances, CHK is likely to move in the tricky range of the 200-day MA resistance and the upper trendline support in Figure 2. Thus, the volatility of XLE would unnerve the bullish moves in CHK.

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
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