April 7, 2014 - Energy strength

The energy sector has had a strong week and has been the strongest sector in the S&P 500 over the past month.  A look at the Energy SPDR ETF (XLE) chart below shows the sector breaking out to new all time highs.  You can see the area highlighted in red has, up until now, provide strong resistance as each time it has been reached in the past prices have fallen. This area was breached on March 28th in the form of a gap followed by a large move up.  This type of action is usually indicative of the potential for continued strength.    One other important thing to note in this move is the lack of divergence in our momentum oscillator which is something we look to avoid (or sell into).

For those that missed the breakout, there is always the chance of a retracement back to levels of support. If that occurs and it holds, that could provide an excellent opportunity. Since resistance that has been broken through becomes support, investors who caught and bought the breakout needs to keep a close eye on the red area in case we get a correction.  Any breakdown below that support is your warning of potential bigger problems ahead.