XLE/ERY Update- ENERGY

Energy and crude both have their difficulties in trading, while USO/Crude can be easy in so far as that currency or $USD value has an inverse effect on it, it is also susceptible to geo-political events like the Iranian 10-day war game exercise they are engaged in right now in the Straights of Hormuz where much of the world's oil passes through, while the aircraft carrier John C. Stennis is in the region. The potential for a mistake with all of that going on in a rather narrow strait can cause crude to break away from the $USD inverse correlation (as crude is sold the world-over in $USD, a weak $USD means oil prices rise and a strong $USD mean they fall in general.

XLE/Energy is difficult because it too follows the dollar, but it is not just crude, there are all types of energy and logistical components as well such as pipelines, drillers, explorers, etc.

Here's an Energy update as well as our short on energy, ERY.

 Yesterday XLE had a false head fake of its own coming out of a triangle intraday, declining volume s useful in identifying consolidation patterns and distinguishing them from just random price patterns that look similar.

 Here on the daily chart, the 50-day moving average has provided support and resistance with serious breaks of the 50-day leading to sharp sell-offs, we saw one around late July. Right now XLE is near the 50-day and should get a little support, but a break of the 50 day could potentially lead to a sharp sell-off. I consider Energy to be one of 3 important industry groups that the market needs to move higher, although there are 10 main industry groups, energy, Technology and Financials are essential to the market being able to sustain a rally.

 Like USO, the 30 min Trend Channel has held swing trends in XLE, as you can see the Swing up trend was broken at the red arrow with a current short trade stop around $69.80 currently.

 Again, like USO, XLE looks like a pre-planned cycle in which smart money accumulates (white) and then marks up price and sells in to strength as well as shorts. I call these cycles, they are manipulations of the market or at least they are put in place to run in tandem with a market cycle, they generally aren't long term changes in trend, but swing trades. The 15 min chart alerted us to problems in XLE as well with sharp distribution at parabolic areas, these parabolic areas offer Wall Street demand to sell short in to, this is why I say parabolic moves generally aren't healthy moves.

 The 10 min chart gave confirmation


 And the 5 min which is leading negative also gave confirmation at the exact same areas of parabolic price movement, it is hard to sell short in to that kind of strength emotionally, but it is usually the least risky area to sell short in to.

 Note the 2 min chart confirmed distribution also at the same 2 areas and now is showing a mild positive divergence suggesting  an oversold bounce, much like the rest of the market.

 The Euro in red was also warning that XLE was breaking away from its correlation and warning of a frothy/manipulated market.

 The same can be seen in USO (generally XLE/USO trade with the Euro).

 Here is ERY which is in the model portfolio as a directional short on energy, ERY looks to have been forming a "W" type of base, note the last few days of downside have seen very small bodied price candles and lower volume, a sign that downside momentum is running out. This is also the type of environment accumulation occurs in to.

 The 30 min ERY chart has shown accumulation near the base lows and when prices move too far away from the target area, they let out some supply and send prices back to the target accumulation zone, note accumulation has been stepping up recently.

 The 15 min chart shows accumulation in to a flat-ish trading range, very typical.

 And the 5 min chart shows heavy accumulation near yesterday's price lows, again this may have been a head fake of sorts with traders providing supply for Wall Street by shorting those breakdown lows. We see this same pattern on bigger daily chart formations as well, again it is the head fake concept and is at odds with everything technical analysis has taught us about market bottoms for nearly 100 years, however it is what it is and it is the way the market operates, traders for the most part just haven't accepted it.

Here's the same accumulation in ERY on a 2 min chart, the theme here is the alignment of multiple timeframes with the 15 min chart positive, this is a very strong signal.

I plan on holding ERY, it is not even close to its potential with a breakout coming at the $14-$16 dollar levels. As the ETF moves in my favor, I plan on reducing the directional use of ETFs and replace them with stock picks as the market starts to act less directional and starts showing who is who in the zoo, it is becoming a better market for stock picking rather then purely directional plays.