Is energy set to experience a seasonal sector surge? | chart watcher

When we think of sector cycles, we think of fundamental-based forecasts tied to the phases of the economic cycle (i.e., business cycle). In contrast, when we think of seasonal forecasting, we typically think of a technology-based context, defined as monthly average historical price performance.

Combining both approaches can be an effective way to identify short-term trading opportunities. Simply put, you can find sectors that analysts expect to perform well in the coming months, while drilling down into the sector’s seasonal patterns to anticipate historically strong months for trading. Finally, we check these forecasts against current price action to see if the technique is favorable for the trade.

Sectors with the strongest near-term seasonal performance

Using the SPDR Select Sector ETF as a sector proxy, the three sectors with the strongest near-term seasonal performance are the Energy Select Sector SPDR Fund (XLE), Utility Select Sector SPDR Fund (XLU) and Materials Selection Sector SPDR Fund (XLB).

In terms of fundamentals, all three are expected to grow in 2024. While energy faces volatility due to geopolitical and renewable energy transitions, the utilities sector is considered a more stable investment due to its focus on renewables and infrastructure. The materials sector can benefit from favorable supply-demand dynamics, expected interest rate changes, and attractive valuations to grow.

Seasonal performance vs. S&P 500

When making investment or trading decisions based on seasonal patterns, it is always a good idea to check the seasonal performance of an asset relative to the broader market. Even if an asset (or, in our case, a sector) performs well in a given month based on its own history, it may not mean much if it underperforms the S&P 500. You are facing an opportunity cost of profit. From trading other assets

XLE, XLU, and XLB all had strong 10-year seasonal performance in the upcoming April. Let’s take a broader look at their performance and compare it to the broader market (see table below).

Looking at the statistics above, XLE is the strongest performer. XLB’s average return is higher than XLU, but when compared to the S&P 500, XLB underperforms XLU. Let’s focus on the XLE, which boasts the best performance.

Seasonal Profile of XLE

Let’s take a closer look at XLE’s 10-year performance using StockCharts’ seasonal profile chart.

Chart 1. XLE’s 10-year seasonality profile. Just because a particular month has a higher closing rate doesn’t mean it’s a good month to trade. You should look at the average return (bottom of the bar) and compare the two numbers over different months. Chart source: StockCharts.com. For educational purposes.

While XLE has enjoyed a 10-year high closing rate of 67% in both March and April, the average April return (6.1%) far exceeds the average negative return in March (-1.2%). April is XLE’s strongest seasonal month..

But what do these statistics mean compared to the S&P 500? Does it outperform or underperform the broader market?

Chart 2. XLE’s 10-year seasonal performance compared to the S&P 500. When you look at seasonality using relative performance, things can change dramatically. For theChart source: StockCharts.com. For educational purposes.

Looking at XLE’s seasonal performance relative to the broader market, we see that it outperformed the S&P 500 (4.2%) during the month of April while maintaining a high closing ratio of 67%.

Is XLE’s March weakness a setup for an April surge?

If you look at the daily chart of XLE, you can see that it has been trading sideways since mid-October.

Chart 3. Daily chart of XLE. All indicators on the chart serve the purpose of measuring momentum in terms of support and confluence, buying pressure, and identifying potential support ranges. Chart source: StockCharts.com. For educational purposes.

While the price was surging, XLE also closed above the upper Bollinger Band.® earlier this week. A closing price above a band (2nd standard deviation) signals that the price is likely to move lower towards the middle band.

The Stochastic Oscillator also has bearish divergence. (See blue dotted line) This is still trending downward, providing an overbought signal. Both signals indicate that XLE is likely to fall soon.

On the optimistic side, this can also be seen in Chaikin Money Flow. (CMF) said buying pressure has increased and is still well above the zero line. Meanwhile, Ichimoku Cloud It is shown on the chart to provide some trend context (slightly bullish) and possible support ranges.

So, if you are bullish on XLE and agree with the seasonal weak March and strong April theory, you will probably wait for the price to fall to between $83 and $84 next month. Set your price alert to $85 to alert you to potential deals.

The $83-$84 level is the lower or middle Bollinger band (If the price drop) and the cloud itself (the space between Senkou Span A and Senkou Span B). Preferably, we see the Stochastic Oscillator moving lower while CMF buying pressure remains above the zero line. Next, you need to look for an upward reversal in strong momentum before determining exactly where to place your buy stop (there are many ways to determine this and it depends on your trading method).

Conclusion: Challenges of Using Seasonal Profiles

In this video, StockCharts’ Grayson Roze explains how to use seasonal charts for your company.It is clear that seasonality is an effective tool. Contextualization. This means that you already have a trading idea and you use that seasonality profile to get more information that can help you evaluate the odds of your trading theory.

But starting with the seasonal chart: Create Trading ideas can become more difficult and problematic when technology does not suggest immediate trading opportunities. Nonetheless, if seasonal consistency is maintained, it potentially opens up opportunities that other traders may not have anticipated.

Sectors cycle in the long term according to the business cycle, and in the short term according to the annual supply/demand situation of the companies they constitute. Therefore, there may be good reasons to trade sectors in the short term in response to seasonal demand.

Sometimes it can be difficult to decipher. Nonetheless, it may be worth putting some effort into analyzing seasonal profiles if seasonal readings give you an edge in predicting potential near-term movements.

How to access StockCharts seasonality tools

There are several ways to access StockCharts’ seasonality tools.

• Click Next. charts and tools Click the tab at the top of the StockCharts page, enter a symbol in the Seasonality panel, and click “Go.”
• Enter the symbol. chart bar Select ‘Seasonality’ from the left drop-down menu at the top of the page.
• at dashboardin member toolsclick seasonality.
• Below the seasonality chart are links to instructions and quick tips that provide more detailed guidance.

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.