Energy ETFs Shaping Up for a Run

The past week's price action in the broad market was quite significant, as the major indices rallied to close above firmly above their 50-day moving averages (MA) for the first time in four months.

This technical change is significant, because mutual funds, hedge funds and other institutions frequently use the 50-day MA as an indicator of overall intermediate-term trend. As such, the break of the 50-day MAs could trigger substantial bullish momentum in the short to intermediate term. Nevertheless, it's important to realize that current strength cannot yet be classified as anything other than a countertrend bounce within the context of the long-term downtrend of this nasty bear market. Regardless, it's prudent to take advantage of the market's strength while it lasts.

The beaten-down energy ETFs have been forming constructive price patterns on their charts recently, and they appear poised to make a substantial upward run in the near term. The various energy ETFs include the Oil Service HOLDRs (OIH - commentary - Cramer's Take), Ultra Oil & Gas ProShares (DIG - commentary - Cramer's Take), S&P Energy Select SPDR (XLE - commentary - Cramer's Take) and S&P Oil & Gas Exploration (XOP - commentary - Cramer's Take), and their chart patterns are all pretty similar.

Below, the daily chart of S&P Select Energy SPDR illustrates the upcoming setup for potential buy entry:

Energy Select SPDR TradeStation

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Market Vectors Alternative Energy TradeStation

While on the subject of the energy sector, it's notable that the alternative energy sector (wind, solar, etc.) is also looking good. One of the top-performing industry sectors on Dec. 17 was alternative energy -- specifically, solar energy. Of the handful of ETFs correlated to the alternative energy industry, Market Vectors Global Alternative Energy (GEX - commentary - Cramer's Take) turned in the best performance that day. GEX showed great relative strength by rallying 4.9% while the broad market was mostly lower. More importantly, it broke out above the high of a three-week base of consolidation and joined the growing ranks of ETFs trading above their 50-day moving averages. The daily chart of GEX is shown at the right:

The GEX breakout above consolidation and its 50-day MA creates a "swing trade" opportunity to play the short-term bullish momentum in the sector. However, if you're buying GEX near its current price, consider keeping a tight initial stop, just below yesterday's low of $20.91, to protect against the possibility of a failed breakout. Convergence of the 10-day moving average and 20-day exponential moving average at yesterday's low provides further reason for a stop below the low.

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At the time of publication, Wagner was long SMH and FXI.

Deron Wagner is the founder and head trader of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his trading methodology with The Wagner Daily, The MTG Stalk Sheet, and The Wagner Weekly newsletters.