Energy Stocks Crushed but Support May Still Be Lower

Energy stocks continue to get hammered, with the XLE ETF falling 20% at one point on Monday. Here's what the charts look like now.
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It’s hard to put Monday’s action into words, with oil and stock prices plunging and bonds and volatility soaring.

As if the elevated volatility wasn’t having enough of an impact on energy stocks, the action in oil is having an exponentially negative effect. The Energy Select Sector SPDR ETF  (XLE) - Get Report fell 20% in early Monday trading, before halting with the rest of the market just a few minutes into the session.

Given that type of drop after such a precipitous decline makes the energy sector a perfect candidate for Real Money’s Stock of the Day.

The S&P 500 hit a limit-down 7% halt in early trading, but why is the energy sector down so much more? On Sunday evening, crude oil prices plunged as an OPEC spat sent some of the world’s largest producers into a price war. The plan involves flooding the market with supply, which is drowning the price of oil.

After the April crude oil contracts touched a low of $27.34 per barrel, the commodity has since rallied a bit, now down “just” 21.5% near $32.40 a barrel. For the year, both oil and the energy sector is down about 50%.

Let’s look at the charts.

Trading Energy Stocks

Five-year weekly chart of the XLE ETF. 

Five-year weekly chart of the XLE ETF. 

Here we have two weekly charts. The above chart is a five-year look at the XLE ETF, while the chart below begins on Jan. 1, 2006.

You’ll notice on the five-year chart that the $42.50 to $45 level was quite notable. Two weeks ago, this area spurred some buying as energy stocks bounced once the XLE hit $45. Last week, more selling pressured the XLE ETF into the $42.50 area, closing just above this mark as oil prices plunged on Friday.

Sunday evening and Monday morning’s action in equities and oil prices were too much though. Shares gapped aggressively lower, as you can see in the 14-year chart below.

14-year weekly chart of the XLE ETF. 

14-year weekly chart of the XLE ETF. 

The Energy Sector ETF now finds itself in a precarious area. By gapping below the $37 to $37.50 zone, buyers either need to step up and reclaim this mark or risk lower prices. Above $37.50 puts $40 on the table and a possible retest or reclaim of the critical $42.50 mark. Below this prior support level and it’s hard to get too bullish on the XLE.

Should investors fail to reclaim $37.50 - which was support in 2006 and 2010 - this mark could turn to resistance. If that’s the case, the $30 level may be in play.

At this point, there is simply too much drama to be an aggressive buyer of energy stocks like Chevron  (CVX) - Get Report, Exxon Mobil  (XOM) - Get Report or even the XLE ETF. Trading against well-defined levels is one thing - for instance, if the XLE can reclaim the $37.50 mark - but buying amid rampant volatility and an OPEC price war simply presents too many unknowns.