How Exxon Could Influence the Broader Energy Sector

Crude oil prices have been relatively flat, tracking in a narrow sideways range for the last three months, and the oil services sector, while weak, has been attempting to stabilize. However, shares of the integrated oil giant Exxon Mobil (XOM) have been underperforming the other components of the energy sector. The stock looks as if it has been leading lower and has now arrived at a technical inflection point. Its reaction at this level and going forward could be an indication of where the overall sector is headed over the intermediate term. 

The weekly chart of West Texas Intermediate Crude Continuous Contract, or WTIC, shows the sharp decline in crude oil prices in 2014 that moderated somewhat in 2015, before continuing lower into early 2016. The attempt at stabilization that followed has played out as a series of price patterns with well-defined levels of technical support and resistance.

A large inverse head-and-shoulders pattern has formed below neckline resistance in the $51.00 level, which could prove to be a long term base for the commodity. The second part of that formation looks like a complex right shoulder or a cup and handle pattern whose rim line is the neckline. That shared resistance level was broken late last year but price quickly stalled and began consolidating in the narrow horizontal channel. The relative strength index is reflecting the neutral momentum while the money flow index, a volume weighted relative strength measure, is entering an overbought condition.

These readings are similar in value to the 2015 consolidation period that preceded the sharp drop in crude prices. Of course, this doesn't mean energy prices are headed lower, the integrity of either, the zone of support in the $48.00 to $51.00 area, and the channel resistance level should be the deterring technical factor.

 

Shares of Exxon Mobil have been declining steadily this year, and moved back down to long-term support in the $81.00 area. This zone was support in September and November last year, and, on both occasions the stock was able to rebound. The relative strength index and the money flow index are tracking lower and below their 21 period averages and center lines, readings similar to those in the previous test periods.

Chaikin indicator suggests that there has been renewed buying interest in the stock this month, but this indicator has a 20 day look-back period. The base line measure for the Chaikin indicator is the accumulation/distribution line and it is flat, while the on balance volume indicator, which is a simple cumulative average that adds volume on up days and subtracts volume on down days, has been reflecting distribution since the beginning of the year.

 

The Van Eck Sectors Oil Services ETF (OIH) traded in a large horizontal channel for a good part of 2016, before breaking above pattern resistance in December and making a measured move up to the $35.50 level. That area proved to be resistance and the fund then began moving in a triangle pattern for the next two months above support at the $33.10 level. Triangle support was recently taken out and has become resistance along with the 50 day moving average, and the  breakdown projects a measured pattern move back down to the long term channel top.

Daily moving average convergence/divergence, which is overlaid on a weekly histogram of the oscillator, is below the center line on both timeframes, and the relative strength index is tracking lower and below its center line. Money flow has been weakening since the beginning of the year and suggests investor confidence is fading.

The services sector and the oil commodity itself have some room to move lower before they test their individual support levels, but Exxon closed the Wednesday session right on $81.00 long term support. The stock, in this case, may be the one to determine, by way of bounce or breakdown, the intermediate term direction of the broader energy sector.

No positions in the stock, commodity or fund mentioned.

More from Investing

A Hungry Grizzly Bear Is Stalking the Stock Market

A Hungry Grizzly Bear Is Stalking the Stock Market

Why Most Americans Like a Volatile Stock Market: Study

Why Most Americans Like a Volatile Stock Market: Study

Former U.S. Education Secretary: Voters Are to Blame for Struggling Schools

Former U.S. Education Secretary: Voters Are to Blame for Struggling Schools

Should Retirees Invest in the Tech Sector?

Should Retirees Invest in the Tech Sector?

Here's How to Trade Walmart, Nordstrom, Macy's and J.C. Penney After Earnings

Here's How to Trade Walmart, Nordstrom, Macy's and J.C. Penney After Earnings