When we started the year, energy was one of the best performing sectors until June when the relative performance between the SPDR Select Energy ETF ($XLE) peaked against the S&P 500. Meanwhile, Technology has been a solid sector for the bulk of 2014; tech hasn’t shot the lights out but it’s stayed steady as a top four sector performer YTD. After the multi-month downturn in oil prices, are we seeing a possible shift out of tech and back into energy?
The following chart shows the ratio between $XLE and the SPDR Technology ETF ($XLK).When the price movement rises we know that $XLE is outperforming $XLK, whether it’s rising more or falling less. Back in June the ratio between these two sectors put in a false break of the prior high from May. This created a shift in relative performance favoring technology for the next five months.
At the start of November we had another false break, this time it was a false break of a prior low. While Energy trailed Technology, it began to improve at the start of the month. This also happened while a bullish divergence was setting up in the Relative Strength Index (RSI), as show in the top panel of the chart. However, when making a second run at the prior high in the RSI indicator but momentum was unable to break above, creating a more defined level of resistance.
Going forward I’ll be watching to see if the movement out of the ratio between $XLE and $XLK can push above its falling trend line while also getting momentum to break above its own level of resistance. This could lead to a shift favoring energy while technology takes a backseat. If energy bulls are unable to create a bullish setup with the trend line and resistance breaks, then we may see the ratio fall back below its October/November lows as the market continues to favor Tech.
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