Dissecting the Energy Sector (UGA, USO, XLE)

Dissecting the energy sector into the commodities and the stocks helps me define the opportunities from a clearer perspective. If we step back and look at what has transpired over the last five weeks we can gain that clearer perspective. For example the price of gasoline as measured by United States Gasoline Fund (NYSE: UGA) has risen from $32.60 to $38.09 or 16.8%. Crude measured by United State Oil Fund (NYSE: USO) has risen from $34.07 to $40.22 or 18.1%. At the same time XLE measuring the stocks of the energy sector has move from $53.74 to $58.42 or 8.7%. Even if we look at iShare Dow Jones U.S. Oil Equipment & Servies Index (NYSE: IEZ) they went from $40.95 to 46.10 or 12.5%, the advance in commodities have outpaced the stocks. So, big deal - right? Not really, maybe now is the time to look at the stocks as an opportunity to catch up as commodities digest the move higher? After all, investing is all about ideas and capturing the opportunities and this very well could play out going forward.

The chart above of Energy Sel Sect SPDR Fund (NYSE: XLE), SPDRs Select Sector Energy ETF shows the trading range the sector has been in since October. It is equally important to note the uptrend off the March 2009 low is still in tact. Not shown on the chart, the 200 day moving average acted as support on the low in January. The higher low in February which broke above resistance at $57.25 was a short term buying opportunity. The chart shows a move towards the next opportunity at $60.20 or the top of the trading range. A break above this level would open the way for a move near the $69 level. Bottom line, technically the sector is poised to move higher. Having a strategy to capture the move is what investing is all about.

This is where a define entry point, stop or risk tolerance for the play and predefined target all come into play. In other words having a disciplined approach to putting your money at risk is as important as finding the investment opportunities. Take some time and define a strategy around the energy or commodities within the sector and take advantage of this technical setup.