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I’ve spent the past few weeks touting the developing trends in the clean energy sector.
Names like SunPower Corp. (Nasdaq:SPWR), Plug Power Inc. (Nasdaq:PLUG), and Blink Charging Co. (Nasdaq:BLNK) have been among those firecracker names, rocketing an incredible 475%, 1,649%, and 2,556% in the last year.
But those massive gains come with a catch.
These clean energy names are volatile with a capital V. They’re a perfect example of a trader’s stock. They have something that resembles a long-term trend, sure. But to rake in gains on these stocks, you need to follow the short-term trends and ride out the volatility storm.
It’s a recipe that scares away long-term investors. But that doesn’t mean they can’t join in the energy market’s bullishness…
And make a profit off of it.
You see, there’s another area of the energy market that is now seeing a technical tide change…
A slower, rolling move, like the ocean’s tidal change, that’s going to garner a lot of attention from the market – as well as market-beating returns.
This is the best long-term trade opportunity of the new year…
The Change in Old School Energy
The “old school” energy stocks are seeing a dramatic shift in their technical picture.
For the last three months, we’ve seen companies like Exxon Mobile Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX), and Schlumberger NV (NYSE:SLB) break into short-term bullish trends as inflation and demand have combined to flash some hope for the sector.
It’s foolish to invest only in hope, but there’s a lot more to the energy trade now. We’re seeing the sector make a technical shift with bullish implications for the first half of the year.
I’m talking about breaking into long-term bullish trends. This powerful shift is easily identified by monitoring a stock’s 20-month moving average. I use this simple moving average as the line of demarcation between a long-term bull and bear market for a stock, sector, or the market in general.
Here’s a chart of the Energy Select Sector SPDR Fund (NYSEarca:XLE) over the last 10 years with its 20-month moving average:
For the better part of the last five years, the sector has been in a bear market trend. This was caused by a few drivers, including dropping demand, lower inflation, and energy prices. On top of that, investors were consumed – as they continue to be – with more aggressive growth areas of the market.
But this combination is changing now. Inflation, higher energy prices, and rising demand are combining with a technology market that has become overcrowded.
As a result, we’re seeing a cyclical shift in the market that will favor the energy sector – both clean and “dirty” – that is driving it above the 20-month moving average and into a long-term bull market. And we’re still in the early phase of that rally.
Now, what’s different about the energy sector as it breaks above the 20-month moving average?
Well, I refer to the 20-day moving average as the “Trader’s Trendline.” With that in mind, you can also think of the 20-month moving average as the “Analyst’s Trendline.”
Short-term traders that swing with market volatility take their cues from the 20-day moving averages. That’s how they find opportunities amidst volatility.
But the analyst community is different. They’re keeping their eyes on the longer-term trends. That’s important to investors, because the analysts control the market’s view of long-term outlooks by way of their upgrades and downgrades.
As we see stocks move into these long-term bullish trends, we’ll see the analysts begin to upgrade their outlooks on them. That’s one of the reasons I’m beginning to favor the energy sector as a longer-term trade.
There are few sectors in the market that have been less liked than the energy sector. By that, I mean they have more analyst “sell” ratings. This means that there is more potential for this “technical tide shift” to draw analyst upgrades, which will fuel these stocks higher – for both traders and investors.
Let’s take a quick look at two names shifting into long-term technical bull markets… and how you can trade them
- Energy Select Sector SPDR Fund (NYSEarca:XLE)
I’ve already shown you the monthly chart of the XLE.
This sector is composed of several companies in the oil and natural gas sector of the market. Both groups are seeing strength for the same reasons: increasing demand and prices.
As indicated, the XLE shares are breaking above their 20-month moving average. January would make the second monthly close above this trendline.
From a short-term (daily) perspective, the XLE shares are forming a pattern of higher highs and higher lows. You can see this in the chart below.
Additionally, the ETF’s 50-day moving average has moved into a bullish trend, as it is ascending and offering support for the ETF.
Notice also that the 20-day moving average is “in play” as well, as traders are moving the stock higher by “buying the dips.” This provided the first wave of buying to act as a catalyst for the ETF to move into its now long-term bullish trend.
How do you trade this?
XLE shares are hitting some resistance, as the ETF is now in overbought territory. This means that shares will likely take a short break in their bullish march and pull back to the $41.50 price level.
Long-term bullish investors should consider this a good opportunity to “buy the dip” before the XLE heads for my target price of $55.
Now, let’s dive even deeper than the energy ETF – and look at a specific stock from this sector..
- Marathon Oil Corp. (NYSE:MRO)
MRO is rising towards the top of my technical trades in the energy sector. The Houston, Texas-based company is a petroleum and natural gas exploration and production giant.
Like many companies in the energy sector, MRO shares have spent the last few years in a bear market trend, but the recent rally is quickly changing that status after posting a long-term bottom at $4.00.
From a fundamental perspective, I like the fact that MRO has exposure to the natural gas exploration market, as natural gas exploration and pipeline companies are rallying a little faster out of their recent lows.
From a technical perspective, MRO shares have already crossed into a bull market trend, unlike many companies that make up the energy ETF. This indicates that MRO is a relative strength leader, a quality that always puts a stock a little higher on my list.
Looking at the chart, MRO shares have rallied out of their November lows and almost immediately shifted into an intermediate-term bullish trend as the 50-day moving average. In mid-December, MRO’s 50-day moving average crossed above its 200-day, indicating a golden cross pattern. This indicates momentum was now pushing MRO higher.
Now, a month later, the stock is trading back above its 20-month moving average, signaling a new bull market trend for MRO…
And a profit opportunity.
There’s a potential trade brewing on this new energy name. And this week, I’m going to send a specific recommendation to this group of readers.
To learn how you can be on the list to receive it, click here.
According to my charting, we should see a target price of $10.00 in the first half of 2021.
Given the current overbought readings, I’m targeting a pullback to $7.75, which is a great entry to buy the stock ahead of a continuation of its bull run.