Is The XLE Primed For A Potential Breakout?

Key Points

• Despite a YTD decline, the XLE is setting up for a potential breakout. 
• The ETF's three top holdings include Exxon Mobile (XOM), Chevron (CVX), and Schlumberger (SLB).
• The ETF's uptrend, consolidation, and proximity to key resistance suggest a favorable risk: reward setup for a potential directional move. 

The Energy Select Sector SPDR Fund NYSE: XLE is setting up on a higher time frame for a potential breakout. YTD, the sector ETF is down almost 7%. However, as the uptrend remains intact and the energy ETF consolidation further contracts, a promising risk: reward setup is beginning to emerge.

The XLE is an ETF that seeks to provide investment results that generally correspond to the price and yield performance of the Energy Select Sector Index. The index includes companies from the following industries: oil, gas and consumable fuels, and energy equipment services.

Bigger Picture View of XLE

Since bottoming out in March 2020, the ETF has been in a steady uptrend, consistently making higher highs and higher lows. However, after reaching a high of $94.71 in November last year, the ETF has traded slightly lower. Notably, the bigger picture uptrend has remained intact, and the ETF is trading near the wedge's resistance and its 200-day SMA.

Since topping out in November of last year, the ETF might have pulled in, but it still put in higher lows versus the previous higher low set in September last year. The uptrend's support is currently $75, and a move below would signal a shift in momentum which might see the price test the higher low from September last year, around $68.

However, expansion becomes more likely as the range contracts near the wedge pattern's resistance. If the ETF breaks above the 200-day SMA and resistance, around $85, there would be breakout confirmation, and the ETF could quickly test resistance near $90. The current pattern offers a favorable risk: reward for a directional move once a breakout is confirmed.

Of course, when considering a position in a sector-specific ETF, it is vital to analyze more than just the chart. Monitoring the top-weighted holdings is crucial since they significantly impact the performance of the ETF.

Top Three Holdings

Exxon Mobile NYSE: XOM is the ETF's top holding with a weighting of 22.45%. XOM has a Moderate Buy rating based on 21 analyst ratings. Analysts are predicting a 16.05% upside in the stock, with a consensus price target of $124.70. Over a year, the stock is up 22.5% and currently trading in a similar pattern to the ETF, with support near $100 and resistance at $110. XOM has a P/E of 7.28 and a dividend yield of 3.39%.

Chevron NYSE: CVX is the second largest holding of the ETF, with a weighting of 19.36%. Analysts are predicting a significant upside in CVX, with a consensus price target of $191.68, predicting a 22% upside. The stock has a Moderate Buy rating based on 21 analyst ratings. CVX has a P/E of 8.48 and a dividend yield of 3.84%. Although shares are down 12.48% YTD, the stock, like the XLE and XOM, is consolidating above critical support and maintains a bigger picture uptrend.

Schlumberger NYSE: SLB is the third largest holding of the ETF, with a weighting of 4.87%. Like CVX, SLB has a Moderate Buy rating and a consensus price target of $64.44, predicting a 30.26% upside based on the 18 analysts' ratings. The stock has a P/E of 18.39, considerably higher than CVX and XOM, and a dividend yield of 2.02%. Like the names already mentioned, SLB has maintained an uptrend since bottoming out in March 2020 and currently trading in consolidation above the uptrends support. A positive catalyst for the sector or one of the names mentioned above, including SLB, might be enough to cause upward momentum and technical breakouts across the industry.