SPDR Energy ETF: Long-Term Breakdown in Market's Weakest Sector?

We've earlier cited downside in S&P Oil & Gas Exploration Fund and Halliburton. Now we're taking a step back to look at the bigger picture on the SPDR Energy ETF. It isn't pretty for the bulls.

As many traders know, XLE is the market's worst-performing major sector by a wide margin. A global crude-oil glut and mediocre economic growth are hurting crude prices. Throw on top of that heavy debt loads at many companies and weak quarterly results (Exxon Mobil and Chevron today). You also have coronavirus reducing air travel.

Finally, the trend toward ESG investing is already giving money managers less reason to hold traditional fossil-fuel companies.

This backdrop has been taking shape on XLE's long-term chart. The fund had a violent drop in 2014 and 2015, followed by 3-4 years of consolidation. The S&P 500 broke out to new major highs twice during that period (late 2016 and late 2019), but neither time did XLE follow. That's a classic sign of weak price action.

While XLE's weekly chart was neutral between 2015 and 2018, it's turned more bearish since last April by forming a series of lower highs. That's now become a descending triangle, with the potential for the earlier downward move to continue.

That could result in accelerating downside with volatility rising. Options traders may want to consider favoring longer-term vega trades. Situations like this can favor buying longer-dated out-of-the money puts.

XLE's chart at this point may have some support at the 2016 low of $50. However, when you consider the long-term nature of the breakdown apparently happening, a retest of the 2009 lows under $40 isn't out of the question.