Warning: Energy ETF Near Critical Price Support

While scanning the major Sector ETFs, a shelf of support (pattern) in the Energy ETF – symbol XLE – caught my eye.

Let’s take a look at the current support level at $72
and then note a logical downside target if the key support level here fails to result in a rally as the next swing.

You don’t need magic indicators to tell you that $72.00 is a critical short-term price boundary in the XLE fund.

That’s because buyers and sellers are ‘testing’ this level for the third time in 2011, and today took us to a fresh new intraday and closing low for 2011.

#-ad_banner-#This means buyers have to step-it-up here and support price here, else we have a confirmed/triggered sell signal that allows for a play to the next logical support shelf at the $68 level which – as we’ll see – is confluence support.

Pattern-wise, it looks like a distributive phase resembling an imperfect Head and Shoulders reversal pattern.  The $72 level reflects a strange neckline of the pattern – it’s something to watch.

Volume is showing distribution – namely volume spikes during the sell-phases and then diverges or declines during the rally phases in price.

Price is already under the 20 and 50 day EMAs which are both separating bearishly at the $75 level.

In other words, the only thing bullish going for price right now is the support at $72 – should buyers lose that and we would expect sellers to capitalize on the failure, which would result in a push back to the confluence support at $68.

Here’s the weekly chart which reflects the confluence:

There was a clean negative momentum divergence going into the highs at the $80 level – that’s one for an educational reference.

Price officially broke down under the rising 20 week EMA at $74.00, and this break sets up a potential retrace back to the rising 50 week EMA at $68.70.

Coincidentally, the rising 200 day SMA – a critical target once support fails on the daily chart – rests also at $68.40.

Here’s the main idea – should buyers fail to hold price (and force a rally) this week at the critical $72.00 price support shelf, then odds shift to favor further downside action, most likely to the multi-timeframe confluence at the $68.50 region.

Of course, watch crude oil for additional clues – should it continue breaking down through its support, then we’ll almost certainly see the $68.50 target achieved in the Energy ETF.