What’s the plan for oil stocks? XLE-DXY correlation

XLE is an ETF. It is a basket of oil and gas stocks. XLE could be used as an indicator of price of crude oil. If not exactly, then loosely as a confirmation such as looking out for existence of divergence if any.

Read price action of XLE from 2016 to present and it looks like it is going higher. Except for being capped at 78~, price action resembles a rising continuation pattern.

Put in DXY Dollar Index, zoom out a little bit, the picture looks different.

Energy is priced in USD. It makes sense that when USD weakens, energy producers price higher in order to maintain their ‘real’ income. When USD strengthens, energy producers afford to price lower.

 

Inverted correlation between the two

From this chart below, it does appear that the last two sentences are true; that major moves in XLE coincides with opposite moves in the Dollar Index. XLE could still go up on a lot of geopolitical risk but what if USD continues to strengthen?

XLE-DXY monthly chart from 2010 - present

XLE (top) -DXY monthly chart from 2010 – present | Source: Trading.com

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