Is the energy sector ready for a breakout?

As the US market hovers near all-time highs, one sector has quietly risen and now finds itself at a critical juncture: the energy sector. While the broader market has seen significant upside year-to-date and hit new all-time highs, led firmly by the technology sector, the energy sector has risen steadily while remaining out of the spotlight.

However, recent developments indicate that this sector may be on the verge of a significant breakout, attracting further attention. Let us therefore analyze the current landscape and potential opportunities in the energy sector.

The SPDR Energy Select Sector fund New York Stock Exchange: XLE has shown resilience in recent months. Its 9.5% year-to-date gain has outperformed the broader market’s 8.5% gain. XLE is approaching a significant resistance level around $93, marking a potential multi-year breakout point. With $38 billion in assets under management (AUM) and a healthy 3.5% dividend yield, XLE remains a focal point for investors keeping an eye on the energy sector’s potential.

After spending months consolidating in a tight range above contracting moving averages, the sector broke out in February and has steadily risen since then. It is now trading near a significant inflection point, near $93. As the sector trades near a multi-year resistance level, investors will be closely monitoring price action and headlines to see if it can continue to consolidate near this key breakout point.

If the sector can break above resistance with authority, it would mark a significant turning point and the start of a potentially major uptrend on a longer timeframe. To gain further insights and clues into the industry’s overall momentum, it’s crucial to note where some of its top holdings are trading and how these individual industry heavyweights might take shape.

Main players in the sector

With a market capitalization of more than $440 billion, Exxon Mobil holds more than 21% of XLE’s weight, exerting significant influence on the direction of the industry. XOM has a P/E ratio of 12.71 and a dividend yield of 3.36%. Based on these metrics alone, the stock could appear favorable and attractive to value investors.

However, thanks to double-digit gains year-to-date, the stock’s RSI of 74 indicates overbought territory. As XOM approaches potential resistance near $114, the best short-term outcome would be for the stock to take some time to consolidate and make a higher low, allowing its RSI to reset.

Chevron is the ETF’s second-largest holding, accounting for an impressive 18.52% of the ETF’s portfolio. While CVX has slightly underperformed XOM and the sector in terms of year-to-date earnings, the company offers an above-average dividend yield of 4.22%.

Notably, for CVX, the stock recently reclaimed its downside-sloping 200-day SMA, indicating a potential shift in momentum. If the stock can continue to base above its 200-day and build a solid support base, it could provide confirmation of a trend change and point to higher prices. Analysts are bullish on the name, with a Moderate Buy rating and a price target of nearly 17% upside.

With a 5.38% weighting in XLE, Schlumberger is the third largest holding. Even though its market capitalization pales in comparison to the previous two stocks, the stock is currently showing many positive signs.

Based on thirteen analyst ratings, SLB has a Buy rating and a consensus price target of over 30% upside. The company’s earnings are expected to grow 18.64% over the next year, from $3.54 to $4.20 per share. Similar to CVX, SLB stock recently reclaimed its flattening 200-day SMA, indicating a change in momentum and the potential start of an uptrend on a broader timeframe.

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