The charts say this energy stock is showing signs of leadership that must be respected

Published Wed, May 29 20241:14 PM EDT

One of the best performing stocks in the underperforming energy sector looks ready for another potential up leg, according to the charts. The Energy Select Sector SPDR ETF (XLE) has underperformed the S & P 500 thus far in 2024, but with a year-to-date gain of about 8.5%, it's actually the fifth best sector out of 11. And within the sector, a number of components have displayed distinct relative strength. One of its best holdings over the last 12 months has been Marathon Petroleum (MPC). MPC (not to be confused with the Marathon Oil being purchased by ConocoPhillips) has had quite a ride over the last year. From the closing low in May 2023 to its recent closing high on April 5, it gained a whopping 109%. However, that wasn't sustainable. Since then to its most recent closing low on May 15, it dropped 21%. That retracement prompted the first 14-Day Relative Strength Index oversold reading since May 2023. However, when the stock finally emerged from that condition a year ago, demand resurfaced, and the strong advance commenced. While we frequently look for bullish pattern breakout opportunities, those haven't worked quite as well for MPC. This is an important concept to grasp – different technical strategies work for different stocks. To fully understand this, we need to analyze each stock chart with an objective viewpoint. Different strategies for different stocks Thus, over the last two years, buying MPC after it has flipped higher from a recent oversold state has been the best approach, as is quite clear below. Looked at differently, the price action in 2024 has constructed this potential bearish head-and-shoulders pattern. We respect all patterns – bearish and bullish – and a downside break could lead to additional weakness. But we've seen this set up before in MPC. Since the October 2022 lows, MPC successfully averted two prior topping formations. In fact, just as the stock was getting ready to roll over both times, demand returned. Said differently, important support zones were respected on both occasions. MPC will be trying to replicate that behavior again now. Zooming out, we see that MPC has been trending higher since the COVID-19 crash lows in March 2020. Indeed, buying the stock at any point since then would have yielded a handsome profit based on where it's trading now. However, the risk-return ratio was a lot better if one bought the dips within the long-term uptrend. The same goes for now. While past performance provides no guarantee for the future, the risk-reward ratio has improved from where the stock was trading in April ($220). Seeing the stock once again hold near a key support area now between $160-$170 and continue to leverage its recent oversold state could help produce the next large up move. Lastly, even after MPC's recent 20% decline, the stock has drastically outperformed both the XLE Energy ETF and the S & P 500 since the COVID lows. Relative strength often persists for longer than we think it can or should sometimes. This particular chart shows how well MPC did even as XLE struggled from mid-2022 through late 2023. That's a true sign of leadership, which we need to respect for as long as it continues. -Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.