Stoyan Bojinov: Thursday was a bright green day on Wall Street as investors piled into equity market after European leaders took another step forward in the right direction. Policymakers in Brussels agreed upon a $1.4 trillion “bailout” while private bondholders negotiated to accept a 50% writedown on Greek debt. Although several key issues remain unanswered, investors are quite optimistic that EU leaders will prevail in bringing forth a comprehensive plan to restore stability. Amidst the cheer, gold worked its way higher throughout the day, bolstered by inflation fears from overseas. Futures prices for the yellow metal hit a fresh multi-week high of $1,751 an ounce as the trading day drew to a close.

Energy giant, Chevron (NYSE:CVX), is expected to report third quarter earnings results later today, and analysts are expecting for the company to generate a profit of $3.44 per share. Chevron is the second biggest holding in the Energy Select Sector SPDR (NYSE:XLE), which makes this our ETF to watch for the day.

Chart Analysis

Consider the chart below and notice how XLE attempted, and failed, to break above the $80 level back in April, May, and towards the end of July in 2011. Since breaking below its 200-day moving average (yellow line) in early August, XLE lost quite a bit of ground, although it appears to have bottomed out at $54.26 a share on 10/4/2011. Since its most recent low, this ETF has bounced back a considerable 28%, quite impressive for less than a month’s worth of work.

Click to Enlarge

XLE closed right on its 200-day moving average around $72 a share yesterday, which is noteworthy because this ETF had significant resistance at the $70 level. Price action in shares of XLE is quite bullish given that this ETF managed to hold its gap on relatively high-volume trading, perhaps suggesting that investors are anticipating even more upside over the coming days.

Outlook

Bullish sentiment appears to be sweeping over Wall Street as investors are becoming less and less fearful of the possibility of a financial crisis in the Euro zone [see Energy ETFs: Six Very Different Ways To Play]. Now that XLE has broken above its previous resistance at the $70 mark, the level of resistance and potential profit taking comes in at $75 a share. If Chevron reports better-than-expected earnings and manages to lift the energy sector, XLE could very easily hit $75 a share tomorrow. Likewise, this ETF may just as easily fall back down to the $70 level if investors decide to pull the trigger and take profits, given the funds stellar run-up over the past month.

In terms of downside, the first level of minor support for XLE comes in at $70 a share, although major support lies around the $65 mark. Conservative investors looking to get long ought to consider waiting until this ETF establishes support above its 200-day moving average for two or more consecutive days, depending on individual risk tolerance. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

Written By Stoyan Bojinov From ETF Database Disclosure: No Positions

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XLE