An update on the monthly chart for the XLE energy EFT as the sector appears to fall out of favor with the monthly chart looking to post a bearish engulfing candle. However, we were already aware the price action in the XLE was likely to come to a pause and probable reversal with the failure to take out the volume band of the volume point of control (vpoc). As one of our most powerful indicators, the vpoc not only gives us the structure of the chart in terms of whether the price action is in trend or congestion but also gives us key volume-based support & resistance levels and zones. In addition, last month’s candle also triggered our volatility indicator so a retrace into the spread of the candle was highly likely, particularly when accompanied by low volume. The vpoc itself (yellow hatched line) marks the area on the chart which could be described as being ‘fair value’ where traders & investors are happy to oscillate around resulting in a consolidation phase. The transacted volume builds over time which is why the vpoc is always present where this volume is most dense. Eventually, the price action breaks free and a trend is born. As we can see on the chart the XLE broke to the downside before a reversal higher and a return to the vpoc which is what we are seeing once again. The vpoc will move but only when a fresh consolidation phase is created elsewhere as determined by the depth of the histogram.
The advantage of this indicator to both traders and investors is that it gives a strong visual picture of the type of market condition they are facing. In other words, is the chart in trend or simply trading sideways.
