The Select Sector SPDR - Energy (XLE) appears to be forming a reverse head-and-shoulders (H&S) bottom formation, but the neckline (line a) is well above current levels at $78.

• So far, XLE has been unable to surpass the resistance at $73.19 (line b), which was the late-October high
• While prices have formed higher highs (line a), the relative performance, or RS analysis, has formed lower highs (line c)
• It is also a sign of weakness that the RS has formed lower lows, line d
• The volume pattern is consistent with a reverse H&S bottom formation, but the OBV is still in a downtrend, line e, and is just barely above its weighted moving average
• Weekly OBV (not shown) looks more positive
• There is next good support for XLE in the $68.50-$69.50 area with major support at $64.80

Anadarko Petroleum Corp. (APC) is a $40 billion oil and gas exploration company that has traded in a fairly tight range between $77.60 and $82.47 over the past six weeks. It looks ready to close this week above last week’s high at $81.69, which would be quite positive.

• A close above long-term resistance at $85.25-$85.50 (line f) has an initial Fibonacci price projection target at $94 with further targets near the $100 area
• The RS analysis has broken its downtrend, line e, suggesting that APC is ready to outperform the S&P 500
• Weekly OBV broke out to new highs in October, as it was stronger than prices. It has now moved back above its weighted moving average and is well above support at line i
• Daily OBV has formed higher highs over the past four months
• There is initial support now at $80.70 with stronger support at $79.50

What It Means: If the economy continues to be stronger than most economists think, then a drop in crude oil prices and a pullback in oil stocks should present a good buying opportunity.

In the first quarter of 2011, the Select Sector SPDR - Energy was up by 16.8% (see complete sector performance chart here). Therefore, I will be watching it closely on a correction. I expect some oil stocks, including Anadarko to hold up better than XLE.

The monthly jobs report released this morning was much stronger than expected, and stocks as well as crude oil are both sharply higher in early trading.

How to Profit: For Anadarko Petroleum, go 50% long at $80.88 and 50% long at $79.78 with a stop at $75.74. On a move above $85.50, raise the stop to $79.70.