XLE Energy Trend

## XLE Energy Trend — Full Methodology

### Oil Correlation Filter

1. **WTI crude correlation:** Calculate 30-day rolling correlation between XLE and CL (WTI crude futures)

2. **Minimum correlation:** Only trade when correlation > 0.70 (XLE is tracking oil, not idiosyncratic)

3. **Oil trend:** WTI must be above its 50-day SMA (crude oil in uptrend)

### Momentum Entry

1. **XLE momentum:** 14-day Rate of Change (ROC) must be positive

2. **Relative strength:** XLE must outperform SPY over the trailing 20 days

3. **MACD confirmation:** MACD(12,26,9) histogram must be positive and rising

4. Enter long at the close when all conditions align

### Exit Rules

- **Oil breakdown:** Exit if WTI closes below its 50-day SMA

- **Momentum loss:** Exit if 14-day ROC turns negative for 3 consecutive days

- **Trailing stop:** 5% below the highest close (energy is volatile)

- **Correlation breakdown:** Exit if 30-day XLE/oil correlation drops below 0.50

### Position Sizing

- Risk 1% of portfolio. Energy is cyclical and volatile

- Max allocation: 12% of portfolio to XLE

### Best Market Conditions

Works best during commodity super-cycles, OPEC supply cuts, and geopolitical tensions that support oil prices. The 2021–2022 energy rally was ideal. Underperforms when oil is range-bound or in structural decline (EV transition narrative headwinds).

### Backtest Notes

Tested on XLE/CL daily data from Jan 2016 to Dec 2024. Oil correlation data ensures the strategy only trades when the macro relationship holds. 2020 COVID crash produced the max drawdown.