The third quarter brought a severe repudiation of energy stocks, turning what was earlier this year the best-performing sector in the S&P 500 into a laggard.

Energy, which accounts for over 9% of the benchmark U.S. index, tumbled 9.2% during the third quarter as oil prices tumbled the U.S. dollar rose. During the July through September time frame, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy ETF, lost 9.5% as the United States Oil Fund (NYSEArca: USO) tumbled 11.5%. [Sector ETFs Hoping for Dollar Reversion]

An even more egregious energy offender during the third quarter was the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP), an ETF popular with active traders and short sellers alike due to the ETF’s penchant for volatility. The $1.1 billion XOP plunged 16.5% last quarter, but the equal-weight ETF’s chart indicates a rebound could be in the offing.

After XOP violate the $73 area, “which it had held successfully no fewer than a dozen times since breaking above it in April. From that day forward, it has dropped…and dropped…and is still dropping. In the September 15 post, we stated that “…a break of $73 would target an area around $63”. XOP achieved that target yesterday, capping a stunning 13% drop in just 13 days,” according to J. Lyons Fund Management.

Dana Lyons of J. Lyons believes XOP has achieved a downside target of $63 caused by a bearish head and shoulder chart formation. Securities, including ETFs, have a tendency to rally and recover some of the loss induced by the head and shoulders after the pattern has run its course, which it appears to have done with XOP.

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