Thoughts On The Energy Sector

A reader asked me today what I thought of the energy sector and if I would look at it using Stage Analysis.  I have been noticing some energy stocks appearing on my stock scans, and that hasn’t happened in quite a long time so that’s a positive.  But here’s what I’m not seeing that hasn’t made me want to load up on energy stocks yet:

  1. Large number of energy stocks across the sector breaking out to new highs on big increases in volume
  2. Energy stocks outperforming the S&P 500 and other sectors
  3. Crude oil in an uptrend
  4. Commodities as a group in an uptrend (I tend to use the GCC ETF to view that)

Here’s a longer term chart of XLE.  A couple of things to note on this chart.  I’d rather see a nice long base here to launch into a new bull market, but all we have so far is a bounce higher from the 2016 bottom.  I could see energy stocks basing for a while longer here and digesting the previous bear market.  I want to see XLE outperforming the $SPX on the middle section of the chart too, and that’s clearly not the case.  If you look at semiconductors or biotech (SMH or XBI) you’ll see the exact opposite of what you see here and that’s why I like those sectors right now.

I actually did recently trade one energy stock WTI because I liked the chart but I didn’t trade it as a sustainable uptrend.  Maybe I’ll be wrong and energy stocks have bottomed here but I don’t see that yet in the charts.  On this chart of WTI though you can see how we have a nice Stage 1 base that it exploded higher off from on massive volume.  But notice how it did the same thing in late 2016 only to turn out to be a fake rally that failed.  I wouldn’t be surprised if the same thing happens here unless we see more strength across the sector.

I see the same thing in energy in other commodity sectors like gold stocks.  A few stocks breaking out higher but that tends to be the exception more than the rule.  That was why I didn’t think the August to September rally in gold was going to lead to a new rally as well, I saw a lot of gold stocks acting terribly when they should have been gearing up for a big move.

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18 thoughts on “Thoughts On The Energy Sector

  1. Hello again,

    For those of us learning your system-especially those who are investors and not very short term traders-can you please try and post when you see it as being the proper time to enter the energy sector (XLE and XOP) and gold sector (GLD and GDX) for a sustainable run higher and show us what signals you say that said that it was time to enter for a long hold (not just a short term trade)? This would be most helpful.

    You were correct when you said before that you did not see a sustainable run for Gold and miners a while back and sure enough they topped out when gold hit 1360s (now I see many on social media claiming gold has bottomed and it will run much higher now) and the Energy sector may also be pulling back now too just as you posted your thoughts about the energy sector a few days ago.

    Thank you for your excellent work. It is greatly appreciated.

    1. Thanks for the nice comments. Yes I will certainly post about energy and gold if I start to see the right type of price action and volume in those sectors.

      1. Hi Justin,

        Thanks for your continued posts on this site. They are very educational.

        Just a reminder to please post once you see a turn around in energy and gold. I wonder if crude oil can break above 53 soon and head to 55 or higher which would be good for the energy sector. I guess high volume buying in XLE would be an initial sign that it may be time to enter (as of now XLE has pulled back a bit from its recent run so waiting for a proper entry).

        Thanks again.

        1. No problem! High volume buying in individual gold and energy stocks will be the signal the dynamics are changing for those sectors. Until that happens they will continue to drift sideways and frustrate investors.

  2. Hi,
    I forgot to ask. With the stage analysis system, is it possible to time pullbacks in the market? With SPX being so strong it seems like it is very risky to buy anything at these levels yet there are no pullbacks. Does the stage analysis system have a way to try and determine pullbacks for entry into the market? I understand one still needs to look at each stock on an individual basis but it would be helpful to know if your system has a way of determining whether the market is set to pull back/correct in the near term, allowing for better entries into individual stocks.

    Thank you again for your help and your time.

    1. I use the PPO on the chart to show how far (in percentage terms) a stock is away from the 30 week moving average. Ideally I like to buy as as close to zero as possible, because that percentage essentially becomes my percent risk to the downside. To mitigate risk I can position size according to this percent too so if it is higher than say 20% I can reduce position size on the entry.

      I don’t look at the PPO on indexes too often. If you are worried about a general pullback but still want to enter the market you could always reduce position size on entry to lower your risk.

      I don’t have or have I ever seen a reliable indicator for predicting short term pullbacks in the market. I use position sizing quite often in my own trading though, probably something I can write a post about. If I want to take risk off the easiest way is just to reduce my position sizes and build up cash to deploy again later.

  3. Hi Justin,

    WTIC is over 54 now and many small Canadian oil and gas stocks are up 10-20% over the last week. I wonder if the Canadian energy sector is getting very close to a buy if not already a buy?

    Thank you.

    1. Worth keeping an eye on but I still don’t see volume coming into the oil and gas stocks I’m looking at and many of them are still below a declining 30-week MA. It should be obvious when they are breaking out for real, such as what’s going on with the lithium stocks right now. If it doesn’t look obvious it’s more likely it’s a false breakout.

      1. Thank you. I will go through and look at as many Canadian energy stocks as I can to see what % still have declining 30 EMAs on the weekly.

        1. That’s a good idea I run my scans nightly since things can change rapidly and new stocks can set up. I see some energy stocks acting well like WTI and ECA, and some have done well after earnings. Could be some rotation into energy but it doesn’t look like enough yet for a big breakout. That doesn’t mean you can’t catch a good trade in a stock though over a short period of time.

          1. Agreed.

            TCW.TO (oilfield service co.) looks really good using your methodology. Big volume coming in on daily and weekly and outperforming the TSX on weekly chart.

          2. Yes that stock looks great, huge volume on the breakout and on the retest of the 30 week MA. That’s the type of pattern where if that sector was firing on all cylinders you’d catch a nice trade. I’ve got my eye on the sector, I still see few oil and gas stocks coming up in my scans but there are a few good looking charts like this one.

  4. XEG.TO is the Cndn energy ETF and it is looking good on the weekly in my eyes as price has just now poked above the XEG.TO:$TSX price line (using simple 40 moving average as you do).

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