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:
- Large number of energy stocks across the sector breaking out to new highs on big increases in volume
- Energy stocks outperforming the S&P 500 and other sectors
- Crude oil in an uptrend
- 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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