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Energy Sector Presents Bounce Opportunity at Trader’s Narrative

Oil has corrected sharply. And so have the majority of commodity markets. But in contrast to the financial sector which has the news in a headlock, the energy sector is not only being mostly ignored, it actually presents exhaustive selling and is setting up a pattern which has seen it bounce higher.

This is a chart of the bullish percent index for the S&P Energy Sector:

bullish percent energy sector september 2008

After yesterday’s close the bullish percent closed up but on Tuesday, there were less than 6% of the component stock showing a buy signal according to point and figure charting. This is a sign of extreme exhaustion within the group and as you can see, it has presaged some important inflection points. The lower the bullish percent, the more powerful wave of selling that hit the sector. If anything, right now I would play this group as a whole (through an ETF like XLE) or components like Valero (VLO), Chevron (CVX) and Halliburton (HAL) for a bounce.

The last time this happened was in January 2008 when immediately after, the whole sector bounced back with a vengeance. Of course, in these situations, one has to be mindful whether it is more of the same or a whole new ball game. That is to say, if we are seeing yet another correction within a secular bull market, or whether the major trend has changed and the “oil bubble” has been pricked.

But I would argue that at this junction, if any sector is in “washout” mode, it is the energy sector and not the beleaguered financials. At least they aren’t there quite yet - although there is a lot of wailing and gnashing of teeth.

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3 Responses to “Energy Sector Presents Bounce Opportunity”  

  1. 1 Tom

    Dear Babak:

    So good to have you back.

    Do you have any bullish percentage charts on EEM FXI, etc. I don’t know how one could unless you had charts on the Shanghai stocks etc. It looks to me that the Emerging Markets have really underperformed the US and are ready for a Bear Market rally at least? Your thoughts please.


  2. 2 Babak

    Thanks Tom, the emerging markets are in much much worse shape than the developed countries stock markets. I posted a few charts here to show just how broken they are. Could we have a dead cat bounce? sure, but they have fallen so much that I’m not sure it would be worth it.

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