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Traders should lock in gains on the energy sector. “Big Oil” is heading for a decline.
We turned bullish on energy stocks (XLE) two months ago when the bullish percent index for the energy sector (BPENER) was on the verge of generating a buy signal. Since then, the Energy Select Sector Fund (XLE) has rallied 20%.
That’s a fantastic gain for just two months. And, as often happens when a sector puts on such an impressive performance, traders are chasing prices higher in anticipation of even stronger gains in the weeks and months ahead.
That’s probably a mistake.
Right now, the BPENER is on the verge of generating a sell signal. Take a look…
As a reminder… a bullish percent index (BPI) measures the percentage of stocks in a sector that are trading with bullish technical patterns. It’s designed to measure overbought and oversold conditions.
An index is overbought when it registers above 80 – meaning 80% of the stocks in the sector are trading with bullish patterns. An index is oversold when it drops below 30.
Sell signals occur when the BPENER turns lower from overbought conditions. That has happened twice already this year.
XLE fell 12% in three weeks following the BPENER sell signal in late March. It lost 10% in one month after the sell signal in May.
And now, the BPENER is poised to generate another sell signal when it turns lower from the current overbought condition.
Of course, nothing is ever guaranteed when it comes to the stock market. No indicator has a perfect track record. But, we’ve had a lot of success using bullish percent index signals in multiple sectors. And, the BPENER is building a strong track record of reliable buy and sell signals.
There’s a good chance the energy stocks will be lower a few weeks after the next sell signal – which could trigger any day.
Traders should take advantage of any short-term strength to reduce exposure to the energy stocks.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
P.S. Did you take our advice and buy into energy in July? Are you going to take some profits? Let us know – along with any other questions you may have – at [email protected].