Now is not the time to be buying oil stocks.

That time was just over one month ago when the price of oil was first challenging the $65 level, and oil stocks looked ready to play “catch-up”.

Since then, the price of oil has rallied as much as 10%. And the oil sector, as represented by the Energy Select Sector SPDR ETF (XLE) is up 10% as well – in ONE month.

As I mentioned two weeks ago, the oil stock rally has gotten a little too extended to the upside. It needs to either pause or pull back – or maybe some combination of the two – in order to relieve the overbought condition before the sector is ready to push even higher.

Well… for the past two weeks, the energy sector has paused. XLE was trading at $73 per share two weeks ago. It’s still hanging out right near that same level.

But the sector now looks vulnerable to a short-term decline. We just got a sell signal from the S&P Energy Sector Bullish Percent Index (BPENER). Look at this chart…

A bullish percent index 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.

The red arrows on the chart point to times when BPENER rallied above 80 and then turned lower from overbought conditions. That action generates a BPENER sell signal. Usually, it’s a good idea to avoid owning energy stocks in this situation.

Here’s how those arrows coincide with the action in XLE…

Following the BPENER sell signal last October, XLE chopped around for a couple of months before marching higher again. The sell signal in January kicked off a significant decline.

There’s no way to know for sure what sort of action the most recent sell signal will trigger – a consolidation phase or a sharp decline. It’s a pretty good bet, though, that the immediate upside is limited. So, there’s no real urgency to jump into the energy sector right now.

Traders should give the new BPENER sell signal some time to play out before buying into oil stocks. We’ll likely have a chance to put money to work in the sector at somewhat lower prices in the weeks ahead.

Best regards and good trading,

Jeff Clark

P.S. Tonight’s the night.

This past week, I’ve been telling you all about my one-night-only online training event, where I’ll reveal my breakthrough method of finding winning trades in times of extreme market turbulence. It’s sure to be an invaluable tool as volatility ramps even higher from here.

If you haven’t signed up yet, do so right here. I look forward to seeing you there…

Reader Mailbag

Today, a Delta Report subscriber writes in about their time with the service…

Jeff, your service, the Delta Report, is excellent. It has delivered returns on trades that have exceeded my expectations.

I do not have the bandwidth to learn what you know or the years of trading experience. I have only been using your trade recommendations for a few months; but because your advice is clear and concise, I make my trades at the risk level and dollar level I am comfortable with. My option trading status favors buying the calls on your recommendations vs. selling the puts, as I have not bothered with getting cleared for the next level. Regardless, thanks. Our retirement plan appreciates your guidance.

– Rob

Thank you, as always, for your thoughtful letters. Keep them coming right here.