The oil sector is setting up for a rally.
The Energy Select Sector Fund (XLE) – an exchange-traded fund that tracks the action in oil stocks – has had a rough few weeks.
XLE was trading above $87 per share in mid-April. It’s below $79 today. That’s nearly a 10% decline in just one month.
As a result, the oil sector is now oversold. And, it looks due for at least a short-term bounce.
Take a look at this chart of the bullish percent index for the energy sector (BPENER)…
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.
The blue arrows on the chart point to when the BPENER declined below 30 and then turned higher from oversold conditions. That action generates a BPENER buy signal.
Usually, it’s a good idea to buy energy stocks in this situation.
Here’s how those arrows coincide with the action in the Energy Select Sector Fund (XLE)…
In every case, XLE trended higher in the weeks immediately following a BPENER buy signal.
The signals didn’t always happen at the absolute bottom for the energy sector. But, they did provide solid profits for traders who were willing to buy into oversold conditions and then hang on for a few weeks.
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The BPENER is currently trading below 30. The energy sector is oversold. And, we’re approaching a buying opportunity for the oil stocks.
The BPENER hasn’t turned higher. So, we don’t have a buy signal… yet. But, we’re close.
The seasonal patterns for oil are bullish this time of year. So, the BPENER could turn higher any day.
And, based on the success of previous BPENER buy signals, traders should be looking to buy into the oil stocks in the days ahead.
Best regards and good trading,
Jeff Clark
READER MAILBAG
Do you typically buy oil around this time of year?
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