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Oil Is Heading Toward a Bottom

With oil closer to a buy signal, traders can slowly start adding exposure now.

It’s almost time to buy big oil.

In fact, traders who were looking to buy into the energy sector two months ago have a much better opportunity to do so today. The Energy Select Sector Fund (XLE) has declined 10% over the past two months.

So, while the S&P 500 and NASDAQ are hitting new all-time highs, and while stocks like NVIDIA (NVDA) and Microsoft (MSFT) are trading at historically expensive valuations, the energy sector looks like a bargain.

An Ever-strong Sell Signal

We turned bearish on the energy sector in late-April when the Bullish Percent Index for the sector (BPENER) was on the verge of a sell signal. We argued, “… Traders will do much better buying into the energy sector a few weeks after a BPENER sell signal than a few days before.”

We reiterated that cautious stance last month. The BPENER was still elevated. It was still on a sell signal. And, it looked like oil stocks had farther to fall.

Now though, the BPENER is nearing levels that often coincide with the end of a decline in the energy sector. Traders who are anxious to buy oil stocks can slowly start adding exposure now.

Here’s an updated look at the BPENER…

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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.

The BPENER hasn’t yet dipped below 30. So, we need some additional weakness in the energy sector before this index will generate a buy signal.

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But, the BPENER is now closer to oversold than it is to overbought. And the last time the index was near this level, back in February, the energy sector turned higher. XLE gained 20% in about two months – without the BPENER ever generating a buy signal.

The energy sector may not have hit bottom yet. We could still see some weakness in the days ahead. But the sector is closer to a bottom than it is to a top. And folks who were looking to buy oil stocks two months ago have a much better opportunity to do so today.

Traders should look to slowly add exposure to the sector on any weakness in the coming days.

Best regards and good trading,

Jeff Clark
Editor, Market Minute