Energy stocks got slammed down hard on Friday.

The Energy Select Sector Fund (XLE) lost nearly 4% – which is a huge one day move for this popular exchange-traded fund (ETF).

Many individual stocks fared even worse. For example, Exxon Mobil, Occidental Petroleum, and Marathon Oil all dropped about 5%.

This is just the beginning. The energy sector has further to fall…

We warned about the potential for a decline in the oil stocks last month, when the Bullish Percent Index for the energy sector (BPENER) reached 100. It’s not possible for that indicator to push any higher. So, we argued that if it can’t get any better, then it has to get worse.

It got worse a couple weeks ago when the BPENER turned lower from overbought conditions and generated a “sell signal” for the energy sector.

It took a while, but that sell signal finally kicked into gear last week.

And, if this signal plays out like the other BPENER sell signals this year, then oil stocks should continue lower for the next few weeks.

Take a look at this chart of XLE…

The red arrows point to the three previous BPENER sell signals that have been triggered this year.

XLE fell 10% following the sell signals in January and March. It lost more than 15% after the sell signal in June.

Even after Friday’s big drop, the energy sector is only down about 6% from its high. So, there’s more room to fall.

Traders should keep in mind, though, XLE closed Friday right near the support of its blue 50-day moving average (MA) line.

So, it’s possible the oil stocks will bounce a bit over the next day or two. But, it won’t be the start of a new rally phase for the energy stocks. It’ll just be a bounce.

The energy sector is headed lower.

Best regards and good trading,

Jeff Clark

Reader Mailbag

In today’s mailbag, a few Market Minute and Jeff Clark Trader subscribers give their thoughts on Eric’s recent bitcoin essay…

Thanks for sharing this thought on bitcoin. I use the volume profile often to make decisions on where to buy stocks – particularly once a stock begins to decline from highs and violates some key support levels.

I think this is a good indicator used with other chart indicators to help with both buying and selling decisions. Today’s email gives me more confirmation on what my current thinking is on bitcoin. Thanks again.

– Larry B.

I’m not a big bull on bitcoin, at least not this year. I see it rising in fits and starts. Of course, that may look different for bitcoin than it does for a lot of other investments, with the jumps being up to 100% at a clip.

But I don’t see BTC going on a tear to $200K, $500K, or $1,000,000 like some pundits have predicted. Who would the buyers be at those levels? It seems people have proven they’re more inclined to support much smaller run-ups and then take profits. That scares enough people out of the market to drive the price way down, and the cycle repeats at a somewhat higher level.

– David M.

We all have heard the adage, “The stock market moves by fear and greed.” Well, when it comes to cyber currency, greed is a big factor! You can have your bitcoin, I’ll keep my Microsoft, Nvidia, Apple, and Main Street Capital. I may (or may not) be richer but for sure, I’ll sleep better!

– Robert R.

I made the big mistake of purchasing bitcoin at the $67,000 price point and now it has dropped to around $60,000. Fortunately, my purchase was not that large but I’m optimistic that it’ll move back up again at least to $70,000. I hope to purchase more if it moves down to the $48,000 to $50,000 range.

– Paula G.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.