Oil stocks are bottoming.
That doesn’t mean the sector is set up for a huge rally and it’s time to buy every stock with “oil” in its name. Bottoming is a process. It’s a period of low-level consolidation, where stocks chop back and forth in a relatively tight trading range and store up energy for a new rally phase. That consolidation can take several weeks, or even months, to complete.
But oil stocks probably aren’t headed much lower…
Take a look at the benchmark Energy Select Sector SPDR Fund (XLE)…
XLE bottomed in December at about $72 per share. Following a 10% rally, XLE came back down and re-tested the $72 level earlier this month.
In other words, while XLE was making lower lows, the MACD was making higher lows.
That was a good sign the $72 level would hold as support.
It did. And XLE has bounced about 5% higher since then.
With a double bottom now in place, it’s unlikely XLE is going to break below that $72-per-share support line anytime soon.
But it’s also unlikely XLE is ready to take off sharply higher just yet. You see, the nine-day exponential moving average (EMA) is still trading below the 50-day moving average (DMA), which indicates the downtrend is intact.
The nine-day EMA needs to cross above the 50-DMA to kick off a new bullish trend for the energy sector. Getting too aggressive right now and trying to anticipate that “bullish cross” is dangerous.
Look what happened in September when the nine-day EMA failed to cross over the 50-DMA. Look at what happened with the same setup in late November. Buying oil stocks in both of those situations would have been a disaster.
This time, we do have a double bottom in place, and we do have positive divergence on the MACD indicator. So the odds of a bullish cross are better. But it’s still going to take at least a couple more weeks for that to happen. And if oil stocks chop back and forth for a while, it could take much longer.
The good news, though, is oil stocks have started the bottoming process.
And there’s a lot of value in the oil sector right now, even with oil trading near $40 per barrel. Many oil stocks are trading with single-digit price-to-earnings (P/E) ratios – a big discount to the S&P 500’s P/E ratio above 17. Many offer dividends of more than 3%. And many are trading at steep discounts to their book value.
So value investors can slowly start accumulating shares of oil stocks. But it isn’t the time to make a lot of speculative bets that oil stocks are headed higher right away. Aggressive traders should wait until the chart shows a bullish cross before betting on an oil stock rally.
Best regards and good trading,
Jeff Clark
[ad#stansberry-ps]Source: Growth Stock Wire
