Stalking an Energy Trade

By Jim Farrish | November 19, 2008 | 8:25 AM | 0 CommentsTweet This

The energy sector has been in an accelerated downtrend since peaking in June and July. The index fell more than 50% during this period and is now trying to find a short term bottom. The general consensus is we are at or near a bottom and prices will begin to gradually rise. The chart below is giving some evidence to that statement, but there is still plenty of room in either direction. There are several sub-sectors you have to consider when looking at the energy complex overall. The first and most obvious is oil. The price of crude continues to fall as oil now stands below $54 per barrel. Along with the price of oil, gasoline has fallen below $2 per gallon at the pump. This has been good for consumers, but bad for stocks. Another component is the alternative energy sector which has fallen along with the price of oil. Coal and natural gas are in the same boat and to some degree worse. All combined the sectors have been pushed to levels were fundamentals look attractive assuming oil finds a bottom near the $50 mark.

A break out of the wedge higher would be an opportunity to play the broad sector. (NYSE: IYE) or (NYSE: XLE) are the two ETFs for the broader index. Looking through the index at the positions that are creating the current push you find first the conglomerates. Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), BP (NYSE: BP) and Marathon Oil (NYSe: MRO) all moving off their lows and make attempts at breaking higher. The refiners are looking better as well. Sunoco broke above resistance at $31.50 and is now attempting to take out the short term downtrend line. The oil services stocks are still lagging short term and could be the key to any breakout to the upside short term for the broader sector. Coal and natural gas have yet to establish a short term bottom and are still under pressure to the downside. Alternative energy stocks are not fairing much better. They have not established a near term low and in some cases are near breaking below support.

The broader index offers less risk in any plays that may develop short term. Be patient in adding any positions and have a disciplined entry, exit and target established before you put money to work. To track this daily you can link to www.SectorExchange.com

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