Oil Stock Breakout: Bullish Trend Reversal IN?

| October 8, 2015 | 0 Comments

oil pricesOil Stock Rally- More Gains Ahead?

Much like the abrupt rally in gold stocks we talked about earlier this week, oil stocks are seeing similar bullish performance.

In fact, the Energy Select Sector SPDR $XLE rallied 13% over the past four trading sessions.  As you may know, $XLE is the top dog of energy ETFs as it currently has assets under management of around $11.5 billion.  Without question, $XLE is the best representation of overall oil stock performance the market has to offer.

But here’s what’s really important…

Over the past few days, a number of very important (and bullish) technical developments have occurred in $XLE, as well as other energy assets.

Here’s a quick breakdown of the situation…

Oil Stock Rally: A Much Needed Technical Break…

As you’re very likely aware, it has been a remarkably tough year for US oil producers.  With the price of West Texas Intermediate (WTI) skidding to multi-year lows under $40 a barrel, much of the US exploration and production industry has crashed on the rocks.

This chart sums it up pretty well…

Oil Stock, a performance chart of $XLE

As you can see, there’s been no love lost on the oil industry in 2015.  At one point not so long ago, $XLE succumbed to a vicious 30% yearly downturn.

But notice the price action on the far right of the chart.

Here’s a closer look…

Oil Stock, a chart of $XLE

Notice how $XLE broke above (green circle) the long-term downtrend (red line) from the April 2015 highs.  The break of this very important technical level suggests a bottom may finally be forming for the beleaguered energy market.

Analyze the charts of other energy assets like the SPDR S&P Oil & Gas Exploration & Production $XOP, Exxon Mobil $XOM, ConocoPhillips $COP, etc. and you’ll find similar patterns.

But that’s just the start of it…

The price of WTI is suddenly breaking higher from a month-long trading range at $45 a barrel.

Check it out…

Oil Stock, a chart of WTI

After a month of monotonous sideways trading, it appears crude bulls are taking another shot at moving this important commodity to higher ground.  Given the triangle pattern (red lines) in WTI, a rally to the low $50 a barrel range is likely in coming days.

Is there a fundamental reason to support such a bullish move?

While the US oversupply problem is nowhere near over, there are signs it will soon start alleviating.  Case in point, last week’s Baker Hughes rig count revealed another big downturn.

As of October 2, 2015, there were 614 crude directed rigs drilling for oil- a stunning 61% drop from the 1,591 rigs reported this time last year.

Clearly, oil drilling in the US is suffering a severe slowdown.

It’s just a matter of time before this drastic drilling reduction starts turning US production numbers sharply lower.

But that’s not all…

There may also be a fear premium building into the oil market thanks to the situation in Syria.  I won’t rehash all the worrisome details here, but Russia’s involvement in the 4-year old Syrian civil war could immensely complicate matters in the entire Middle East region.

Bottom line…

The culmination of the technical factors in the charts above, along with the fundamental points just discussed, increase the likelihood the energy markets have finally found bottom.

How do you capitalize on it?

Carefully placed bets on oil stock ETFs may reap outsized rewards in coming months as energy markets rebound.

Until Next Time,

Justin Bennett

BIO:  Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com.  With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them.  Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.

Tags: , , , ,

Category: Crude Oil, Energy

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.