This Oil Stock Analysis Shows A Bottom Is Near For Explorers!

| August 11, 2015 | 0 Comments

oil prices plungingLittle Known Technical Secret Suggests A Bottom Is Near For Oil Stocks…

No doubt about it, the past three months have been a disaster for oil stocks.  You’ll be hard pressed to find the stock of an oil exploration and production name showing positive performance since early May.

One of the best ways to measure overall oil exploration industry performance is through the SPDR Oil & Gas Exploration & Production $XOPThis widely followed ETF holds oil producing names like Newfield Exploration $NFX, Exxon Mobil $XOM, and EOG Resources $EOG.

One look at a chart of $XOP tells you all you need to know…

Oil Stock Analysis, a chart of $XOP

As you can see, after a weak May, the ETF went into a free fall in June and July.

The recent downturn has $XOP down 15% on the month, 28% lower on the quarter, and weaker by 21% since the start of the year.

Clearly, oil stocks have been sent into the gutter in recent weeks.

Not surprisingly, sentiment towards oil stocks has grown highly pessimistic.  It seems just about everyone has thrown in the towel.

But take a look at this… 

A highly reliable technical indicator is showing an unusual pattern, which suggests a bottom may finally be near for oil stocks.

Let me explain…

Ask anyone that has studied technical analysis extensively and they’ll likely tell you the Relative Strength Index (RSI) is the best momentum indicator available.  Developed by J. Welles Wilder, the RSI measures the speed and change of price movements.

In a nutshell, the RSI index is great at indicating overbought and oversold levels in any market.

Here’s where it gets interesting…

Every once in a while the RSI gives a very accurate signal that proceeds a change of trend.

Let’s look back to that chart of $XOP so I can explain…

Oil Stock Analysis, a chart of $XOP with RSI

Notice that in early August the $XOP made a new low (upper red line).  But at the same time, RSI did not make a new low (lower red line).

Remember, RSI measures the speed and change of price.  So when RSI did not confirm the new low set by $XOP in early August, it’s a great sign of selling momentum decreasing to the point where a reversal to higher prices is likely.

This rare technical phenomenon is called a divergence. 

While no technical indicator is 100% accurate, RSI divergences are darn close to it.  When you see these patterns develop, you best sit up in your chair and take notice.

Given the RSI divergence pattern, extreme oversold nature of oil stocks, and severe pessimism towards the industry, the odds are growing quickly for a recovery rally in oil exploration stocks.

How do you capitalize on this situation?

The easiest way is to simply buy $XOP, or its big brother the Energy Select Sector SPDR $XLE.   Both $XOP and $XLE hold a wide basket of oil stocks and are exhibiting the same RSI divergence pattern.

But just to be safe, I also suggest you place a stop-loss order below the early August low in $XOP or $XLE.  If the bullish RSI divergence pattern doesn’t pan out, you’ll want to cut your losses quickly and efficiently. 

Until Next Time,

Justin Bennett

***Disclosure*** Editor Justin Bennett has a long position in $XOP.

BIO:  Justin Bennett is the head commodity research analyst at  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

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Category: Technical Analysis

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.