Energy and materials have fallen off a cliff. I wrote about coal and steel Monday, and today I'll take it a little farther down the line with Ecopetrol (EC). It has lost more than half its value in a year, but is "only" down a bit more than 7% in 2015. Unfortunately, looking at this daily chart, if EC loses $15, it goes another 10% lower before finding support.
The week started with big, bearish, short-term, option-put purchases on the energy sector exchange-traded funds, which included the exploration-and-production names. Even though these puts may be short-term in nature, if they do play out well for the buyer of those puts this week it is likely to have a more lasting impact on individual names. For instance, EC is hugging a downtrend line after spending two months moving higher. There is potential for a head-and-shoulders pattern or just a simple bearish channel developing. In either case the $15 area looks supremely important as it comes into play on either of those, and it was the initial launching point for the recent bullish reversal.
I was at least hoping to see some bullish divergences in the secondary indicators, but we don't have that yet either. The Relative Strength Index (RSI) is running right along with price and still declining. Until the RSI is back above 50 on the 13-period measurement, I have a hard time believing any bounce will be anything more than short-lived. The slow stochastics also turned bearish again after a brief flirtation with a reversal signal. We are now back to waiting for the black line on the stochastics to flat line and break below 10. As far as the vortex indicator stands, it is the most bearish of the group. Trend and momentum are dead -- by dead I mean they are bullish, and price has the potential to increase in velocity here, which a bull doesn't want to see given the current direction and sentiment.
Shorting EC is tough since a trader would be shorting in the hole; but if $15 is broken, it becomes a viable play. This also speaks volumes to how quickly both sentiment and money is moving back and forth in this market between different sectors. Don't be a pig on anything. When you get the bounces, take some off the table. I don't see buying and holding everything as an overachieving strategy.
