This commentary originally appeared on Real Money Pro at 11:00 a.m. on Oct. 19. Click here to learn about this dynamic market information service for active traders.
There have been sporadic calls this year from analysts suggesting that the time is right to buy oil stocks. Unfortunately, some of those calls have been early. Despite a recent upturn, the Energy Select Sector SPDR ETF (XLE), which provides a broad representation of the energy sector, is down 12.54% year to date.
However, the technicals are now looking quite favorable for energy stocks. The sector is on the move, and now it's formed a pattern that indicates the rally is far from over.
West Texas Intermediate (WTI) crude oil remains trapped between $44 and $50, where it has been lodged since late August. While oil itself isn't tempting at the moment, oil stocks are looking downright sporty. Stocks are more than just investments; they can be predictive instruments. As such, energy stocks shouldn't necessarily mirror the performance of the underlying commodity.
Take a look at a chart of XLE, which is still 30% below where it was trading last summer. Over the past three months, the energy ETF has formed a huge double-bottom pattern (circled). The energy ETF is finally trading above its 50-day moving average (blue) for the first time since May. Based on a traditional measuring technique, the bullish pattern projects XLE to the area just below $80.
What are the best-looking charts in this sector? Check out Action Alerts PLUS Holding EOG Resources (EOG). EOG closed at a three month high on Friday, and is now trading above its 200-day moving average (red) for the first time in five months. Since it bottomed in August, EOG has shown a tendency to rise on strong volume, and then fall back on lower turnover. This is a healthy sign that points toward accumulation by institutional traders.
Another name that has managed to breach its 200-day moving average is Transocean (RIG). In addition to trading above its major moving averages, Transocean's MACD indicator (moving average convergence divergence) is trending higher. This positive divergence between RIG's price and indicator suggests the stock is headed higher.
Pioneer Natural Resources (PXD) is another strong name. This stock bottomed in August and has been rocking ever since. The stock's volume, like EOG's, also hints at accumulation (circled).
Best of all, Pioneer has formed an inverted head-and-shoulders pattern (semi-circles). A break above the neckline of the pattern (dotted line) could push the stock all the way to $165.
While the overall sector is preparing to move higher, not every stock in the sector looks ready to rally. Some of the names that failed to make the cut include Schlumberger (SLB), Apache (APA), and Halliburton (HAL). We anticipate that EOG, RIG, and PXD should outperform SLB, APA, and HAL.