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ENERGY SECTOR; BEARS REMAIN STRONG IN THE SHORT TERM

Updated: Apr 12, 2023

This was a premium article that has now been made public


This week we are going to take a look at the energy sector (XLE). You will see in the diagrams below that the energy sector has performed poorly as of recent in comparison with the broader market therefore could provide upcoming intermediate term opportunities in the context of value.

Looing at the heatmap to right (filtered by P/E) you will see energy amongst the few stocks showing undervaluation with the RRG showing the energy sector in the lagging quadrant. This doesn't come as much of a surprise given the downturn in crude oil prices.


Crude prices below show monthly momentum remains firmly to the downside for the time being although we are close to a key area where this downturn could bottom out.


Crude Oil (monthly chart, Stochastic / MACD)


Taking a look at the energy sector ETF, it appears the momentum still remains bearish alongside crude oil with no real sign of it slowing just yet. This brings short opportunities into the picture considering the range bound action we are seeing on the ETF will likely drag onto throughout the sector allowing the bearish momentum to continue.

  • Range bottom: $66.90

  • Weekly support $51.95


XLE sector (weekly / stochastic / MACD)


Looking closer into the sector we can now turn out attention to short term downside plays from a technical perspective. The medium - long term will likely rebalance therefore the strategies below are short term (12week) plays, sell to buy.


Williams Company (WMB, $28.30)

Strategy

Short term: short positions preferred as the daily MACD remains firmly bearish after dipping our head back below weekly support, the door is open for further selling to the downside.

Consider hedging long term investments as the downside risk is open to >20%.

Downside areas of interest: $25 / $23.50

Break above the 4HR gap around $30 would bring a bullish move back into question.


TARGA RESOURCES (TRGP, $67.47)

Strategy

Short term: Short positions preferred: another energy stock that has lost momentum and is breaking lower, in keeping with the theme of the sector.

Downside targets remain $56.27 / $47.61.

Consider hedging core long positions as the risk of a period of downside remains high following a weekly MACD sell signal and overturn from oversold stochastics.


ONEOK. INC (OKE, $59.49)

Strategy

Short Term: short positions preferred as weekly MACD divergence has followed through with a sell signal. Sitting close to the top of a 10year range for OKE, the probability of a move lower in the short term remains high.

Downside target $50 - if the bears find momentum below $50, there is not a great deal of technical assistance to stop it for the time being.


Consider hedging long exposure on energy stocks:

HAL: Target $22 / XOM: target $90 / CVX: target $134


We will see fair value pricing if potential downside targets are met, however the downside risk remains high probability as the energy sector underperforms, given the space to the downside crude oil still has to run.


As the downturn in the energy sector continues at least for the short term, be cautious of buying anything in the following 6-8 weeks (particularly on leverage). There will undoubtedly be high value opportunities that will present themselves for longer term investments however for the time being the momentum remains bearish.





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