OPEC continues to attempt damage control with meetings to reduce production on crude oil. The last move was to cut production by more than 2 million barrels per day. There is another meeting planned to cut production again. I am of the opinion oil is trading relative to the economic data and market outlook currently. This means the supply/demand card that had been driving oil is now focused on what is happening in the U.S. and global economies. If the outlook improves the price of crude rises and if it deteriorates it declines. This is a psychological shift in the thinking among traders and analyst. Therefore, as an investor I have to play the market based on what analysis or strategy works during the current trend.

Outlook – The energy sector has been in a significant downtrend since July. The 50% decline has cleared the decks of speculation to the upside, but has now swung the other way to the downside. The current base being constructed is either a stopping point and we are going to reverse back to the upside or it is consolidating prior to continuing the downtrend. The statistical odds favor the downside continuation, but it is important to let the market decide that point versus speculating or guessing. This is an opportunity to put the sector on our watch list and play the short term movement or develop a longer term strategy should it play out. I would expect oil to trade in the $45-60 per barrel range near term and that should keep the sector in a trading range as well. Take what it gives and play with discipline the short term moves until the next trend develops.

Trend – The dominate trend is down. A simple look at the chart shows the move lower in July confirming the long term and short term trends to the downside. The five year uptrend line which started in 2003 was broken in May and the sector has continued lower since. The only question mark currently is the short term trendline. It would take a move above 500 on the index to take the trendline out. The six week consolidation we are currently in will give a clue on the trend when it breaks – up or down. For now we are consolidating short term to determine a trend break or a continuation of the downtrend. The longer term downtrend line would take a significant move to the upside to break.

Strategy – A close below 357 would be a continuation of the downtrend and a opportunity to be short the sector. A move above the 435 opens a buying opportunity short term. Anything longer term would need to gain momentum to the upside or accelerate to the downside. The simple fact is we are at a decision point. I like what is taking place in the sector technically. The longer the consolidation period the more people who will see it, write about and anticipate the move. That makes the breakout stronger and the play more predictable. Fundamentally the sector is better off with lower oil prices near term to ease some of the cost structure built into the higher price of crude. This ‘timeout’ allows the companies to make better deals for the future and the refiners to start making money again. Look for the breakout of the trading range short term and play based on a strategy that fits your risk tolerance. IYE (iShares S&P 500 Energy ETF) is the ETF for the long side of this play and DIG (ProShares UltraShort Oil & Gas ETF) is the short side of the play. Remember the two times leverage on DIG and adjust your play accordingly. Stay disciplined with any play short term. Define your entry, exit and target.

Chart of the Day

To go with the thoughts of the Sector Spotlight there are two charts worth watching relative to the Energy Sector. The first is ExxonMobil (XOM). As we discussed in the spotlight the short term downtrend line on the energy index could be broken with a continue push to the upside. Drilling into the sector to find what is driving the index higher, turned up ExxonMobil as one of the leaders. As you can see on the chart the downtrend line was broken to the upside yesterday. This is a potential opportunity to the upside with a target of $90. The 200 day moving average at $82.66 would pose the first point of resistance on the move. This is on my watch list to confirm the upside momentum.



The other chart of interest is Sunoco (SUN). This refiner has tried to complete a double bottom and accelerate through the downtrend line over the last couple of weeks. This is a stock that has been on my watch list for awhile and has give several short term plays, but I am looking for a move near the $45 mark short term. The volatility has picked up in the stock along with the news surrounding other refiners and their inability to execute short term on the decline in oil prices. Sunoco has been guilty by association and not execution. I look for the stock to move higher through this volatility. Any plays here would need to give room for the volatility to play out and that increases your risk to the position. Be cautious and disciplined in how you approach this stock.



Both of these charts are looking at the technical view of the opportunities. Fundamentally both are doing well relative to the sector overall. If you don’t follow technical analysis I would suggest to use this as a learning opportunity and follow how these play out. Don’t risk money on something you are not familiar with. Educate yourself first before you put money at risk. If you are familiar with technical analysis these will be updated if they work out and the breakouts continue. If not I will update them based on what happened. Either way develop a strategy before you put money to work in the markets. This is an extremely volatile market cycle and you should play accordingly.