Definitely the energy sector. Don’t worry about falling oil. Energy’s already oversold.
Here’s why.
For a start, the long-term bullish trend is still going on in the Energy Index (XEJ). Indeed, despite choppy markets and two false breaks occurred in August 2007 and late January 2008, the support line that backs that bullish trend is still valid.
It’s a stubborn little fellow.
Currently, this support line goes through the level of 15,000 points. The index closed yesterday at 16,843.30 points. It means that there would need a further decline of 11% to test once again this support.
But we can see that the index should bounce back before that. And the current levels appear to be a good opportunity to jump back on board. We’re looking for a near-term rebound.
Why? Well, globally speaking the XEJ fell by 15% this month. It has just reached the 16,500 points level, which was a high posted in last October.
As previous highs become new lows, it means that the gap existing between the two last highs (points C and D) has closed. Bullish momentum can’t happen until after this takes place.
Well, it’s happened. Let’s switch to a daily shorter-term chart now.
On July 28, the Index reached a low of 16,539 and has slightly rebounded since. It’s a bit early to be sure whether it’s a durable rebound. For such a purpose investors will probably wait until other technical indicators confirm the curving up price action.
However the oscillators and momentum tools should soon confirm a developing bullish signal…especially if the XEJ is still trading above the intermediary support of 16,500 points. Indeed there are technical similarities that argue for a coming upside move.
The RSI has already triggered a “buy” signal. It just quit the oversold zone, turning upward and crossing its signal line. The last times this pattern occurred in a recent past were in August 2007 and January 2008, points A and B on the chart.
Both were big rebounds for the energy sector
The story could be the same with the MACD. It fell to very low levels. All the way down to the same level hit in last August and January. It has curved upward slightly. A cross above its signal line would strongly confirm the bullish signal.
What could be the next target?
On the upside, the 18,700 points is likely to be the main target. It’s the 23.6% retracement of a Fibonacci ratio…and this is exactly where the last rebound ended on July 15.
