From the Desk of Ian Culley @IanCulley
It’s easy to lose sight of how impressive energy has been this year.
We get it. Sideways action is boring.
But while the rest of the market has been selling off, energy has shown incredible resilience, digesting gains in a continuation pattern since early summer.
After an explosive rally for energy stocks off the 2020 lows, it’s normal to experience an extended period of corrective action. In fact, it’s healthy.
Now get this...
Many of these stocks haven’t even broken out yet!
We know it sounds crazy, especially when some of these industry groups have more than tripled during the trailing 24 months.
But the charts don’t lie. They’re telling us some of these trends might just be getting started. Let’s take a look.
We can break down oil and gas companies into three main categories: upstream, midstream, and downstream.
These designations refer to where a particular company operates along the supply chain, from extracting the raw material to selling the refined product.
Reviewing these three segments, we uncover a clear view of the energy space.
Let’s start at the top.
Upstream
It all begins upstream. These companies are the explorers and producers that discover and extract reservoirs of oil and gas.
Check out the Explorers & Producers ETF $XOP:
XOP includes some of our favorite exploration and production names: Valero Energy $VLO, Occidental Petroleum $OXY, Conoco Philips $COP, and Texas Pacific $TPL.
We have open trades on all these tickers, which you can view on Rangefinder. As these trades race toward our targets, XOP is still stuck beneath overhead supply.
It’s carving out a multi-year base in the shape of a potential inverted head-and-shoulders reversal pattern. Interestingly, the neckline of the reversal formation coincides with a decade-long polarity zone at 180.
If and when the bulls push past this critical level, we’re buying strength with a target of 336. Under these circumstances, we imagine many E&P names are trending toward our secondary objectives.
Midstream
Midstream companies connect the explorers and producers to the downstream refiners – think of MLPs as the transports of the energy sector.
Here’s the Alerian MLP ETF $AMLP:
One of our favorites from this group is Cheniere Energy $LNG. It’s been one of our best trades this year, steadily printing fresh all-time highs. Few stocks can say that in 2022.
Yet these names are still contending with overhead supply at the index level. AMLP is pressing against a former support level turned resistance around 41.50.
Once demand absorbs supply at this key polarity zone, we like it long toward the 2017 highs of 66.
Downstream
Last but not least, we have downstream companies focusing on refining and selling the finished product.
Check out the multi-year base in the Oil Refiners ETF $CRAK:
It’s base after base when flipping through these industry ETFs, reminding us the energy sector hasn’t even broken out yet!
There’s plenty of overlap between these funds, especially CRAK and XOP. Many of the large oil and gas companies extract and refine.
Valero Energy is an excellent example, as VLO is a key component of both CRAK and XOP ETFs.
We’re buying strength in CRAK on a break above 36.50, targeting 50. But we can only be long above that level after a decisive base breakout.
The Oil & Gas Services ETF $XES also looks poised to resolve higher:
Top holdings in XES include industry titans Schlumberger $SLB and Baker Hughes $BKR.
It also holds smaller companies on our watchlists, such as NextTier Oilfield Solutions $NEX and US Silica Holdings $SLCA.
Both are on the verge of breaking out. And with XES printing fresh three-month highs, we think it’s only a matter of when not if they break out.
As long as XES is above 68.50, we like it long toward the 2019 high near 126.50.
That’s it for today – a brief review of the key industry groups within the energy space. We outlined key levels, offering well-defined entry points.
But that’s not the main takeaway. If you walk away with one piece of information, it should be this:
The bull market in energy is just getting started!
Sure, these ETFs have stalled out and made absolutely no progress year to date.
However, once buyers reclaim the critical levels laid out above, we have no reason to doubt these consolidations resolve in the direction of the underlying trend: higher.
Stay tuned!
COT Heatmap Highlights
- Commercial hedgers near a record net-long exposure to feeder cattle.
- The unwind in gold has taken a time out. Commercials added 18,000 contracts to their long position this week.
- And commercials like the Canadian dollar, holding within 9% of their largest long position in three years.
Click here to download the All Star Charts COT Heatmap.
