From the Desk of Steve Strazza @Sstrazza
Due to the recent bank failures, this week has been all about the financial sector and the selling pressure taking place there.
However, the price action for energy stocks has been even worse by some measures.
The Energy Sector SPDR $XLE is on pace to fall -6.8% this week, while the Financials Sector SPDR is only lower by about -5.8%.
When we look at energy futures, the outlook only worsens with crude oil registering its largest weekly loss since trading into negative territory in April 2020.
So, what does this all mean for the bull market in energy?
The sector has been so resilient, showing steady leadership for several years now. Is it all over?
Maybe not, but there is some serious damage that will require immediate repair work.
Let’s take a look at it.
After failing at the 2022 highs, energy stocks fell to their lowest level in over five months this week.
Here’s what XLE looks like:
With so much sideways action since last summer, the long-term moving average has completely flattened out, turning lower for the first time since 2020.
Just to be clear, XLE is now below a falling 200-day moving average.
Making matters worse, the daily RSI-14 is at its lowest level since 2021, as momentum confirms the new lows.
Momentum is also oversold for crude oil as the all-important energy contract breaks to new 52-week lows:
When it comes to energy stocks and commodities right now, the playbook is simple. It’s all about the prior-cycle highs from 2018.
For XLE, that level is 78. For crude, it’s 75.
We’d have to go all the way back to 2021 for the last time both charts were below these critical levels at the same time.
If this damage is not repaired immediately, energy is susceptible to heightened volatility. We’re likely to see further downside from here.
On the other hand, if the breakdown from this bearish continuation pattern in crude oil fails and reverses higher, energy stocks are likely to follow.
It’s not too late to save these primary uptrends, but bulls need to act swiftly if that’s where this is headed.
For now, we want to approach energy with caution.
Unless we’re above those former highs, we won’t be looking for new opportunities in the oil field anytime soon!
COT Heatmap Highlights
- Commercial hedgers hold their largest net-long position for the Chicago Wheat in three years.
- Commercials’ short position to Live Cattle hits three-year extremes.
- And commercial hedgers’ short position for soybean meal hit a historical extreme.
The data is as of March 7. We’ll update as soon as the Commodity Futures Trading Commission releases current data.
That’s it for today!
Thanks for reading. As always, let us know what you think.
And be sure to download this week’s Commodity Report below!