Drilling Deep into the Oil Patch

  • 0

Drilling Deep into the Oil Patch

Tags : 

Over the last year one of the toughest sectors in the markets has been Energy.  After a long run something changed last summer and the sector began to underperform.  Earlier this year the space bounced when it looked like oil wanted to retrace some of the losses, but that attempt got thwarted in late April or early may.  Only to drive the sector back to new lows again.  This the noise around the industry is getting even louder about how bad the outlook is for the sector.  How low oil will drop from here, and how many will go out of business.  All of that could be true in due time, but if so, on our way there we are likely to see some violent bounces.  If that is not what is in store for the energy space, then this level of noise and the data we are about to look at could be trying to tell us now.  Each week in the SIN report I monitor sector breadth as well as relative strength to see how things are going.  Of course we all love strength, but I also like to watch for extremes in general and the Energy situation definitely qualifies.  The number of new 52wk lows in the space starting at the end of last year was eye-opening (accounting for much of the negative skew in the broad NHNL Differential).

Energy Sector NHNL Differential8-11-2015 Energy NHNL DIfferential

The first thing that caught my eye here was the divergence in the NHNL and new lows over the recent weeks; then looking back you see there is also a divergence from the December lows as well.  I haven’t studied how well this setup of long followed immediately by a short-term divergence works on breadth, but on RSI it is one of my favorite signals to look for a fast move.  But the divergences in themselves are the key.  Then I looked over to the Moving Average Breadth chart which is showing similar both long and short-term divergences in the %>20sma & %>50sma windows (not marked).

8-11-2015 Energy MA Breadth

It is also worth noting the %>200sma has been below the signal line for a long stretch. It can get longer, but going back on my charts to 1998 this is already spent the most time in the oversold zone than any other time period I can find.

8-11-2015 Energy McClellan

Next, the McClellan chart shows the Summation Index is not diverging, but it is at its lowest reading back to 1998.  So all of our long and Intermediate readings fit the washout definition; now we will turn to the short-term breadth Indicators to see what message they are giving.  First, sticking with the McClellan chart, note how the Oscillator has actually been spiking above zero recently and trying to make new highs here.  Next we look at its cousin, the Breadth Thrust Indicator which is sporting some of the same divergences we saw above.

8-11-2015 Energy Breadth Thrust

There are multiple ways you can draw the divergences here, but is suggests the selling pressure is waning.

8-11-2015 Energy Percent Days

The last breadth chart is the shortest term indicator which is the Percent Days chart.  This shows when both the volume and Advance Decline ratios are very skewed.  July showed a lot of energy selling, but can you see how the pressure died down about mid month and actually has flipped to more positive in August even though we have made new lows.  That is a very subtle divergence and change in character that this reading can help pick up.  You can see it occur at many other reversal points to the left.  It doesn’t tell you how long or far the move will go, but give a daily read on changes in pressure.

So, for those who buy strength, which is a fine strategy, this is not where you want to go fishing.  For those who like finding changes in character for either a major change in trend or just a fast retracement move when everyone gets one side of the boat, then this is where we have to dig in and see where the opportunities are. That is where the Relative Strength readings and segmentation comes in.  We all know Energy has some of the worst RS of the major sectors, so we will skip that list and dig right into the sector itself.

Energy Subsector Relative Strength8-11-2015 Energy SS RS

Here we can see how each Susbsector ranks and the price weighted performance of each segment along with the RS rankings gong back.  Refiners have been on top, but Oil Services is trying to make a move in recent weeks.

Another way we can look at this is with the ETF scan I use in the weekly report.  Below I have the list as of yesterday.  I also highlighted the ETFs that have moved over 20 RS points in the last 5 days which would qualify them as movers.  Green for gainers and orange for losers.

Energy ETF Relative Strength with Movers8-11-2015 Energy ETF wMovers markedFINVIZ link

Many can stop there as this sector has plenty of choices and focused products to choose from.  If you are not an ETF fan, then we need to drill a little deeper and see what we can find in the sectors. Today I am only going to concentrate on the Top and Bottom 25 in the entire sector and then look at some various RS Movers scans.

Top 24 Energy Relative Strength8-11-2015 Energy Top25 RSFINVIZ link

Bottom 25 Energy Relative Strength8-11-2015 Energy Bottom 25 RS


I would suggest sticking with the gainers side, but some may want to really dig deep or maybe do a pairs trade with the losers list.

Another way I like to spot opportunities is using the RS Movers scan.  Many of you know i do it on the entire market each evening, but I can also do precision drilling to make sure we don’t waste a lot of time and money on dry wells.

Energy RS Gainers8-11-2015 Energy RS Gainers


Energy RS Losers8-11-2015 Energy RS LosersFINVIZ Link

For those who didn’t stop at the broad sector and want to focus on a specific subsector below are the each Subsectors RS Gainers.  Since I am looking for a potential move higher I am not including the RS Loser for each in this.  It is already a good bit to digest.  they are in the order of Relative strength in the list above

Oil & Gas Integrated, Refining & Marketing8-11-2015 Energy OGIntRefMkt RS GainersFINVIZ Link

Oil Equipment & Services8-11-2015 Energy OGSvc RS GainersFINVIZ Link

Oil & Gas Pipelines8-11-2015 Energy OGPipelines RS GainersFINVIZ Link

Independent Oil & Gas8-11-2015 Energy IndOG RS Gainers


Oil & Gas Exploration & Production8-11-2015 Energy OGExpProd RS GainersFINVIZ link

This is just the movers, you could also look at the strongest players in each subsector since this is such early stage action.  Lets see how things go and maybe I can do a follow-up with the strongest players in each segment.  Don’t forget, we don’t have a turn yet and this is still a very early read.  As always, price has to follow before action is warranted and even then it should be treated as an oversold bounce until the action proves to you it is growing into more.  If this analysis does pan out there will be opportunities to catch fast moves off the bottom, but with that comes with excess risk as well, so be ready and have a plan for it before you get involved.

Good Luck and I hope this helps!

If you like what you see, follow me on StockTwits or Twitter.
(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)
The information set forth here was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.  Neither the information, nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities. I or my affiliates may hold positions or other interests in securities mentioned in the blog.  Full Disclaimer
There is no guarantee that the views expressed in this communication will become reality,  Investing in the stock market involves risk and potential loss of principal, Investment strategies should be thoroughly researched and understood before implementing and none of this should be construed as a recommendation

About Author


is a Chartered Market Technician (CMT) and Certified Financial Planner (CFPr) in Greensboro Georgia (Outside Atlanta). Founding partner of Barber Lackey Financial Group, LLC, a Registered Investment Advisor. However, this blog is not affiliated with BLFG and does not make recommendations to buy sell or hold any securities.