Scott Maragioglio (212-692-6392) smaragio@epiphanyresearch.com
The energy sector has fallen apart at the seams as crude oil reverses off of the highs, breaks the daily uptrend line and retest the weekly uptrend. The speed of the collapse in crude is catching many traders by surprise. From our point of view the sharpness of the move down in crude along with the weakness of the other commodities suggest a change in the nature of that market and one that should not be ignored. There is a positive created here by the easing of inflation that is implied by this commodity weakness, but we are much more concerned about the implications to global growth and the possibility of a meaningful slowdown.
The energy stocks have been forming distributive patterns and have rolled over. The group is under pressure as long-term holders are being shaken out and hedge funds are pressuring the sector on the short side. We would not try to jump on the short bandwagon here and put these stocks out at this point. The % of stocks > 40-day moving average is moving into oversold territory and the % of stocks > 200-day is getting close. We do believe the % of stocks > 200-day will move to a deeply oversold reading before a rally occurs, but we are in the red zone now and short trades should become unproductive from here and present a much greater risk of a snapback rally. We suggest waiting for the deep oversold readings to occur and cover existing shorts. Aggressive traders can buy at that point and look for a sharp counter-trend move.
The strength of the rally of of the oversold readings will tell us if the bull market for energy resumes or if this oversold reading is a " bad" oversold that only leads to a counter-trend move within a larger bearish structure.









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