The near-term moment of truth is approaching for SPX, as it was discussed how 3800 area should be initial strong resistance for this rise (Technically 3820 for S&P Futures, 3807 SPX cash). Overall, it’s encouraging how well various sectors are holding up lately, with Financials and Industrials showing sharp gains over the past week and outperformance over SPX. Yet, $XLK has been one of the stronger SPDR S&P ETFs over the rolling one-week period and seeing more evidence of Treasury yields and US Dollar rolling over would give even more conviction to the idea that a larger Equity bounce is getting underway. At present, the current tactical bounce remains part of ongoing downtrend from August, and more technical progress needs to happen to exceed early October highs to be able to start projecting higher into December. I suspect that a challenging time could be approaching between Friday and early November, yet I remain bullishly positioned, looking to buy pullbacks for a rise into December. Any near-term weakness likely holds 3600 before turning back up, but 3800-20 is the first meaningful resistance.
Crude oil might bottom by end of week
While this Crude decline has helped to consolidate the huge gains from late September, it now looks to be nearing conclusion. I’m expecting a bottom in WTI Crude by end of week and the start of prices to turn back higher.
Interestingly enough, despite a more than 10% decline in WTI Crude over the last 1 ½ weeks, Energy as a sector has shown positive performance, and was an outperformer vs SPX over the past rolling one-week up until Tuesday’s close (when Technology’s gains finally helped SPX to surpass Energy)
This resilience in Energy makes this group appealing, and patterns of $OIH, $XLE and also $XOP likely outperform the SPX between now and the end of the year.
I’ve discussed $MPC and $HES as being two of my favorite stocks within Energy, and just in the past week we’ve seen some signs of Alternative Energy starting to snap back. While this group has lagged Fossil Fuel stocks in recent weeks, Tuesday’s close in $ENPH and also $SEDG are encouraging towards thinking these stocks can also make a tactical bounce.
OIH starting to gain ground vs. both XLE and also XOP
Whether it be short-covering or optimism about US Drilling starting to possibly increase, the VanEck Oil Services ETF has begun to make good strides lately and has begun to outperform both XLE and also XOP.
The ratio chart of $OIH vs $XLE shows a meaningful breakout in its six-month downtrend, which should allow for OIH to outperform XLE in the near-term after a very sharp period of underperformance.
As I’ve discussed in these pages previously, OIH has been a laggard and should be avoided in Energy, but that seems to be changing as Services stocks and Drillers are suddenly beginning to strengthen.
At present, this remains heavily concentrated in $SLB, $HAL and $BKR, which make up 40% of the OIH etf. In the weeks ahead, it looks like OIH should be favored to continue this recent outperformance.
Technical targets for OIH lie at $272 with intermediate-term targets found back at June highs at $317. Only a pullback under $232.57 postpones this rise, but OIH looks to be on the verge of breaking out, despite recent weakness in WTI Crude.
XOP breaking its uptrend vs OIH suggests E&P’s might lag
Interestingly enough, the ratio of XOP vs OIH is also breaking down, which is a similar but reciprocal way of looking at OIH outperformance lately.
Some of this is directly due to Crude weakening, and the Exploration and Production ETF likely will lag other sub-sectors of Energy as long as Crude weakens.
Since I feel that Crude could bottom by end of week, keeping a close eye on XOP is recommended for any signs of stabilization. However, at present, those who wish to participate in Energy as a sector are encouraged to give strong consideration to OIH over either XLE or XOP.