Browse Symbol Stacks: XLE: It Doesn't Matter, Until It Does

It Doesn't Matter, Until It Does

Saturday, 02 June 2012 13:44 Davis Ramsey

It's now been almost two months since I wrote this post about my belief that the mining sector was near a key turning point and that a large rally was not far away. It took nearly a month before the low was finally seen on May 15th, and now after the surge higher Friday I'm sure gold, silver, and miners will start getting a lot more attention going forward. Needless to say finding the low was more difficult than I thought and there were several days where I questioned whether my general thesis was correct at all - perhaps the sector was simply finished for good and would never recover. Ultimately I knew that I was on the right side, I just had to wait for the market to work itself out since it is virtually impossible to know what kind of reversal you'll see - a quick reversal that takes a matter of days or, as was the case with miners, a grind along the bottom for weeks before final capitulation. The good news for those who bought in the middle of May when I made this post proclaiming my strong belief that the final low had been seen is that the worst is most likely behind us. I'm not anticipating a straight shot higher but the intermediate trend is showing good signs of finally reversing to the upside and I have no plans to sell my mining positions anytime soon, though I will not likely be adding to them either for awhile at least.

Instead, I think the next opportunity lies in energy for the same reason that I originally pursued the miners trade.

As you can see, the bullish percent index for energy is at levels that have triggered strong rallies in the past.

This longer term view of the summation index is particularly interesting. Looking at the RSI indicator below the chart, this indicator has not suffered this much aggressive, sustained selling at any time in the last three years. Furthermore, the index is in an area that has marked the yearly lows for the previous two years though in both 2010 and 2011, the S&P 500 went on to make a lower low while the summation index marked a higher low in July and October respectively. Of course we have suffered more selling according to this indicator than either of those two lows, so it may not be necessary to form the positive divergence later. Either way, based on this the market is very close to staging a strong rally which obviously makes the depressed energy sector that much more enticing for long positions. I plan to use weakness early next week to take long positions in this space, particularly OAS and SGY.

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