Image Source: Pixabay

Energy names, which are tracked by ETFs XLE, XOP, and OIH and include popular names like CVX, XOM, PSX, COP, SLB, and EOG (to name just a few), have sold off hard along with Crude Oil (WTI) this past week (9/28 – 10/5). Crude futures hit a high of 93.69 on 9/28 before selling off on heavy volume down to 82.10 on 10/4.

According to this article on oilprice.com, institutional traders were behind the selloff, despite a drop in inventories and the fact that Saudi Arabia and Russia confirmed that they would continue holding back supply to support prices.

While supply remains constrained, along with the onset of winter heating season, the common theory for the selloff is that traders are wary of demand destruction caused by the recession and the continued economic slowdown in China. The weak demand theory makes sense — but why did it suddenly cause traders to sell? Did they not hear about the recession until this week?

The more likely reason behind the selloff is that the Smart Money started accumulating the brunt of their long positions with crude trading in the 60’s and 70’s. At 93, the Smart Money had profits of between 30 and 50 percent — the right time to ring the register and take their winnings.

Analyze the Charts

If you look at this weekly chart of WTI futures (/CL) you can spot a technical reason for the selling at 93, coincides with the 50% fib retracement from the 123.73 high back in June of 2022.

If you look at the hourly chart, notice the heavy volume on the move up to 95, and then on the acceleration down on the break below 90. Then there’s significant buying volume coming in as support at between 82 and 83.

Has crude found support here, or is this just a short-covering bounce that will get sold again?

Based on the fib levels on the weekly chart above, it looks like crude could break below 80 and test the 23.6% fib level at around 77.50.

It would appear, therefore, that the path of lease resistance for crude is lower.

What about Energy Equities

The drop in crude is bringing down oil and gas-related equities. The equities tend to follow crude, the DOW and the S&P — and they’ve all been heading lower, so it’s not surprising that the energy names are taking such a beating.

Is this selloff going to continue?

Taking a look at a weekly chart of XLE, the ETF that tracks the largest and most popular oil and gas names, we can see that the current selloff is simply a pullback down towards the 89 EMA at around 79. There’s also a large volume area of potential support at around 80. Most of the charts of the equities in the XLE look just like this chart.

What Happens Next?

If I knew what happens next, I clearly would not be spending my time writing this — I’d be mortgaging my house and placing my bet, all in. The market can, and will, do whatever it pleases.

Based on the charts and price action, it looks like the current selloff can continue a bit longer and take crude down to 79-80 and the energy equities down to their respective 89 EMAs. At that point, assuming the supply situation remains tight and demand doesn’t totally shut down, crude and the equities should find support and begin another move up. Remember, the Smart Money sold in the low 90s, so they will probably be ready to buy back in around 80 and ride it back up, this time to 100.

A general market bull run, some positive China demand stimulation or a new geopolitical crisis, can help the bull case in crude and energy stocks. On the other hand, a market dump on bad data releases or Fed speak can push crude and energy stocks through support levels.

Seasonal Performance

One final data point to look at is the seasonal performance of the energy sector.

Here’s a chart, provided by EquityClock.com :

Notice the peak in June followed by the pullback and then the nearly 50% retracement and then the selloff at the beginning of October. Based on this seasonal chart, we could be getting a push through the end of the year.

Should You Buy or Sell Energy Stocks

I cannot give you buy or sell recommendations. This is just for educational purposes. 

Based on the charts we looked at and our analysis, if I already was long energy names (which I am), I would NOT sell here because I think we are close to support and a bounce. I also wouldn’t add to my positions – or start a new position – until I saw crude find support at 79-80 and the XLE at its 89 EMA on the weekly chart. Dong nothing is sometimes the smartest move.

Best of luck in whatever you decide to do!

More By This Author:

What Is A Low Volume Retest And Why Is It So Important?
Should You Use Stops In Your Trading?
You Can’t Beat The Smart Money; So Why Not Join Them?