Technical Strategy Video:
Key Takeaways
- Energy should outperform into 2022 and recent weakness represents buying opportunity
- Exploration and Production Stocks likely to outperform Drillers, Oil Services & Integrated
- Elliott-wave structure and Cycles on WTI both point higher into next year, suggesting WTI and Brent Crude likely stabilize and turn back to new all-time high territory
- Favorite names include: FSLR 22.26% , ENPH -5.57% , FANG 2.82% , DVN 2.80% , OAS, EOG 2.96% , WLL, MRO, PXD, COP 2.68% , GDP
Energy outperformance this year has slowed a bit into November, a seasonally weak time for WTI as relative charts of WTI Crude vs SPX hit meaningful resistance. However, this ratio chart of Invesco’s Equal-weight Energy ETF, (RYE) and lower part of the chart, RYE vs SPY, has formed a large bullish base in recent years. Thus, even on recent consolidation, this should represent a technical buying opportunity for a WTI Crude push back to new highs. Any technical breakout of the “red line” below in RYE v SPY, which intersects highs over the last few years, should lead to some very strong outperformance into 2022 and beyond. Bottom line, recent weakness since late October has not been damaging for Energy, but appears like an attractive time to buy dips.
Key Reasons for Technical Bullishness:
WTI Crude pullback cannot be taken seriously, technically speaking. From an Elliott wave standpoint the overlapping waves gave early evidence of this consolidation proving short—lived and leading back to new highs.
Energy has formed a multi-year bullish base vs SPX that still should lead to much better performance even despite 2021’s stellar gains, when consolidation highs are exceeded
Cycles for WTI Crude point higher into 2022 for a push back to new highs. This means, Biden’s attempts at causing a politically motivated decline in Gasoline should be unsuccessful
Exploration and Production (E&P) stocks look to be the best technical way to play Energy in the months to come (XOP-SPDR S&P exploration and Production ETF) and the breakout in XOP to OIH chart and also XOP to XLE looks meaningful and positive for outperformance in E&P
As seen below, the structure of the first decline from mid-October took the shape of a three-wave decline. Thus, recent consolidation could not have been labeled a larger top for WTI, but something to buy into. That area looks to be at current levels given stabilization near former peaks(now support) just as price makes a critical 1.382% Fibonacci extension of the first pullback. While getting down to 73.23 would be an ideal area of risk/reward support and cannot be ruled out, Crude looks to be getting close to support and it’s right to buy dips.
Oil Services and E&P both look buyable, though E&P is more attractive, technically
Vaneck Oil Services ETF (OIH) ETF has been largely range-bound and trading near similar levels as February of this year. Its 20+% decline from mid-October has been disappointing, but importantly, has not done sufficient technical damage to be negative on this group. The pattern shown below cannot be called a Head and Shoulders pattern until the “neckline” of the pattern at 164.41 is violated. Technically I suspect this is consolidation only and should lead back to new all-time highs.
Exploration and Production has been far stronger than Oil Services, and as shown below, weekly charts show a breakout earlier this year of the seven-year downtrend from 2014. This looks important, technically speaking and is likely to drive this group higher in the months and years to come.
Source: MarketSmith by Investors Business DailyImportantly, when breaking down some of the sub-sectors within Energy, we see that XOP vs OIH has just broken out to new yearly highs after meaningful consolidation for most of 2020 followed by a slow rally back this year (2021) Subsector breakouts like this on this scale are rare, and mean that stocks like DVN, EOG, FANG, OAS, WLL should be stronger going forward than names like SLB and HAL. Overall, I favor XOP instead of OIH or XLE for outperformance in Energy heading into next year. While OIH likely can still show strength as WTI Crude starts to work higher, it likely will lag the E&P’s.
Finally, it’s worth pointing out that the Cycle Composite I employ that I created from the Foundation for the Study of Cycles is pointing up sharply next year and has been a reliable gauge for cycle studies in weeks and months past. It has correctly identified many of the former peaks and troughs in recent years.
