While the energy sector has been one of the leading groups in this market since the beginning of the year, not all subsectors have participated equally. We have seen the oil service, refiners and integrated producers move out to the upside with conviction. The one energy subsector that has lagged on a relative basis is exploration and production.

Exploration and production is tied very closely to the price of oil, and crude oil has not made as much of an improvement as the strong action in the broader energy sector would suggest. Traders have bought into the idea of a refining bottleneck and continued spending on oil services more than on rising prices for crude itself.

We have witnessed some improvement in the price chart of crude oil. It has formed a basing configuration that is typically indicative and supportive of higher prices. A move above the $67 to $68 level would produce a breakout and suggest further upside to the low $70s area.

We believe that crude has a good chance of moving to the upside, and the E&P stocks should follow closely. Higher crude means the oil in the ground is worth more, and that is exactly what these companies have, oil in the ground.

Exploration & Production Sector Breadth

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If we look at the breadth line for the E&P sector, we see a divergence between this group and the breadth line for the broader energy sector. This tells us that even though the E&P index is moving higher, we haven't seen a breakout in money inflows toward the group.

This isn't surprising when we look at the chart of crude oil. Crude has been stuck in neutral as it consolidates at this level, but we believe that this consolidation has a good chance of resolving to the upside. Problems with Russia and the coming hurricane season are increasing the event risk in the commodity over the summer.

If we do see an upside break in oil prices, the E&P stocks may be the names that give traders the best bang for the buck at this point due to the lagging relative strength of the group and the leverage of these stocks to oil prices. Today we are looking at two more production companies

Apache

(APA) - Get Report

and

Newfield Exploration

(NFX)

. These two stocks are displaying very similar positive technical characteristics.

Apache Corporation

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Apache is a little further along in its rally, but has recently broken out of a multimonth basing process. The lengthy basing process is a very big positive characteristic and is supportive of a further rally in price and time. We would expect further upside to the $90 level.

Newfield Exploration

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Newfield Exploration is earlier in its advance, but is in the process of completing a multimonth base as well. It can be bought at current levels or on pullbacks to the $48-$50 level. This has upside potential into the low $60s.The confluence of individual names in this sector displaying similar positive technical characteristics is a very encouraging sign.

At the time of publication, John Hughes had no positions in the stocks mentioned. Hughes began his career at the NYSE in 1989 followed by twelve years running the technical analysis department and co-managing a hedge fund for a New York based brokerage firm. In 2001, John Hughes co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indexes and sectors. Mr. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion.