Energy Sector Will Survive a ‘Key Reversal’ in Crude Oil - Here’s How to Trade It

There are several ways to participate in the coming recovery in the energy sector.
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The turmoil in the energy sector caused by the tensions between the U.S. and Iran caused the Nymex crude oil contract to experience a “key reversal” this week, unless the contract ends the week above $60.63, last week’s low.

Oil futures traded as high as $65.65 this week then failed to hold their quarterly pivot at $62.89, which accelerated the price reversal. Traders immediately realized that the U.S. no longer relied on oil from OPEC.

There are several ways to participate in the coming recovery in the energy sector. Here are the weekly charts for four energy sector choices: Nymex crude oil futures, the Energy Select Sector SPDR Fund (XLE) - Get Report, Diamond Offshore Drilling (DO) - Get Report and Transocean (RIG) - Get Report.

The Weekly Chart for Crude Oil

Weekly Chart For Nymex Crude Oil

Weekly Chart For Nymex Crude Oil

Courtesy of Refinitiv XENITH

The weekly chart for crude oil will remain positive if the nearby futures contract ends this week above its five-week modified moving average of $59.60 a barrel. 

Oil remains above its 200-week simple moving average or “reversion to the mean” at $55.30. 

The 12x3x3 weekly slow stochastic reading is projected to end this week rising to 80.29 above the oversold threshold of 80.00. 

At the April high of $66.60, this reading was above 90.00 as an “inflating parabolic bubble” which prompted a bear market decline of 21% to a test of its 200-week SMA of $52.61 tested during the week of June 7. This was a buying opportunity.

Trading Strategy: Buy weakness to the 200-week simple moving average at $55.30. The chart shows the monthly value level at $49.89 with the quarterly pivot at $62.89. A pop back above this pivot indicates upside potential to its semiannual risky level at $76.18. 

The Weekly Chart for XLE 

Weekly Chart For The Energy ETF

Weekly Chart For The Energy ETF

Courtesy of Refinitiv XENITH

The weekly chart for XLE is positive with the ETF above its five-week modified moving average of $59.07. 

The upside potential is to its 200-week simple moving average or “reversion to the mean” at $65.55 which was last tested during the week of April 26 when the average was $66.14. 

The 12x3x3 weekly slow stochastic reading is projected to rise to 76.74 this week up from 74.46 on Jan. 3.

Trading Strategy: Buy weakness to the quarterly and monthly value levels at $56.96 and $52.84, respectively, which are horizontal lines on the chart. 

Reduce holdings on strength to annual and semiannual risky levels at $68.38 and $71.20, respectively, which are the higher two horizontal lines on the chart.

The Weekly Chart for Diamond Offshore

Weekly Chart For Diamond Offshore Drilling

Weekly Chart For Diamond Offshore Drilling

Courtesy of Refinitiv XENITH

The weekly chart for DO is positive with the stock above its five-week modified moving average of $6.52. 

The longer-term upside is to its 200-week simple moving average or “reversion to the mean” at $14.75 which was last tested during the week of Oct. 12, 2018, when the average was $20.10. 

The 12x3x3 weekly slow stochastic reading is projected to rise to 65.51 this week up from 58.81 on Jan. 3.

The stock is above its semiannual pivot at $6.68 with its quarterly value level down at $4.58. There are no risky levels, so the risk / reward outlook is favorable.

The Weekly Chart for Transocean

Weekly Chart For Transocean

Weekly Chart For Transocean

Courtesy of Refinitiv XENITH

The weekly chart for RIG is positive with the stock above its five-week modified moving average of $6.

The longer-term upside is to its 200-week simple moving average or “reversion to the mean” at $9.78 which was last tested during the week of Oct. 19, 2018, when the average was $12.17. 

The 12x3x3 weekly slow stochastic reading is projected to rise to 78.52 this week up from 75.37 on Jan. 3.

The stock is below its quarterly and semiannual pivots at $6.56 and $6.75, respectively, with a monthly value level at $3.52.

A breakout above the pivots would be a buy signal. There is no higher risky level, so the risk/reward outlook is considered favorable. 

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the last nine closes in these time horizons.

New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.