For most of 2015, the energy sector is where investment performance has gone to die. Over the past 12 months, for instance, the big SPDR Energy Select Sector ETF (XLE) had shed almost a quarter of its value, the worst of any sector over that 12-month stretch.
But the selloff in energy may be running its course this fall. It may come as a surprise, for example, that energy has actually been the best-performing sector over the course of the last quarter, from a relative strength standpoint. And that about-face in energy sector performance is parlaying into some tradable opportunities in a handful of the sector's biggest names.
Today, we're turning to the charts for a technical look at five energy stocks to buy.
In case you're unfamiliar with technical analysis, here's the executive summary: Technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, here's a rundown of five technical setups that are showing solid upside potential right now.
Up first on the list is oilfield services giant Halliburton (HAL) . Halliburton's performance track record is right in line with the rest of the industry over the last year or so. Since this time last November, shares of this $32 billion energy stock have slipped almost 25%. That's a huge chunk of this stock's value that shareholders have given back in 2015. But Halliburton's chart indicates that the tide may finally be turning.
Halliburton is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance up above shares at $40 and uptrending support to the downside. Basically, as Halliburton bounces in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakout above that $40 price ceiling. When that breakout happens, it's time to be a buyer again.
Momentum, measured by 14-day RSI, provides some extra evidence for the breakout. Our momentum gauge has been in an uptrend since August, making higher lows at the same time Halliburton's price was forming the ascending triangle pattern. That's a bullish divergence that becomes actionable once increasingly eager buyers can muster the strength to shove this stock back above $40 resistance.
Even though the price pattern is a little unconventional -- the ascending triangle is typically a continuation pattern that occurs after shares have already begun an uptrend -- the trading implications are exactly the same here. Wait for $40 to get taken out before jumping into this trade.
We're seeing the same price pattern in shares of $8 billion energy industry technology provider FMC Technologies (FTI) . Like Halliburton, FMC is forming a slightly unconventional ascending triangle pattern. In this case, the big breakout level to watch is horizontal resistance up at $36.
Why all of that significance at the $36 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle setup in FMC, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for FMC Technologies' stock.
The $36 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $36 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Remember to be reactionary here. This isn't a high-probability trade until our $36 line in the sand gets crossed.
After shedding more than 35% of its market value in the last 12 months, long-suffering shareholders in oil and gas company Imperial Oil (IMO) could be in store for a well-deserved reprieve. While Imperial's downtrend is still intact this fall, shares have been looking "bottomy" in the long-term. The buy signal comes with a breakout above $35.
Imperial Oil is currently forming a double bottom, a bullish reversal setup that looks just like it sounds. The double bottom is formed by a pair of troughs that bottom out at approximately the same price level, and it triggers with a push through the peak that separates those two lows. For Imperial Oil, that's the aforementioned $35 price level. And while this stock's downtrend is still intact here, it's no coincidence that a breakout above our $35 price level also breaks shares through the top of that downtrend.
As with any trade, risk management is crucial for anyone thinking about buying this stock once the buy triggers. After it happens, it makes sense to park a protective stop on the other side of the bottom of the pattern down at $31.
The big change in trend is already in play over in shares of oil and gas exploration and production stock Encana (ECA) . Shares of Encana bottomed back in late August, and they've been moving up and to the right ever since, bouncing their way higher in a well-defined uptrending channel. That makes Encana a "buy-the-dips stock" this fall -- and shares are testing a dip this week.
Encana's uptrending channel is formed by a pair of parallel trend lines that have identified the high-probability range for this stock over the last three months now. Every successive test of the bottom of that price channel has provided traders with a low-risk/high-reward buying opportunity, and early indications suggest that shares are trying to stage their fourth bounce this week.
Actually waiting for that bounce is important for two key reasons: It's the spot where shares have the most room to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before the channel breaks, and you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for a bounce to happen first, you're ensuring Encana can actually still catch a bid along that line before you put your money on shares.
Canadian Natural Resources
Last up on our list of bullish energy trades is $27 billion oil and gas producer Canadian Natural Resources (CNQ) . Canadian Natural Resources doesn't look much different from most of its energy sector peers on a broad strokes level -- shares have been selling off for more than a year now, shedding a double-digit chunk of this stock's market value in the process. But a sharp rebound at the beginning of last month is putting Canadian Natural Resources in a strong position for a longer-term breakout in November.
Canadian Natural Resources has spent the last several months showing traders a classic reversal setup called an inverse head and shoulders. The pattern signals exhaustion among sellers, and it's identified by two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakout above the pattern's "neckline." Right now, that's the $26 level in Canadian Natural Resources.
The 50-day moving average has started acting like a good proxy for support in recent sessions, which makes it a logical place to park a protective stop once our $26 breakout level triggers.