Oil stocks have played a great game of “catch-up.” But now it’s time for traders to cash out.

Two weeks ago, it looked like the oil sector was on the verge of a rally. The price of oil had been rallying yet oil stocks were being held back by the weakness in the broad stock market.

We figured that once buyers stepped up, they’d be looking to buy the cheap energy stocks and fuel a “catch-up” rally for the sector.

That’s exactly what happened. The S&P 500 is up almost 4% over that timeframe. Andthe Energy Select Sector SPDR ETF (XLE) is up 7%.

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Now, though, it’s time to take some profits. XLE is now quite overbought and far extended to the upside. And it’s vulnerable to a short-term pullback. Take a look at this chart…

It’s rare for XLE to trade much more than 5% above its 50-day moving average line (the blue line on the chart). Yesterday, XLE stretched nearly 8% above its 50-day MA. That’s an overbought condition. And, it’s a condition that is not likely to sustain.

The energy sector either needs to pause right here and give the moving averages a chance to catch up to the current price… or XLE needs to pull back and drop down closer to the blue line. Either way, the potential for further upside from here in the short term is small.

So if you bought into the energy sector two weeks ago, congratulations. It’s been a great ride. But the time has come to take some profits.

Traders can look to get back into oil stocks once the risk of a short-term pullback is out of the way.

Best regards and good trading,

Jeff Clark

P.S. My Delta Report subscribers just closed out our energy sector position for nearly a 20% gain in just three weeks… And just yesterday morning, I sent them a speculative idea in Delta Direct. (Subscribers can view that latest recommendation right here.)

To learn how you can take advantage of everything the Delta Report has to offer, click here.

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