The Energy Select Sector SPDR Fund (XLE) looks vulnerable to a stronger decline.

We first turned cautious on energy stocks back in October.

Back then, XLE was trading at its high of the year…

Financial television analysts were universally bullish on oil stocks. And, the Bullish Percent Index for the sector (BPENER) – which measures the percentage of energy stocks with bullish technical patterns – was at 100, the highest level possible…

We argued it couldn’t get much better than that for the energy sector. And if it can’t get better, then it can only get worse. So, investors would be better off waiting a few weeks before buying into the sector.

Well, here we are two months later and XLE is trading about 4% below where it was back then. Traders will do better buying the sector today than they would if they had bought in October.

But, it’s still too soon. It looks to me like there’s more downside ahead for energy stocks.

Take a look at this chart of XLE…

Chart

XLE is now trading below all of its various moving averages, and those moving averages have shifted to a bearish formation – with the 9-day exponential moving average (EMA – red line) below the 20-day EMA (green line), and the 20-day EMA below the 50-day moving average (MA – blue line).

This often occurs at the start of an intermediate-term downtrend. And, those moving averages will now provide resistance on any rally attempts.

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So, until XLE can climb back above all of those resistance levels, the path of least resistance is lower.

Perhaps even more important, though, is that the BPENER just generated another sell signal.

Take a look at the chart below…

Chart

Sell signals occur when the BPENER reaches extremely overbought territory (above 80) and then turns lower.

The red arrows on the chart point to the four sell signals that have triggered this year. In the three previous cases, XLE was lower one month later. I expect the same thing to happen this time around.

Traders looking to buy into the energy sector should stay patient a little while longer.

We’ll likely be able to buy the oil stocks cheaper in January than where they are today.

Best regards and good trading,

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Jeff Clark

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