Over the last couple of weeks I have been tweeting that the credit market for the Energy Sector (and select energy related names) seems to have made a turn for the better, albeit at levels that are still stressed. That sentiment is now spilling over into energy stocks. Looking at some DeMark charts of the Oil Services ETF (OIH), they show levels that, if a couple of things fall into place, could signal that the worst for this group is behind it, at least for an extended period of time. Note that the charts for the S&P Oil & Gas Exploration ETF (XOP) look similar.
Let’s take a look at the credit ‘tells’ first:
As you can see above, spreads on high yield bonds and on the Credit Default Swaps of major oil services names are revisiting recent tights. If they can manage another leg down they will likely serve as an invitation for shorts to “declare victory” and close out what has been a VERY successful trade. This would give the energy sector some breathing room and likely put a bid under energy equities.
When seen through the lenses of DeMark analysis, the same message transfers to energy sector equities. (If you are not familiar with DeMark indicators and want a brief primer, please you can read more here.
The first chart shows the daily DeMark counts and levels for the Oil Services ETF (OIH).
Those familiar with DeMark can easily see the importance of the setup:
- A close above the TDST Level Up at $36.57, followed by a higher open and a higher high tomorrow morning, will “qualify” the break of the TDST line and argues for the eventual completion of the active Sequential and Combo Countdowns both of which are only on bar 6;
- In layman’s terms, the completion of a TDST Sell Setup above a TDST Level Up, and the qualification of the break of the TDST Level Up line suggest that the daily downtrend that has been in place for months has likely been broken;
- The caveat here is that the TDST Sell Setup printing today calls for a pause/pullback of 1-4 bars, so watching how price behaves through the end of the week will probably clarify the overall picture quite a bit.
Considering how long and how brutally energy stocks have been beaten, if the improvement were seen only on the daily charts I would probably be more than a bit skeptical of its staying power. We know the old axiom that the sharpest rallies tend to be of the counter-trend nature. But things are getting better for this energy sector ETF also on a weekly basis.
The first thing to point out is the completed Combo Countdown Buy 13 (white arrow), which was foretold when the TDST Level Down level was broken on a qualified basis (red arrow). It’s at that “13” level that sellers, according to DeMark theory, should have reached the point of exhaustion. True enough, note how the price never approached the “Risk Level” at $29.37, i.e. the secondary exhaustion level below which the Combo Buy signal would have been deemed to have failed. The selling exhaustion was then confirmed when the price printed a bullish “Price Flip”, i.e. a close higher than the close 4 bars prior.
However, consistent with the state of credit and the daily DeMark tells, bulls have more work to do before they can claim the “all-clear”. First, the TD Sell Setup, which is currently on bar 3, needs to continue to its conclusion (Bar 9). If the Sell Setup count cancels out early, it will be a sign that the bulls’ firepower is iffy at best. Second, the weekly TDST Level Up at $45.20, is still very far away, and until that’s overtaken on a qualified basis, the most someone can argue is that energy sector stocks may be on the cusp of a cyclical bull move within a secular bear.
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The author has no positions in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
