Opportunities in the Oil Patch?
Short term traders and active investors looking for oversold markets among all the recent bull market euphoria need look no further than the energy sector, where a number of major stocks has weighed down the group as a whole, creating potential short-term trading opportunities in many of the energy sector’s most widely traded exchange-traded funds.
Many of these ETFs, like the Energy Select Sector SPDRS ETF (NYSE: XLE) are not yet trading in technically oversold territory. That said, pulling back on Tuesday after two-day bounces, both the S&P Oil & Gas Exploration & Production SPDRS ETF (NYSE: XOP) and the iShares S&P Global Energy Sector Index Fund ETF (NYSE: IXC) reversed back to the downside by more than 1%. These reversals lower have earned XOP a “consider buying” rating of 8 out of 10 heading into Wednesday’s session, and given IXC a positive, short-term edge of a third of a percent.
For its part, the Energy Select Sector SPDRS ETF is set to open Wednesday morning with a short-term edge of more than three-quarters of a percent. Closing lower by 1% on Tuesday, XLE has retraced half of its bounce from Monday and Friday, and could easily trade oversold and at new, short-term lows on any significant, follow-through selling on Wednesday.
The Tuesday pullbacks in these exchange-traded funds can also be seen as part of a larger correction that began with a three-day sell-off a week ago. To the degree that the bounces in these ETFs did not sate those still wanting to sell, the pullbacks on Tuesday could be the beginning of more aggressive selling over the next few days. This potential for weakness in funds that otherwise have been trading in bull market territory since at least late January is likely to attract short-term buying interest, especially if the weakness over the next few days becomes pronounced.
Traders and active investors interested in leveraged ways to trade increasingly oversold conditions in energy stocks may want to look at exchange-traded funds like the ProShares Ultra Oil & Gas ETF (NYSE: DIG), as well as the Direxion Energy Bull 3x Shares (NYSE: ERX). Shares of DIG earned “consider buying” ratings of 8 out of 10 in Tuesday’s session after pulling back by more than 2% on the day. Earning a one-point upgrade to a neutral 6 out of 10 were shares of ERX, which slid by nearly 3% ahead of trading on wednesday.
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David Penn is Editor in Chief of TradingMarkets.com