Many traders know the old saw “overbought can become more overbought.” Strongly trending markets may look ready to crack on paper but keep going longer than anyone expects. The other side of that coin is that steep rallies can have equally steep corrections, and they, too, can last longer than anyone expects. #-ad_banner-#Right now, the energy sector seems to be at a crossroads between these two possibilities. After a sharp run up this year, the Energy Select Sector SPDR ETF (NYSE: XLE) became very extended to the upside by numerous metrics. Momentum indicators such as the… Read More
Many traders know the old saw “overbought can become more overbought.” Strongly trending markets may look ready to crack on paper but keep going longer than anyone expects. The other side of that coin is that steep rallies can have equally steep corrections, and they, too, can last longer than anyone expects. #-ad_banner-#Right now, the energy sector seems to be at a crossroads between these two possibilities. After a sharp run up this year, the Energy Select Sector SPDR ETF (NYSE: XLE) became very extended to the upside by numerous metrics. Momentum indicators such as the Relative Strength Index (RSI), the spread to key moving averages, lopsided bullish sentiment and an uncharacteristically high price/earnings (P/E) ratio all suggest it is time for a correction. The question now is how to play it. Do we buy this dip or do we wait for a pullback to a lower-risk entry point? For me, after the energy sector has racked up 20%-plus gains since February, the latter is far more palatable. I may miss the next leg higher, but given that the market is still overbought, controlling risk is paramount. On the daily chart, we can… Read More