Trends tend to overshoot. Markets are driven by emotion. And irrational exuberance reigns all markets.
Those are some of the principles of markets.
Crude oil and energy is definitely a textbook example of how markets work. More about it in our 2016 Outlook Report (free download).
First, crude oil has now fallen to the lowest area of its secular support going back +3 decades. Old resistance becomes support, and that’s where crude has arrived now. Can this downtrend overshoot? Always. But the downside here is really limited in our view.
The only technical indicator in our methodology is the 90 week moving average. Today’s deviation from the 90 week moving average has only been seen during the depth of the financial crisis in January of 2009. This downtrend has run its course, the downside is limited.
Looking from another angle, we come to the same conclusion. The XLE ETF, representing energy stocks, has reached secular support when compared to the S&P 500. We know that ratios can signal a strong message when combined with other indicators. This is a textbook case in which extreme readings are set across all our indicators, including the XLE to S&P ratio, as seen on the chart below.
We believe the downtrend in crude oil and energy stocks is over. This is the time to be at the long side of the market. However, trading in and out is recommended, as, after such a decline, a bull market should not be expected anytime soon. We do anticipate a sharp relief rally.