Trend – A quick look at the daily chart shows the impact of the speculation that consumption will fall as a result of a slowing economy in the US. With the slowdown in Europe the same speculation is gaining global support. Regardless, the question remains as to the validity of this assumption. The weekly chart shows a different scenario with the long term uptrend still in play. Since July the sector has essentially trended sideways looking for the next catalyst to push the sector higher. So far that catalyst has not materialized and in fact the opposite opinions have developed; a correction in the energy sector as a result of higher supply and lower demand. This is a tricky sector to make simple assumptions due to outside variables that are truly unpredictable. Those would be political, such as we are seeing in Venezuela and Iran. They would be supply driven by OPEC, which just announced they want to cut production due the “slowing” in the US and Europe. They would be subject to growth in developing countries such as China and India. The point here is simple; making assumptions in this sector can be dangerous to your portfolio. The key is to let the data speak for itself and have a definitive strategy in approaching your investments for this sector.

Outlook – Short term consumption in the US and Europe have dropped. But, only in the last two weeks has supply data shown an increase versus a decrease. It is also important to realize we are heading towards the peak consumption periods as we head towards spring and summer. Thus, we would not be betting against any significant drop in price or consumption long term. With the price of crude in the $85-100 price range exploration and production of oil will continue.

Strategy – IYE (iShare energy sector ETF) allows you to play the entire sector based on the Dow Jones Energy Index. It has held support near the 200 day moving average after testing support near the $116 mark. It looks like a trading range is in the process of developing short term. This would set up the next trading opportunity. If we break out of the topside of the range, $126, it offers an opportunity to go long with a target of $136 short term. If we break out of the bottom of the range, $116, it offers an opportunity to go short with a target of $108 short term. (FYI: Exxon and Chevron make up 38% of this ETF) Other opportunities exist here such as XOP which is the SPDR ETF for exploration for oil and gas. With the pullback near $50 this is an attractive entry point near term with a stop at $48.27. IEZ is the ETF for equipment and services sector which is consolidating near the lows and could offer an opportunity as well. There are short term opportunities in the energy sector with the key being patience for these plays to develop. On the other hand the long term trend is still bullish.

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