OVERBOUGHT ENERGY SECTOR KEEPS RISING -- HOW TO USE THE ENERGY BULLISH PERCENT INDEX

THE ENERGY BULLISH PERCENT INDEX... A week ago I talked about how the energy sector was very overbought on both a short and long term basis and even suggested taking some partial profits (with emphasis on the word partial). With energy prices still rising, however, energy stocks keep hitting new highs. What to do? One of the technical tools that can be helpful at times like these is the Energy Bullish Percent Index. Bullish Percent Indices can be found for the major stock and sector indices at the bottom of the Stockcharts.com Summmary Page. Bullish percent indices

ENERGY SECTOR IS AT 90%... The bullish percent indices are based on the number of stocks in a group that are on point & figure buy signals divided by the number of stocks in the index. Readings over 50 are considered to be bullish. At the same time, reading under 30% are oversold; readings over 70% are overbought. The Energy BPI is currently at 90% which is extremely overbought (See Chart 1). Chart 1 shows that it usually doesn't get much higher than that. That's a caution signal that the group is dangerously overextended. While that may justify some partial profit-taking, it doesn't justify selling core positions. To justify that, we have to see some evidence that the uptrend is slowing -- or possibly even reversing. That means a decline of 6% from the highest even number. At present, that would mean that the Energy BPI would have to fall to 84% to signal a short-term reversal or the beginning of a downside correction. Even that wouldn't be reason enough to sell out your whole position. But it might be enough to suggest taking a little more money off the table.

Chart 1

MORE ON POINT & FIGURE CHARTING... The use of BPI numbers is explained in Thomas Dorsey's excellent book Point & Figure Charting (see StockCharts.com online bookstore) which is based on the original Chartcraft p&f method. According to that method, a three-box downside reversal is necessary to signal a market correction. Since each box is worth 2%, a three-box reversal calls for a 6% decline from an even number. I'll have more to say on how to use that form of charting in another article. And I'll have more to say on the Bullish Percent Indices. In the meantime, keep an eye on the Energy Bullish Percent Index for some help in trying to determine when to take some profits in an overbought energy sector.