ENERGY STOCKS PULL BACK FROM OVERBOUGHT CONDITION -- CRUDE MAY BE PUTTING IN SHORT-TERM TOP

HIGH VOLUME REVERSAL IS A CONCERN ... On September 14 I used weekly charts to show why I believed that the the long-term trend of the energy sector had reached overbought territory (September 14, 2005). [The monthly charts are also overbought]. I allowed, however, for higher prices since the short-term trend was still moving higher. On Monday of this week, however, I wrote that the 9-day RSI for the Energy SPDR (XLE) had moved into overbought territory over 70. That made the short-term energy trend overbought as well. Chart 1 shows a couple of negative short-term readings. One is that the daily RSI line is starting to weaken from over 70. The second is that the latest price move into new highs by the XLE wasn't confirmed by the RSI (See blue arrow). In other words, a short-term negative divergence has been created. Thursday's downside reversal day took place on the heaviest trading in a month. That's another caution signal. Any closes beneath the 20- and/or 50-day averages would signal more serious profit-taking in the Energy SPDR.

Chart 1

Chart 2

OIL SERVICE HOLDERS ALSO LOOK TOPPY... Chart 2 shows the Oil Service Holders (OIH) and carries a similar warning on the daily MACD lines. The September bounce in the MACD lines has fallen well short of its early August peak. That has created a more obvious negative divergence with the price action (See red arrow). It wouldn't take much to push the OIH MACD lines into negative territory.

OIL MAY BE FORMING SHORT-TERM TOP ... Today's selloff in oil of more than two dollars may be completing a right shoulder in a short-term head and shoulders top in the key commodity. The September bounce has fallen well short of the late-August peak (the head) and is about equal to the early August peak (left shoulder). It's now challenging its 50-day average and may be headed for a test of the neckline near 62.50. A close beneath that support line would turn the short-term trend down. That would weaken energy stocks even further. I'm not suggesting that the long-term bull market in energy is over. I am suggesting that it's come too far and is need of some correcting. I also believe that the price spikes from the two recent hurricanes have probably been overdone. What better time to take some energy money off the table when TV stations are talking about nothing else. One TV station showed a chart of the XLE yesterday and said it was a good thing to buy when oil prices are rising. That's the "kiss of death" in any rally.

Chart 3