DROP IN ENERGY PRICES CAUSES PROFIT-TAKING IN ENERGY PATCH

NATURAL GAS INDEX STALLS AT PREVIOUS PEAK... Last Thursday I showed the Natural Gas Index (XNG) pulling back from its late-September peak and suggested that it was leading an energy pullback. With natural gas prices falling to a six-month low, and crude down to the lowest level in a month (below $64), selling in the energy patch has intensified (as it has in most commodity markets). Chart 1 shows the XNG threatening its 50-day average. A close below that line would signal even lower prices and would justify some short-term profit-taking.

Chart 1

ENERGY SELECT SPDR ON SHORT-TERM SELL ... Although the long-term trend of Energy Select SPDR (XLE) is still up, it's giving some short-term sell signals. The daily bars show the XLE falling beneath its 20-day moving average which signals a further drop to the lower Bollinger band and/or its 50-day average near 63. Daily MACD lines are also turning negative. For those heavily long the energy sector, this looks like a good time to consider locking up some of those profits.

Chart 2

OIL SERVICE HOLDERS NEAR TEST OF INITIAL SUPPORT... Oil Service has been the strongest part of the energy patch. However, the Oil Service Holders are also succumbing to short-term selling. Chart 3 shows the OIH moving down to test initial chart support at 144.69. A drop below that level would constitute a short-term profit-taking signal. It's already trading below its 20-day line for the first time in 2006 and the daily MACD lines have turned down. I'm not turning bearish on the energy sector. I just think it's a good time for those with a shorter time horizon (or those with large long positions) to consider taking some money off the table. As with my previous suggestion on the gold market, however, I continue to favor holding onto a core position in the energy sector.

Chart 3