The energy space may be bad but oil itself is worse

• Posted by Greg Harmon
• on August 14th, 2015

There is no doubt that the drop in crude oil last summer hurt the entire energy space. So much of America’s energy independence had been built on oil drilling via fracking. But then oil stopped falling for a while and so did broad energy stocks. The worst was over? Not so fast as oil takes another leg lower with a barrel of oil trading under $42 Thursday. Breaking the March low, it touched levels it had not seen since 2009.

As this is happening the broad energy sector is falling again right? Well yes, and no. It is falling but not as fast. A look at the chart below shows the ratio of the energy sector ETF ($XLE) to West Texas Crude Oil prices over the last 3 years. First notice the long move higher in the ratio from the start of the October sell off in Crude Oil. Outperformance by the sector.

Next the pullback in the ratio until the start of this last leg lower in oil. Since oil started falling again the XLE has outperformed again and the ratio is rising fast towards the prior high. The price action is tracing out a AB=CD pattern that targets a ratio of 2.04, well above the prior high. So waiting for the ratio to make a new high, and confirm that the previous one will not stop it, still leaves a lot of upside. And a natural stop loss level.

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