Trading Places with Tom Bowley

Energy Is Now Primed For A Big Rebound

Tom Bowley

Tom Bowley

Chief Market Strategist, EarningsBeats.com

I know. I know. It's been the worst sector and the second worst sector isn't even close. Look at this sector leaderboard for the past six months:

The XLE is the ONLY sector in negative territory. Its SCTR score is 2.3. What the heck could trigger a rally?

The U.S. Dollar ($USD).

It began rolling over late last week and I believe it could continue for awhile. The PCE index from the Q4 GDP report on Friday showed inflation WAY below the Fed's 2% target level and that'll either keep the Fed on hold on rates for a long time.....or it might trigger pressure on them to lower rates again. That will put downward pressure on the dollar. There's already pressure on the dollar to move lower, however:

U.S. treasury yields are dropping much faster than treasury yields abroad (most notably in Germany, shown above). The direction of that relationship generally triggers a similar reaction in the USD. That's what the bottom panel above (correlation) tells us. We spend a lot more time in positive correlation territory than we do in negative (or inverse) correlation territory. I see the dollar falling and both energy (XLE) and materials (XLB) strengthening on a relative basis. I don't expect this to be a long-term change in direction, but 1-3 months wouldn't shock me.

There's another chart you should be aware of:

50-52 is an important support zone. Given a potential target near 72, the reward to risk entry into the XLE here makes a lot of technical sense.

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Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More