Tuesday, November 22, 2016 8:20 PM EDT
Crude oil is quite volatile lately. Our crude oil forecast for 2017 was rather neutral. With that in mind, are energy stocks worth buying or not?
First, we do not see crude oil breaking out significantly, it could rise to the 65 to 70 area in the best case scenario, where it will meet secular resistance. Because of that, we should not be overly bullish on energy stocks.
However, the energy sector has arrived at a crucial point. That insight is not available to investors looking at a daily or weekly chart; it is only visible when zooming out sufficiently, particularly on a 13-year timeframe, as shown on the first chart below. The energy sector, represented by XLE ETF, is currently meeting secular resistance. Both the horizontal and rising trendlines meet each other at current price levels.
We prefer to let the market speak: whatever happens at this price area is truly crucial to the energy sector. If energy stocks break through this price level, it would suggest the whole energy sector is going higher. In such a scenario, crude oil will rise to $65 a barrel, a 30% rise from here.
One of the bellwether stocks in the energy space is Halliburton, symbol HAL, a company with a market cap of $43M. Its chart pattern is very similar to XLE. So investing in the energy space or in HAL is rather similar, it is a matter of preference (individual stocks or ETFs) and risk diversification.
As always, we look a the market with an open mind, and recommend investors to do the same. If, and that’s a big IF, energy stocks penetrate the resistance area outlined above, we believe there is some 30% upside potential until previous highs (XLE and HAL) or secular resistance (Crude Oil). In our view, that will be the absolute maximum potential gain in the energy space in 2017.
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