Oil made a comeback in the past week, rallying 3 percent, after major crude producers agreed to cut output.
Energy stocks didn’t get the memo. The XLE energy ETF slumped 3 percent in a week and pushed the group to the edge of a bear market.
Craig Johnson, chief market technician at Piper Jaffray, says that after the tumble, the likely path now is up.
“We’re overweight the energy sector at this point in time for one simple reason: It looks like a lot of the bad news is largely baked in,” Johnson, said on CNBC’s “Trading Nation” on Friday. “When you look at the decline in the oil price that we had seen and when you look at the XLE chart, you saw [the] oil price fall at a much faster pace than what you saw the stocks fall.”
West Texas Intermediate futures tumbled by around 35 percent from peak to trough over the last sell-off, says Johnson. However, the XLE fell by roughly half that amount.
“The XLE chart has come right back to clear identifiable support and you’re getting a positive divergence on the RSI so at this point in time it’s better to be buying the XLE in here than selling it, and that’s what we’ve been telling our clients,” he added.
The XLE hit its most oversold level in four years in October as its relative strength index tumbled to 18. Any RSI reading below 30 typically suggests oversold conditions.
Mark Tepper, founder and president of Strategic Wealth Partners, sees big upside for crude from here.
“With OPEC actually cutting production, we should see oil trade according to demand finally and it could have 20 percent upside from here,” Tepper said on “Trading Nation” on Friday.
A 20 percent gain from Friday’s close would take West Texas Intermediate crude oil up to roughly $63 a barrel. The commodity got a big boost on Friday after OPEC and non-member countries agreed to a 1.2 million barrel-a-day production cut beginning in 2019.
Tepper is neutral on energy stocks as a whole, though he does favor one name.
“Within the sector we prefer a company like Occidental Petroleum. It’s much more diversified, and I think those companies are going to be in favor,” he said.
Occidental Petroleum has fallen 13 percent in the past three months, lagging the 12 percent drop in the XLE ETF.