Energy stocks are limping into the new week as the weakest sector on Wall Street. While the recent oil plunge hasn’t helped matters, the bearish behavior began months ago. In mid-December, the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) peaked at $78.45 and has since fallen 11%. We’re officially in correction territory.
The downside reversal has been sufficient in carrying XLE beneath its 20-day, 50-day and 200-day moving averages. With resistance aplenty now heaped overhead, rallies should be viewed with skepticism — like last week’s, for example. Energy stocks were caught up in the post-Federal-Reserve-meeting euphoria with everything else. The optimism was good for a 3% pop in XLE that quickly fizzled.
With a new downswing upon us, now is as good a time as any to scan the space for low-risk bearish setups. Having already done the exercise, I can tell you — the sector is riddled with downtrends that are in the process of testing resistance.
Consider these three picks one banana peel away from another plunge into the abyss.
3 Energy Stocks to Sell: Baker Hughes (BHI)
Baker Hughes Incorporated (NYSE:BHI) kicks us off with a delightful little downtrend. Increasing momentum accompanied its last downswing, showing that bearish conviction is growing. Last week’s Fed-induced rally carried BHI stock right back to its declining 20-day moving average. It’s an area that has halted many of its prior advances. Friday topped off the week with a large topping tail, or upper wick. This candlestick formation reveals the downside reversal may have already begun.
If BHI breaks below Friday’s low ($58.33), consider shorting the stock with a stop-loss at $60. You option traders are out of luck. Though BHI has options available, they are extremely illiquid so steer clear.
3 Energy Stocks to Sell: Transocean (RIG)
Next up is the most volatile of today’s selections, Transocean LTD (NYSE:RIG). The stock is already down 4% right off the bat this morning. RIG shares have followed the descent of their sector, but with a lot more vigor. Since peaking at $16.66, RIG is down almost 30% over the past three months.
Last week’s rebound carried shares of the offshore driller to the declining 20-day moving average. Thursday’s massive bearish engulfing candlestick illustrates just how handily buyers were rejected at this level. With today’s downdraft, RIG stock is now testing its 200-day moving average. Look for RIG to fill its OPEC-inspired gap from late November if the 200-day gives way.
This will take shares down to $11. Buy the May $12 puts for 90 cents.
3 Energy Stocks to Sell: Apache Corporation (APA)
Apache Corporation (NYSE:APA) rounds us out with a chart similar to its predecessors. The exploration and production company has been steeped in a downtrend for months now. The descent has been so substantial that the 200-day moving average has been turned lower. That’s no small feat. Last week’s pop lifted APA stock to the descending 20-day moving average where it was rebuffed in short order.
APA shares are falling in early-morning trading, confirming its next down-leg has begun. Buy the April $52.50 puts for $2.80 to profit.
At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.