Knowing when to fade a trend is important in trading and investing.
Knowing when not to chase performance is just as important.

In that regard, let’s take a look at the energy sector and a technical indicator called bullish percent.

It's a counterintuitive measurement that traders can use to fade trends and exploit overbought/oversold conditions.

This indicator is based on point and figure charting, a form of charting that only takes into account price and reversal of price for decision making.

Below, we have a chart of the composite of stocks in bullish/bearish positions as a percent of a totality of a given sector, in this case, energy.
Both in March 2020 and late October 2020, the number of stocks within the energy sector that were in bullish positions using point & figure was less than 10%, demonstrating a washed-out totally unloved, and out of favor sector.
It is at these points in investment psychology that the perceived risk was the greatest but in actuality, the risk was the least, since most everyone had sold on the imminent fear that energy had stalled and the expectations were low for a meaningful turnaround. The bad news was built in.

Today we see a complete turnaround.
Now in March 2021, we see that 100 percent of the stocks in this sector are in bullish positions, and it is exactly at this point when everything in the sector appears to be working.

We believe that in this backdrop & technical readings that energy markets will either:

 1) Have a significant pullback

or

2) Top out and have a major decline.

Either way...the risk looks to the downside in energy based on charts and trading psychology.

It pays to be careful on the long side in a sector showing 100% bullish percent!

Be careful with what looks safe.


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