Energy in Danger

The SPDR Energy ETF (XLE) is back below the line that triggered the big 2020 sell-off. I don't expect a similar plunge is on the way now, but there could be substantial downside. Below are the 10,3 and 1-year volume profitles. They all show support in the area of $45 to $47.50, with a gap below. A pullback of around 10 to 15 percent from here is likely, with a possible 30 percent correction in the cards if the broader market sells off. Retaking support would negate the bearish outlook. A larger sell-off would extend into August and beyond. A quick 10 percent drop could come in the next week or two.

Investors are also highly complacent. There are various signals I won't get into, but things like SKEW and the put/call ratio tell me that traders are very vulnerable to a negtive market event. A small correction could quickly become a big one in these conditions. Or not! We've been here before and the market sailed through fine. Sentiment is also high. The TD Ameritrade Investor Movement Index or IMX, is much higher than it was at its former peak in January 2018. Volmageddon was a week later. Conditions are ripe for the bears.