Yesterday, I discussed the recent slide in oil prices wherein I stated:

“For investors long ‘energy’ at the current time, oil prices are indeed extremely oversold and are due for a bounce. That ‘bounce’ should likely be used to substantially reduce energy positions in the short term as an increasing amount of data suggests oil prices could go lower.”

Today, I want to specifically address the “technical” backdrop for energy related investments. Specifically, I will use the NYSE Energy Index (NYEI) as a proxy for the overall investment space as it contains a broad spectrum of energy space participants from refiners to drillers. Also, I will use weekly and monthly data, rather than daily, to smooth out the “noise” of short-term market gyrations.

Note: As a portfolio manager, I am invested for long-term returns but remain focused on short-to-intermediate time frames for risk management and capital preservation. In other words, I want to be invested when markets are rising, but avoid the bulk of the major market declines along the way. Spending the majority of your investment time horizon making up previous losses is not an investment strategy to live by. Therefore, while fundamentals are critical in understanding “what” to invest in, it is also just as important to know “when” to make it and when to take profits in it which are critical to compounding long-term value.

This is the focus I want to take today with respect to energy-related investments. While oil prices have indeed had a sharp decline in recent weeks, does that mean that it is now time to “buy” for a long-term investment horizon?

There are several ways of potentially answering that question. First, if we look at the NYEI as compared to West Texas Intermediate Crude we find, not surprisingly, a high correlation between the energy companies and the underlying commodity. The current price correction is well within the norms of a “Fibonacci Retracement” having only slightly surpassed at 38.2% retracement of the advance. With the decline in oil prices far surpassing that of the NYEI, it is probable that the correction in energy-related investments is not complete as of yet.  There is strong historical support at the 50% and 61.8% retracement levels.

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