RRG Charts

Energy sector bursting into leading quadrant on Relative Rotation Graph, strong potential for EOG and COP

The Relative Rotation Graph above shows all the members of the S&P 500 Energy sector against XLE, the ETF that tracks the Energy sector price index.

The main reason for looking at this universe at the moment is the fact that the sector (XLE) on the RRG for US sectors is about to burst into the leading quadrant (chart further down in the article).

The chart above highlights a few areas of interest which I will dive into a bit deeper.

We will investigate the cluster of stocks inside the weakening quadrant as well as the cluster of stocks on the opposite side, inside the improving quadrant. Also inside the improving quadrant, ESV draws attention at the high JdK RS-Momentum level and its long tail.

Inside the lagging quadrant KMI, WMB, and SLB show (further) weakness, while there are a number of stocks inside leading that are powering ahead.

 


Summary

  • XLE sector crossing over into the leading quadrant
  • OKE and EQT coming dangerously close to lagging quadrant
  • CVX tracing rotation of OKE
  • ESV too low on JdK RS-Ratio scale
  • HP, NFX, and APC providing good opportunities
  • Avoid SLB and KMI (both inside lagging quadrant)
  • Picking EOG and COP as potential leaders within Energy sector.​

 

From a sector perspective

On the Relative Rotation Graph for US sectors, energy (XLE) is found on the edge of crossing over from improving into leading but more importantly at a positive RRG-Heading (0-90 degrees) at a high JdK RS-Momentum level and showing a long, powerful, tail.

The improvement for the energy sector was visible on the Relative Rotation Graphs for a while already and mentioned recently in RRG blog posts here and here.

With the crossover into the leading quadrant about to happen, let's inspect the relative rotation of the individual members (stocks) inside the energy sector.

 

Inside the weakening quadrant

Except for CNX and MPC, all stocks inside the weakening quadrant are moving at e negative RRG-Heading. Especially OKE and EQT are getting dangerously close to the 100-level on the JdK RS-Ratio and a crossover into lagging.

Another interesting observation that can be made on this subset of the Energy universe is the fact that CVX is tracking the rotation of OKE almost to the dot.

 

Oneok, Inc. - OKE

After a steep(er) rally in relative strength at the beginning of 2016, OKE's RS against XLE lost pace. With the clear change in Rate-of-Change of the RS-line, the JdK RS-Ratio line came off of its highs set in July 2016 and hovered just above the 100-level during 2017 so far.

At the moment we see the RS-Line breaking below a rising support line while the price is also breaking a short-term support line. Most likely this combination will lead to a further decline in relative strength and it will push both RRG-Lines below 100 and, with that, OKE into the lagging quadrant.

With the sector being very strong against the S&P 500 index, this is a stock to avoid.

 

EQT Corp - EQT

The chart of EQT above is sending some mixed signals. On the price-chart, it looks as if a falling resistance line is being broken at the moment which is a positive. The con is that a horizontal resistance level is waiting immediately after that break.

The RS-Line can be read as being in the process of tracing out a long-term bottom pattern, but that process is not yet complete.

The struggle on the price chart over the past weeks and the drop off the horizontal resistance in the RS-Line is causing the RRG-Lines to move South.

Unless relative strength picks up really quickly and strongly in coming weeks, EQT is expected to weaken further and become one of the lagging stocks in the universe.

 

CVX tracing OKE

The overlap in rotation between OKE and CVX caught my eye on this Relative Rotation Graph. I have never spotted such a remarkable resemblance in rotation so I am certainly going to monitor these two tails going forward.

I'd expect at least the direction of the relative movement for CVX to be similar to OKE in the next few weeks, so UNDERperforming XLE. If CVX really continues to trace the OKE rotation that would mean around 2% underperformance in the next two weeks.... We'll see.

 

Names to watch inside the improving quadrant

 

The improving quadrant is the most densely populated quadrant on this Relative Rotation Graph. And, with the exception of NOV (inside the red oval) all stocks inside that quadrant are traveling towards leading at a favorable RRG-Heading.

I'll have a better look at ESV as it is the stock with the highest JdK RS-Momentum value and has the longest tail which indicates that there is a lot of power behind the move.

Then I'll have a closer look at the stocks, closest to crossing over, inside the green oval.

 

Ensco plc. - ESV

 

For a better view on ESV, I had to zoom into the last two years of price action as prior to this period the stock came from much higher levels which compresses the scales too much for a good view.

Due to the low price, a small move in dollar amounts makes a big move in % and thus against the benchmark. On the price chart the improvement, with a first higher low already in place, is becoming more and more visible. A break beyond resistance around $ 6 is needed here to move higher.

On the relative chart, a somewhat similar situation is visible, the bottoming process is underway but the RS-Line needs to clear overhead resistance.

Given the position on the RS-Ratio scale, in combination with the high level on the RS-Momentum axis and the overhead resistance levels on both the price- and the relative charts, I remain cautious. Another rotation at the left-hand side of the RRG might still be needed before ESV can really start to move higher. 

 

Helmerich & Payne Inc.

 

HP turned around from downtrends in both the price- and the relative charts. The falling channels on both charts have convincingly been broken and HP is pushing against resistance on both. 

The overhead resistance may cause a small hiccup going forward but the charts look good and a break above these horizontal levels will certainly give a boost to HP. An even bigger boost then what we have already seen over the past months.

The big difference between HP and ESV is the position of HP on the RRG, much closer to the 100-mark on the RS-Ratio scale and therefore much closer to crossing over into leading. The current relative momentum behind the move suggests a further rally into leading.

 

Newfield Exploration Co. - NFX

 

The conclusion for NFX is similar. Downtrends have broken in both the price- and the relative charts and the position on the Relative Rotation Graph suggests that there is enough relative momentum to push the stock into the leading quadrant in coming weeks.

Especially the relative line has plenty of upside potential to continue it's move higher.

 

Anadarko Petroleum Corp. - APC

 

The third stock inside that blue oval is APC. 

On the price chart, the downtrend has been turned around and APC has started a new series of higher highs and higher lows.

The relative line put in a low at the (support) level of the major low that was set at the beginning of 2016. Hence, more than enough upside potential from a relative point of view to outperform the benchmark (XLE) in coming weeks/months.

 

An, almost, empty lagging quadrant

 

Only four energy stocks inside the lagging quadrant at the moment. This underscores the overall strength of the universe within the S&P 500. It also shows that it is important, more important if you ask me, to avoid the weak stocks in a universe rather than concentrate on picking the rights stocks.

In this particular case, a PM can, almost certainly, outperform the XLE benchmark by buying all stocks in the sector, except for SLB, KMI, WMB, and SOM.

SLB is worth looking at because of the rotation back to lagging from improving while KMI catches the eye because of its long tail and rotation straight through the benchmark at a 225 degree RRG-Heading.

 

Schlumberger Ltd. - SLB

 

The price chart for SLB is not very decisive. For sure it is not positive but it's also not overly negative with this more or less broadening pattern with one higher high and two lower lows in place now.

The relative strength chart, on the other hand, leaves very little to the imagination. That's a downtrend and it just started moving lower at a steeper angle...

The resulting RRG-Lines show a brief period where RS-Momentum was above 100, pushing SLB into the improving quadrant. But just recently it dropped back below 100 causing RS-Ratio to roll over again while, way, below 100. 

The resulting rotation on the RRG is a tail that travels from improving back into lagging which usually signals a renewed period of, accelerating, underperformance.

 

Kinder Morgan Inc. - KMI

 

The relative strength of KMI against XLE hovered around 100 since the beginning of this year (2017).

At the end of September, this RS-Line broke below support and this break is now followed by a break of support on the price chart.

The combination of these two breaks is bringing the RRG-Lines back to life as they start heading lower at the same pace. 

Take a look at the recent moves of the RRG-Lines on the charts of  SLB and KMI and then take a look at the tails of these two stocks on the Relative Rotation Graph....

This difference in "power"  cannot be visualized by just looking at these two stocks in combination with their relative strength.

The direction, origin, and pace of the RRG-Lines cause an RRG-Heading at almost 225 degrees which means dropping on both scales at a solid, similar, pace. Further underperformance against XLE is therefore expected going forward.

 

Take your pick from leading

 

Clearly, there is a reason why stocks end up inside the leading quadrant... Because they are strong...

With a lot of stocks to pick from in the leading quadrant of the energy sector, I like to focus and look for stocks that still have potential left despite the fact that they are already inside leading. being inside the leading quadrant means that a relative uptrend is already underway and that that trend is still getting pushed higher by positive relative momentum.

My picks for further inspection here are EOG and COP.

 

EOG Resources, Inc. - EOG

 

The decline in price of EOG from $107.50 to $82.50 caused the RS-Line to move sideways since the beginning of the year.

The upward break out of the falling channel in September initiated improvement in both price and relative strength. It's especially the upward break out of a year-long consolidation in relative strength that is the kicker for this stock.

This break above horizontal resistance in the RS-Line is pulling the RRG-Lines higher at exactly the same pace and levels, causing a strong RRG-Heading at 45 degrees.

Given its position in the lower left corner of the leading quadrant on the RRG this is one of the stocks with still a lot of potential outperformance ahead.

 

ConocoPhilips - COP

 

COP also broke out of a falling trend that was in place since late last year. A few weeks later things started to improve from a relative perspective when the RS-Line broke above its 2017 high. 

The RRG-Lines started taking off from the 100-level even before the breakout in relative strength.

Just like EOG, the position for COP on the RRG, in the lower left corner of the leading quadrant, suggests that there is more relative (out)performance ahead in coming weeks. 

 

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Julius de Kempenaer | RRG Research
RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered TradeMarks by RRG Research

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