You Should Think Twice Before Buying Oil Stocks Now

The oil rally is solid. The price of a barrel of West Texas Crude is up 100% since its bottom last December. By the look of the following chart, there are more gains to come…

The chart has broken above resistance at $55, and there should be enough momentum to take it all the way to $70. So if you’re long oil, then stay long.

But if you’re thinking about buying oil stocks now, you better think again. The single best oil stock timing indicator is flashing a warning sign…

A bullish percent index (BPI) is a measure of overbought and oversold conditions. A sector is oversold when the index dips below 30, and it’s overbought when the index rallies above 80. The best market timing signals, however, come when the BPI reaches truly extreme conditions.

For example, the best buy signals in the oil sector occur when the BPENER dips below 10 - as it did in October, November, and March. Each of those signals generated 25% gains in the AMEX Oil Index in just a few weeks.

The best sell signals in oil are when the BPENER runs near 90 and above. You can see how the two previous sell signals played out on this chart…

Yesterday, the bullish percent index for the energy sector closed above 93. That means 93% of the stocks in the energy sector are trading in bullish chart formations. That’s an extreme reading… And it doesn’t leave much more room for additional momentum to carry it higher. In fact, it increases the likelihood of a strong selloff in the oil sector.

So even though oil itself looks ready to run higher, the stocks are in the danger zone. We’ll likely have a better opportunity to buy them a couple months from now.

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