But the bulls are stepping in and repairing the damage.
Valid tops have turned into "not tops" and bear traps.
This burst of upside momentum comes right as crude is bouncing off a major support zone, both in absolute terms and relative to the broader market.
Energy stocks have been under pressure for months, but this looks like a potential turning point.
Not only is the price action improving, but positioning is also offside.
Short interest in the Oil & Gas Exploration & Production ETF $XOP just hit its highest level in years.
A lot of the individual stocks have the highest short interest ever.
The unwind could fuel a powerful move higher across the energy complex if these moves hold.
Polarity 101
The major petroleum contracts are bouncing from key support zones that previously acted as resistance in 2018 and 2019.
These levels have been successfully defended recently, a great example of market polarity.
Prices are now pressing against declining trendlines from the 2022 peaks.
This setup suggests a potential trend reversal if buyers can push prices through overhead resistance.
Crude Oil futures are ripping higher
Crude Oil futures just posted their biggest 3-day gain since March 2022. The price rallied 13% and completed a textbook false breakdown.
In addition, this move pushed the price above a multi-year downtrend line that has capped rallies on numerous occasions in the last few years.
We want to see upside follow-through next week to confirm this move.
We'll also closely monitor future corrective waves. The time it takes the buyers to regain control gives us valuable information for judging the trend's strength.
Energy stocks are at a key level of polarity on a relative basis
Relative to the S&P 500, the Energy sector just retested a shelf of former highs from 2020 and 2021.
This level was tested for the first time from above late last year. It held.
Now the market is proving this is a valid level of support again in June.
If it continues to hold, it supports a bullish rotation back into Energy.
In the S&P 500, Energy is the 4th largest sector, representing 3.1% of the total fund.
This is dramatically different than before the sector peaked in 2008.
Today, they're irrelevant to equity investors who matter.
Good.
The lack of exposure just increases the magnitude of a rotation into Energy.
Energy stocks have extreme short interest
The Oil & Gas E&P ETF $XOP has its highest short interest in years.
One of our favorite names in this space, Comstock Resources $CRK, recently had its highest short interest ever. Now, it's squeezing higher.
XOP recently broke lower from a multi-year consolidation pattern.
However, the bulls have quickly stepped up, and the setup looks like a textbook failed breakdown.
This combination of a bear trap and real short interest leads us to believe that energy stocks have tremendous squeeze potential.
Commercial hedgers trimmed over 200 contracts from their largest net-long Bitcoin position in history. This comes after a few consecutive weeks of new all-time highs.
Commercials have a fresh 3-year record net-short Silver position, adding nearly 6,500 contracts in the latest report.
Commercial hedgers added over 4,000 contracts to their largest net-short Brent Crude Oil position ever.
