Energy investors are desperate for some good news. Even as the broader U.S. market has ignored geopolitical risk and political chaos to keep marching upwards, energy stocks have been quietly collapsing. I would love to tell you that that is about to change and that the sector represents a rare value in an overbought market, but neither technical nor fundamental analysis suggest that.
I have said many times before in these pages that technical analysis has its limits. An analysis of a chart can tell you a lot about what has happened, but using it to forecast what will happen is fraught with danger. There is no logical reason why, just because a market followed a pattern in the past, even on many occasions, it will do so in the future. That said, charts are one of traders’ few tools, and are useful for illustrating trends and identifying levels that others see as significant. They cannot be ignored, but it is important to understand their limitations.
Fundamental analysis also has its limits. Even on the rare occasions when the various factors that influence supply and demand all point in the same direction at the same time and can only be interpreted in one way there is no guarantee that the market will do the logical thing. The old trader’s saying that the market can remain illogical longer than you can remain solvent exists for a reason.
When an obvious technical analysis and an obvious fundamental analysis both suggest the same thing, you can…