Energy stocks are about to have their best month in three years, and the run could continue

Energy stocks haven't been this hot since 2015. These gains are just the beginning, says one technician.

"Lows have been made. You're starting to make some higher highs and some higher lows in here," said Craig Johnson, chief market technician at Piper Jaffray, told CNBC's "Trading Nation" on Friday. "You're above your 50-, 200-day moving average."

The XLE Energy ETF, banged up after years of low oil prices, has begun to show signs of life. It is up 10 percent in April, looking to close the month with its best gains since October 2015. Over the past two weeks, the ETF has risen above its 50-day, 100-day and 200-day moving average.

"I think the next stop for the XLE is going to be $78 which is the old highs we've tested twice before so I think we're going to run up to that," said Johnson.

The XLE last touched $78 during the broader market rally in late January. It is currently 5 percent from that level.

This month's surge has dragged the energy sector into the green for the year. Before April, it was one of the worst performers in the S&P 500.

The XLE's underperformance was largely tied to weakness in Chevron and Exxon Mobil, the ETF's largest weightings. Excluding those two stocks, the XLE would be up more than 7 percent so far this year, said Johnson, far better than its current 3 percent increase.

"We're overweight the space," said Johnson. "We'd continue to be buying the names, not Chevron or Exxon, but we do like things like ConocoPhillips and some of the other names and even the refiners. We think there's lots of leverage in there."

Larry McDonald, editor of the Bear Traps Report, also sees upside ahead for energy stocks.

"For most of the year the companies have dramatically underperformed the commodity, but over the last month there's a real catch-up going on," McDonald told "Trading Nation" on Friday.

Oil prices have rocketed nearly 13 percent higher so far this year, while the energy ETF has risen by roughly a quarter of that. Crude is on track to close April with gains of nearly 5 percent, its seventh monthly increase in eight months.

As stocks and bonds have come under pressure this year, McDonald sees a shift in holdings toward the underowned commodity and energy space.

"The flight out of stocks and bonds will move toward commodities, toward energy names and you're talking potentially a trillion dollars over the next year and a half, two years," said McDonald. "So back up the truck, the energy space, the XLE, XLP are screaming buys right here."

The XLE was up 0.7 percent on Monday, while West Texas Intermediate crude gained 0.5 percent to $68.41 a barrel.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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