Nifty Energy closes in green after 7 trading sessions! What should be done with Energy stocks now?

Nifty Energy has soared 2.76% on Tuesday’s trading session.

Nifty Energy was undergoing a strong downtrend in recent past and has plummeted about 20% from its lifetime high of 29304.05. After enjoying a stellar rally in the month of March and April, the index is back to its February levels. Rise in crude oil prices has certainly lifted sentiment in energy stocks. Thus, the index had gained about 30% in two months. However, with the prices of crude oil cooling off now, it seems that the index shall have a negative sentiment. Last week, the index registered a breakdown from its triangle pattern and has also slipped below its 200-DMA.

Nor its price action look fascinating, nor its technical parameters show much positivity. The 14-period daily RSI (37.119) is still in the bearish territory. The trend indicator ADX (28.32) is pointing northwards and suggests strong bearish trend. The MACD histogram is negative, while the True Strength Indicator (TSI) and KST do not show any positive signs either. The index is about 4% below its 20-DMA while its short term moving averages indicate strong bearishness.

Considering above factors, the outlook tends to be bearish. Tuesday’s rally was due to short covering in energy stocks and a bullish sentiment shall emerge in the index if it sustains above the level of 25500. The level happens to be its 20-DMA level and a good bounce can take the index near to this level. However, the 200-DMA level of 24500 shall act as immediate resistance for index to overcome.

Cooling-off of crude oil prices certainly shall affect the top line of Oil Marketing Companies and thus, it is likely to keep stocks under pressure. One needs to wait for a base formation followed by a breakout to initiate a position in energy stocks. This is important considering the negative outlook of the index. Meanwhile, pick on good quality energy stocks which shall provide good returns on medium term.