Look Toward Energy Stocks After Markets Take a Breather : NFLX, XLE, GLD

It was another choppy session Tuesday, filled with rumors, fake-out moves and some earnings disasters — see Netflix (NASDAQ:NFLX).

Click to EnlargeIn the case of the S&P 500, the index yesterday put in an outside day and found support right at 1,230, which, of course, is where it broke out higher from last Friday. The stochastics oscillator remains in overbought territory, suggesting the index might need to pause a little up here. It is important to note, however, that oscillators can remain in their respective overbought or oversold territories for extended periods of time.

Given how sharply the stocks in general lifted off the early October lows, I think it’s unlikely that we see those lows again anytime in the next few months. Rather, my base case remains that equities pause somewhat in the very near future, followed by higher prices into year’s end.

Click to EnlargeOne group of stocks that looks especially juicy for higher prices into year’s end is the energy sector as measured by the SPDR Energy Sector ETF (AMEX:XLE). After falling hard in August and September, the sector rallied sharply into a resistance area near $70, where it again couldn’t break through Monday.

After some backing and filling, I do expect the energy sector to push higher and above $70, possibly toward the $75 area. Individual energy stocks, however, might offer better risk/reward than this index.

Click to EnlargeGold and silver both rallied yesterday and broke out of their recent congestion areas ever so slightly. Going long either metal here is far from a high-probability trade purely looking at the chart, but a solid daily close above $168 on the SPDR Gold Trust (AMEX:GLD) might offer a better confirmed long-side entry signal.

Then there are the European stocks, which by looking at Germany’s blue-chip stock index, the DAX, also are coming into a smidge of resistance in the very near term.

Click to EnlargeMuch like the major U.S. equity indices, however, the DAX too has come quickly off the October lows and — after last week breaking above the 38.2% Fibonacci retracement level of the July-to-October downward movement — might have room up to around 6,500, which is where the 61.8% retracement line comes in.

The DAX will be an important index to watch and track if and when we push to higher levels as the fourth-quarter rally continues after a brief pause in the immediate term.