Energy stocks got slammed down hard on Friday.

The Energy Select Sector Fund (XLE) lost nearly 4% – which is a huge one day move for this popular exchange-traded fund (ETF).

Many individual stocks fared even worse. For example, Exxon Mobil, Occidental Petroleum, and Marathon Oil all dropped about 5%.

This is just the beginning. The energy sector has further to fall…

We warned about the potential for a decline in the oil stocks last month, when the Bullish Percent Index for the energy sector (BPENER) reached 100. It’s not possible for that indicator to push any higher. So, we argued that if it can’t get any better, then it has to get worse.

It got worse a couple weeks ago when the BPENER turned lower from overbought conditions and generated a “sell signal” for the energy sector.

It took a while, but that sell signal finally kicked into gear last week.

And, if this signal plays out like the other BPENER sell signals this year, then oil stocks should continue lower for the next few weeks.

Take a look at this chart of XLE…

(Click here to expand image)

The red arrows point to the three previous BPENER sell signals that have been triggered this year.

XLE fell 10% following the sell signals in January and March. It lost more than 15% after the sell signal in June.

Even after Friday’s big drop, the energy sector is only down about 6% from its high. So, there’s more room to fall.

Traders should keep in mind, though, XLE closed Friday right near the support of its blue 50-day moving average (MA) line.

So, yesterday’s jump probably isn’t the start of a new rally phase for the energy stocks. It’ll just be a bounce.

The energy sector is headed lower.

Best regards and good trading,

Jeff Clark
Editor, Market Minute