Mapping the Market: Warning signs flash for US energy shares rally

US energy shares have climbed just over 42% this year as the Iran ​war pushed oil prices higher, making them the best-performing sector in the ​S&P 500. The impressive run may be coming to ‌an ​end, technical analysis indicates.

Click here for a detailed technical analysis chart. Though the S&P energy sector index – – remains on pace for its strongest annual gain since 2022, the advance is showing signs of fatigue. The group fell 2.8% last ‌month even after notching a record close of 1,006.74 on September 15, according to LSEG data.

When a market rises as sharply as energy shares have, chartists often turn to momentum gauges to judge whether the move can last. Two widely used tools are the Relative Strength Index (RSI) and candlestick charts. The RSI measures how fast and how ‌far prices move. It labels a market "overbought" when it may be rising too quickly to last, and "oversold" when it may be falling too fast. Analysts ‌also check whether the RSI hits new highs at the same time as prices. If prices reach new peaks but the RSI doesn't, that's a warning sign called a bearish divergence.

That's what has happened with the energy sector. In March, the sector's 9-month RSI hit its most overbought level since October 2007. Since then, the index kept rallying, hitting new record highs in August and ⁠September, but ​momentum hasn't kept up. The RSI peaked ⁠well below its March level and has been struggling. Over the past two decades, major pullbacks in energy shares have often come after either this kind of divergence or a sharp RSI drop from ⁠extremely overbought levels.

It’s important to note that the RSI breakdown took shape in the S&P energy sector index as oil has been unable to return to this year’s highs ​reached in March. This is where candlestick charting comes into play. Candlesticks present price data – open, high, low and close – in a relatively easy ⁠way for analysts to discern the balance between buyers and sellers. In this case, the candle for US oil prices in September was decidedly bearish – with the open and close coming well below the extreme ⁠high ​for the month. That said, the SPNY gained for four consecutive sessions through Tuesday, leaving it down 3.1% from its all-time intraday high, and could reignite bullish sentiment if it rebounds above that peak.

However, a fall through the September 29 intraday low of 936.39 would increase expectations for further losses. What the chart ⁠shows:

(Mapping the Market is a daily column written by Reuters journalists. The commentary is based on a technical analysis of financial charts, which helps assess the likelihood of future price moves but does not guarantee the outcome. The ‌column does not constitute investment advice ‌or trading recommendations. ) (Terence Gabriel is a Reuters market analyst. The views expressed are ​his own. Editing by Burton Frierson)