The energy sector continues to hold up and has caught my attention lately for several reasons.

I am beginning to see relative strength displayed in many energy ETFs and stocks within the sector versus the broader market.

The strength in the sector has resulted in the formation of many bullish setups in energy-related penny stocks.

So, if the strength continues in the sector, might we have a potential theme play on our hands?

Let’s take a closer look at the current strength in the sector:

The above chart shows the SPDR Trust Energy ETF (XLE). The energy ETF has spent most of the year consolidating in a range. Lately, this range has begun to tighten, which could signal a breakout is just around the corner.

Crude oil futures are beginning to trade closer to a possible breakout level. A move over $73 in the futures could signal a breakout, which might further strengthen energy-related stocks and ETFs.

Camber Energy (CEI) has been in play and hugely popular with retail trader online social media platforms for several weeks now. 

This penny stock has held up impressively and continues to trade abnormal volume. If the stock breaks resistance and experiences a second leg higher, it could ignite other small-cap penny stocks.

Based on the strength across the board in the energy space, I have developed a watchlist consisting of three stocks.

When developing a watchlist relevant to the above theme and opportunity, I look for stocks that have begun trading unusual volume or stocks with favorable technical setups.

If the strength continues in the sector, these three stocks might experience upside and increased volume.

Northern Dynasty Minerals (NAK)

NAK began moving last week, in sympathy to the move in CEI, as attention grew larger and many online social media platforms cited NAK as the next CEI. I spoke about this, in more detail, here.

This stock has continued to hold above support and trade an unusual amount of volume.

If strength continues to occur in CEI and the overall sector, then NAK will be on close watch for a move higher.

Crucial resistance in the stock is currently at $0.50. A move above the $0.50 level would signal a technical breakout.

US Well Services (USWS)

Shares of USWS have primarily traded minimal volume and been in a downtrend all year. Yesterday the stock, on no apparent news, rose sharply and traded heavy volume.

The stock rose 16.92% yesterday and traded over 14M shares, significantly higher than the average volume of just 1.91M.

The bulls will want to see this stock hold above $0.70 and sustain the increased volume.

If the stock can establish firm levels of support and resistance, and the strength in the sector continues, then it might turn out to be a significant risk: reward play.

Houston American Energy (HUSA)

HUSA is on watch as the stock is currently trading near the resistance of the bullish flag and appears to have bottomed out at $1.50.

From a technical point of view, this is a highly bullish setup. A break over $2.20 with increased volume could signal a critical technical breakout.

HUSA has a float of just 7.63M and a short interest of 6.09%. 

The Bottom Line

The above watchlist is, of course, conditional on further strength and upside occurring in the energy sector.

The job now becomes a game of patiently waiting. Either volume will increase, and the stocks on the watchlist will break above key resistance, or they will continue to consolidate and fail to move higher.

Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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