I believe determining the strength and duration of a trend is a matter of analyzing three factors – fundamentals, technicals and sentiment. Two of factors for energy stocks, fundamentals and technicals, look strong.
However, sentiment seems to be becoming a bit overly optimistic. I think this means that the stocks will continue to consolidate in a trading range rather than continue to new highs. The 140 level on the OSX has been a long-standing resistance level and I think the stocks will need to consolidate further before attempting to make a run at new highs.
After some backing and filling, the technicals look good. Most of the oil stocks have bounced strongly off of the bottom of rising channels and the charts are strong.
However, I’m concerned about the overly positive sentiment toward the oil stocks. While short interest remains high, it seems lots of short term traders have started pouring money into the sector. The put/call ratios remain at very low levels. And the amount of money in the Rydex Energy and Energy services funds remains at very high levels.
All in all, I think the stocks could rally back to old highs but will stall at those levels.
Sentiment
Although the assets in the Rydex Energy fund have come down, they are still at relatively high levels. This indicates that traders are still pouring money into the sector fund. 
Chart courtesy Sentimentrader.com
Traders have been pouring even more money into the Rydex Energy Services fund. Assets in the Energy Services fund have just come off of all time highs. That’s worrisome to me. It indicates that traders are chasing this rally and that usually means the trend is long in the tooth. 
Chart courtesy Sentimentrader.com
As a comparison, the assets in the Rydex technology sector fund hardly ever break $100 million. The fact that both Rydex Energy and Energy Services are over $100 mln in assets indicates that traders have rotated out of technology and into the hot sector of the day – energy.
Chart Courtesy Sentimentrader.com
The reason I believe a consolidation is ahead for the Energy stocks and not a serious correction is that Short Interest in all the stocks is still at high levels. Short interest serves as fuel to push stocks higher as short sellers are forced to cover. While the short interest ratio (short interest/avg daily volume) is low, the absolute short interest is still at a high level. SLB shows there’s still plenty of short interest in the stock.
But contrary to the short interest, the put/call ratio for SLB is very low, indicating that traders are chasing the stocks by buying calls. This is in stark contrast to late 2003 when puts were much more popular for SLB.
HAL still shows plenty of short interest to fuel the stock higher. However, HAL’s put/call ratio also indicates that traders are becoming overly positive on the stock.
One OSX stock that still shows lots of skepticism in the put/call ratio is BJS.
The Majors have had big moves but the short interest hasn’t dropped that much, indicating that there’s still plenty of fuel to drive the stock higher. Both XOM and CVX show the same high levels of short interest.
One issue that really bothers me about the sentiment is that analysts are falling over themselves to increase their oil price estimates.
Another sign of the times is that Barron’s has interviewed a bullish oil analyst two weeks in a row. The April 3 issue of Barrons contained an article called "Oil’s Well" with the subtext of "A veteran energy investor doesn’t think opportunities are tapped out" and the March 28, 2005 issue contained the article "High-Octane Outlook" subtitled "A veteran investor finds some undervalued stocks in an energy market that will stay strong."
Fundamentals
The fundamentals are obviously extremely strong. But there could be a fundamental reason for oil to correct in the near future. This comes from Ed Yardini…
"Global Liquidity Growth Is Slowing. FRODOR, my favorite measure of global
liquidity, is slowing, suggesting that commodity prices and global oil demand growth could peak soon, or at least stop going up. I have found that the yearly percent change in Foreign Official Dollar Reserves (FRODOR) is a great leading indicator of the level of CRB raw industrials spot price index (and the metals sub-index) 52-weeks ahead (Figures 9 and 10).3 The growth rate of FRODOR peaked at 36.2% during the week of August 18, 2004. In early March, it was down to 16.1. This is a big drop, but the latest pace is similar to the growth rate sustained by FRODOR during the mid-1990s Global Synchronized Boom.
Why does this indicator work so well? U.S. monetary policy is amplified by foreign central banks when they intervene in the foreign exchange markets to buy or sell dollars. Easy money in the United States tends to put downward pressure on the dollar and to cause foreign central banks to increase their holdings of U.S. Treasuries to prop up the dollar.
These operations tend to convert easy U.S. monetary policy into a flood of global liquidity. The Fed’s “measured” tightening of monetary policy since early last year seems to be working to slow global liquidity growth. In turn, the growth in FRODOR is inversely correlated with the yearly percent change in the trade-weighted dollar (Figure 11). So FRODOR says “The latest downturn in the dollar may be setting the stage for the next upturn.”
Technicals
Given the positive sentiment, I think it’s more likely that energy stocks consolidate further rather than break straight to new highs. I think the XLE could top out around $45 again.
I think a consolidation between the two green lines is likely.
The OSX bounced off the top of the purple channel and is in the orange up channel. I think a consolidation is more likely than a move straight up given the positive sentiment.
There’s nothing wrong with this chart though. It’s very bullish. If I didn’t look at sentiment, I would say there’s nothing but upside for the OSX.