My thoughts this week are centered on the sudden strength out of commodities. While the rally in the broader market can’t be discounted, it’s the outperformance of the heretofore undesirables that tells the tale.

Lest you haven’t been paying attention, allow me to introduce you to the cohort of sectors lying at the epicenter of what’s been ailing the aging bull market. First off, you have crude oil and oil stocks; which entered bear country ages ago and have been plumbing the depths ever since. Next, there’s basic materials; with metal and mining stocks diving day after day. Finally, there’s the entire emerging markets complex with commodity sensitive countries (think China, Brazil, and Russia) sucking wind.

The persistent weakness in these areas finally came home to roost late August, taking the rest of the market down with them.

Interestingly, it was this group that led the charge higher this week. While you could argue it’s simply a bounce of the dead cat variety, I find myself more optimistic. More than a few technical resistance barriers were breached turning the short-term trend higher in a number of these sectors. Continued rotation into these beaten-down, left-for-dead areas could be just the ticket to keep the current correction from turning into a full-fledged bear market.

To chronicle the abrupt about face, let’s use the Energy Sector Fund (XLE). This week’s turnabout holds more than a few lessons on how to spot a bottom.

The first bullish sign of note was the higher pivot low formed on September 29. Higher pivot lows reveal increasing aggression by dip buyers, a group that’s been MIA in the energy patches for months, as they begin snatching up shares quicker than prior pullbacks. It’s a slight change in character with the potential to bloom into a full-fledged trend change. This time for XLE, it did.

Next we have the oh-so-beautiful breakout above both horizontal resistance and the oft-watched 50-day moving average. Well done dip buyers, well done.

Finally, comes the volume crescendo accompanying the pop. Accumulation days (high volume up days) provide legitimacy to the breakout increasing the likelihood of success.

While I don’t doubt commodities will see a bout of profit taking in the coming days, such logical action would be a welcome development for those of us loath to chase. If this turnabout in energy stocks (XLE, XOP, XOM, COP, etc…) can go the distance, I suspect bullish plays aplenty will be setting up in the coming weeks. To those that have been waiting for a good reason to begin bottom fishing in the commodity pond, consider this your invitation.

It could be teeming with big fish.

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