By Terence Gabriel

(Reuters) - U.S. energy shares have had a strong year, driven in part by rising oil prices in response to the Iran war, but the gains have come with ​a lot of volatility, and now charts are flashing a warning that ‌could signal a major pullback.

A line chart showing a potential head-and-shoulders pattern forming in the S&P 500 energy sector index

The S&P 500 energy index (.SPNY), which tracks performance of energy shares in the S&P 500 (.SPX), is currently forming a pattern that technical analysts call a head-and-shoulders top.

This pattern often signals ​a shift from a bullish trend to a bearish trend. It features three ​peaks - with the highest in the middle and two lower peaks ⁠on either side.

In the case of the S&P 500 energy index, or SPNY, the "head" ​is at 976.91, with the left "shoulder" at 883.48 and right one at 913.79.

The SPNY was ​trading at 872.41 on Monday, according to data supplied by LSEG, and would need to fall below 820 to confirm the head and shoulders had formed. If so, then technical analysts would expect it ​to fall to 660, which would erase all of this year's gains.

A move above ​the right-shoulder high near 914, however, would undermine the bearish setup and increase expectations for a rise ‌past ⁠the March high near 977.

Something to keep in mind is that the SPNY tracked oil prices closely earlier in the year, but that relationship has weakened lately.

Energy shares now appear to be responding less directly to moves in the price of crude oil and ​more to broader equity ​trends, including sector rotation ⁠and company-specific moves. Also, almost half the sector is tied up in just two stocks: Exxon Mobil (XOM.N) and Chevron (CVX.N).

(Daily ⁠markets commentary ​from Reuters analysts on the signals financial charts ​are sending - and what they might mean.)

Terence Gabriel is a Reuters ​market analyst. The views expressed are his own. Editing by Burton Frierson and Himani Sarkar

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