Oil and Gas Stocks Outlook for Monday, November 6
Nov 6, 2017 Trading Blog
I spent some time reviewing my opinion on the energy sector and was hoping to find that maybe I had missed some piece of information that would clear up future direction, however I think I just came away more uncertain. All signs point to this being a bullish sector, but I still have many concerns pointing in the other direction.
The biggest bullish factor for me is the total lack of supply overhead compared to my opinion of what should be there. My opinion says there should be a huge amount, but reality seems to be saying otherwise. Last week, there wasn’t a seller anywhere in that 33-35 range. On the few runs we had over 35, there didn’t really seem to be much supply there either. The only place I saw any supply at all was late Friday afternoon on the move up past Wednesday’s highs. That could have simply been someone just doing some end of week squaring up. If there isn’t any supply in this 35-37 range, then the buyers could easily have this at 37 by the end of the week. I expect that supply should show up before that happens, but it hasn’t yet.
Second concern was XOM giving up the 8 day moving average. Friday was the first close below the 8ma since late August. When the sector leader rolls over, the index may not be far behind. CVX also closed below the 8ma and the 50ma on Friday. SLB finally made a bit of a comeback, but it still couldn’t take out the 8ma either. Those three stocks make up about 40% of the XLE and none of them can get above the 8ma. If the leaders can’t get it going, then I don’t expect that the index will either.
Another pattern that seems negative to me is the broadening formation that continued to develop last week. We hit that top line again and usually when that happens we are due for a correction in the opposite direction. If that happens, the immediate downside target would be around 31.50.
Underlying all the above is oil in the 55-56 range. We have had quite a run on very high expectations. It would be troublesome if those expectations didn’t transpire. At some point, oil will correct downward and take the XOP with it. I’m guessing we get a pullback to 50 soon, and likely oil sees 50 before it sees 60.
Outlook for Monday: It is about 8am and the XOP is acting like it wants to gap up. I haven’t been shorting at all over the last couple of months, but any gap up here is just begging to be sold short. I probably won’t take that trade yet, but I could really see a gap and trap type situation today. An opening above the highs to capture any liquidity up there and then a screaming run back under 34.50 to hit the liquidity under the market is a very possible scenario. I’m probably being way too negative on the sector, but I’m having a difficult time shaking off my concerns. I hate being in this situation where most of the signs point to bullishness, but every bit of intuition says that price could easily be bearish this week. It should always be ‘trade what you see, not what you think’, but I often have difficulty with that. If I miss some run up, then so be it.
Trading Plan for Monday: I’m likely sitting it out today. The only trade I would consider would be a long off of any test of the lower boundary set last week around 34.50-34.80. I don’t feel comfortable yet getting short in the energy sector. Sorry for the lack of a real plan today, but some days are just like this where nothing really looks attractive. There is just too much downside risk in getting long up here, as it completely skews the risk:reward to something that I don’t want to be in.
I’m going to be hanging out over here on the sidelines until at least after lunch.