Oil and Gas Stocks Outlook and a Bearish Warning for Thursday, December 14
Dec 14, 2017 Trading Blog
I spent some time last night trying to come up with a bearish gameplan for the XOP and energy stocks just in case things deteriorate. I’m not saying that is where we are going, but it pays to be aware of all possible scenarios and developments well before they happen.
I think the first clue might be near. For the last month, the XOP has been stuck mostly in a very slightly upsloping channel between 34 and 36, which started on November 15 and has been supported by the 50 day moving average. That moving average currently sits at 34.57. The first bearish warning sign we could see is a break down of that 50 ma. Wednesday’s price action made a move toward it and it was on fairly strong volume. I would have felt much better if yesterday’s run toward the ma would have been light volume. It is totally possible that we could get a high volume break, or at least a test, of that 50 day ma soon. The results of that test could give valuable clues as to how energy stocks start 2018.
One thing that is a concern was that double top test at 37 and then the resulting slide down to 34.50. The real question is now: Was the bounce to 36 on November 11 a lower high in a newly created downtrend? The answer to the question depends much on whether we establish a lower low under that swing low of 34.40 created on the December 7 fall from 37. That 34.40 level also corresponds to the 50 day moving average.
IF price decides to give that swing point and 50 ma a test and it breaks down through it on convincing volume, the next level to watch is 33.85, which was the pivot low on November 15. Almost every person who has gone long in the last month will have a stop order right under that level. When price hits this bundle of market orders, it could propel the market down toward the 200 ma which sits at 33.64. This move toward the liquidity under the market would also break the uptrend line we created starting back in mid August. Taking out a strong uptrend line, the 50 day ma, a significant pivot low AND the 200 ma is probably not going to be a good thing for longs.
If all of those breakdowns happen, the next significant level is the late October swing low in the chart above at 31.67, which also was a test of the 50 day moving average. That should be a strong support level, but if it somehow got taken out, we likely find ourselves right back down at the August lows around 29 very quickly.
Again, I’m not saying this doomsday scenario is going to happen, but it pays to be aware of the danger signs if we happen to start drifting in that direction. If we know the roadsigns and landmarks, it is much easier to plan the trading journey.
As for the upside, that is a pretty simple picture, we should just continue to make higher lows riding the 50 day moving average up to 37. Once we reach 37 again, we will have formed a nice base and it will be decision time as to whether the market wants to break out of that base to the upside.
Trading Plan for Thursday: Most of the above was larger picture stuff. So how about the immediate future of today? I’m looking for a red day for energy stocks. I’m going to be sitting on the sidelines watching the 34.50 level for directions. Odds say that we probably hold that level again and I will be looking to get long on any low volume retest of a morning low near 34.50. I might get some size on this one as the stop can be placed really tight on the initial morning low. Like I said above, if the 50ma fails today, I’m going to get really cautious and await the results of the next level down near 33.85. If a long trading opportunity appears between 33.85 and 34.50, I might still take it if the setup is right with a tight stop.
Individual Stocks: I’ve still got OAS from 8.95, but I’m probably going to dump this small position into the first run near 8.50. I was watching APA yesterday for a buy, but it never dropped and was probably one of the stronger stocks on my list. I’m hoping for an initial entry near 39. RRC is coming back down into the buy zone again on any move under 16. DVN is on the radar at 37. NBR is a service name that I would like to pickup on a move toward 5. I’m still holding out hope for another try at a big position in ECR under 2.12, but it’s realistically probably not going to happen.
Good luck today and be really careful over the next week. Things can sometimes get even crazier during the low volume of the holidays. Protection is always the first move.