Oil and Gas Stocks Outlook for Monday, October 30
Oct 29, 2017 Trading Blog
The chart above covers the last two years of price action for the XOP. We are now at a critical spot in determining the direction for the next 6 months. I like the recent price action and am bullish of the energy sector, but I do have some concerns right here on the chart.
On the bullish side, we had that dip in the summer and it was bought up heavily back to the 34 level. We have now slipped back right to the 50 day moving average as shown above. We now need to see a powerful bounce off that level and then take out that 34.50 level with heavy volume for a new leg to begin. I think this is what we get, but I’m a little concerned about how the chart sets up here.
On the bearish side, we have two significant levels just overhead. We have the small range we created over the past couple of months between 33.25-34.50. I’m not too concerned about that one, what does concern me though is the next level up, the 35-37 level. From the chart above, you can see how much supply is sitting in that level. The sector got up there in early 2016 and managed to spend about 12 months in that area making several low pivots on the 35 price point. That 35 price point was also the place where in late May we started the slide to 29. That level was where the heavy sellers stepped in and there could be large supply left there. In addition to all the possible supply, we also have the 200 day moving average coming into play at 34.50, just another barrier for any leg up.
Something else that concerns me is that the XOP could be forming a broadening formation which started back in June. We made higher highs in June, July and September and made lower lows in June, July and August. If you draw trendlines using those points, you get a megaphone type formation with a liquidity gap down to 29. There is the possibility that the XOP could explore one more new low on that lower megaphone line in the coming months, especially if the SPY finally has its long overdue pullback. I hate to sound negative, but I always try to throw as much out there to try and disprove my bullish bias rather than just following it blindly.
I think this week will be extremely important. I could really see possible shorts attacking this 33.50 – 34.00 area. That run on Friday was just really strange and I think mostly a result of the USO breaking out to the upside. The USO might be the important key here. If that USO breakout fails, the XOP is likely headed down hard from here. If the USO can sustain it’s momentum, then the XOP could make a run back into that 35-37 range. Be careful with the USO though, as it doesn’t exactly represent oil. If you place a weekly chart of USO next to a weekly oil price chart, you can see how USO has a bit of decay which forms a downward sloping channel, whereas the actual price of oil doesn’t. Any failure in the USO is another concern.
XOM also might provide a barrier to further XOP upside. It has now moved all the way across that range that it created from January through August and hit that 84 level. I don’t see it just running wild from here, as it probably needs to consolidate and pullback to build up some energy for the next leg. I could see it pulling back to the 81 area. It would certainly be nice to see a mild pullback and a breakout of that 84 level, which would likely carry the XOP up with it. The other giant, CVX, also isn’t helping after getting crushed on earnings Friday. If it can’t regain the 50ma soon, then that is just one more negative for the sector. It seems that maybe we saw a shift of some CVX money into XOM Friday, so see if they continue to move apart.
Another concern I have is the OIH. It fell sharply from that 26 level and has now taken out the 24 level which acted as firm support back in June. There really isn’t much to stop it from falling right back to the lows if it can’t hold 23. SLB can’t seem to get off the bottom and it isn’t a great sign when the index leader is hitting lows. If the sector is going to make a new leg up, we will really need to see SLB get moving to the upside.
The real problem I have here with the XOP is the risk to reward that has developed. It is clear that there is huge supply in that 35-37 range, so that may be the cap on any upside run. I really don’t feel like a trade on the long side is warranted until we break above 34.50. That really only leaves about $2 in profit while risking quite a bit more than that. While I feel confident that I have the direction of the XOP correct, the money management side of the trade really isn’t working for me. The real trick is to dig deeper into the sector to find the right stocks that have the upward bias combined with sufficient room to run to the upside to make the downside risk worthwhile.
Outlook and Trading Plan for Monday: There are two scenarios for Monday based on two magnets. I posted my hourly chart in the Twitter feed showing the bearish setup. The first scenario is a run to 34 to test that high from October 18th. The other is a drop back to the 32.64 area to test the 8 and 50 day moving averages. I will probably give the pullback scenario a shot long using the 50 ma as my stop. If the market decides to choose the first scenario and move up first on Monday to the 34 area, I will not be trading it long or short, it just isn’t a great spot for me.
The key on both of these scenarios is volume. If the index runs into heavy sellers on the move up toward 34, then I wouldn’t be surprised to see more shorts pile on and the index move down sharply. However, if the drop back toward 32.64 is on very light volume, I would take that as a complete lack of sellers with the buyers just pulling back trying to get a better price after last week’s run.
It is going to be a very important week for the future direction of the sector, so caution and patience are definitely warranted here. As you can see, I have many concerns regarding the bearish possibilities for the XOP, so I’m going to be letting those things either prove or disprove themselves in the coming couple of weeks. Keep an eye on the 50 ma, that is the key.