Oil and Gas Stocks Outlook for Wednesday, November 1
Nov 1, 2017 Trading Blog
I expected an important pivotal week and the energy market has not let me down. Today we should get our first look at how the market wants to handle the liquidity that has formed overhead in the last six weeks. Everyone who has shorted this market since late September likely has a buy stop somewhere in this 34.50-34.75 range. The market should clear all those stops today. There should also be some breakout players in there with new long orders as well. Will the smart money unload into all these buy orders?
In Monday’s post, I talked about the supply that likely remains over this market in two levels, the 33-35 level and the 35-37 level. The action on Monday and Tuesday cut up a big portion of the first level without any problem at all. Watching the action yesterday, it was clear that there just weren’t any sellers around. It was much like the action we saw on the run from 29 to 34 where the market just ran up each day on very little volume simply because there wasn’t anyone willing to sell. We barely did average volume (12.5 million) on a pretty big +1.6% move up yesterday. We should get a look soon at the supply that remains in the 35-37 range. At this point, I think the stops here over the market will match off some of the 33-35 supply today. The key will be how big the imbalance is between the available supply overhead and the number of buy stops overhead. In addition, we are probably looking at some new longs who want to buy the 34.50 breakout. Will those stop orders combined with the new long orders be enough to propel the XOP into that 35-37 level?
I’m very much bullish of this sector, but I set forth a few concerns on Monday to be on watch for. A few of those concerns still bother me. XOM looked weak and failed again at that 84 level and closed right on the 8 day moving average. SLB looked like it was going to make a bounce off the bottom, but put in an ugly candle yesterday and closed near the lows of the day on a strongly green sector day. The broadening pattern that I discussed should put in a new price discovery high today, but does it fail after doing so? We are also running right into the XOP 200 day moving average and almost closed right on it Tuesday. The USO looked ok, but will get a checkup this morning with the 10:30 EIA number.
At this point, I have to stick with the bullish position on the sector until the market says otherwise. Shorting this market is completely off the table for now, and has been for me for a couple of months. Right now we just have no sellers, and there really isn’t much way to be profitable shorting a market without sellers. The sellers may show at some higher auction point, but right now the buyers are completely in control of this market. Also, like I discussed Monday, a long here in this 34.50-35 level really doesn’t have enough reward to justify the risk. The top side could be capped around 37, while the downside could be larger if the market turns.
Outlook for Wednesday: The market is looking at a gap up into levels where there should be some decent liquidity in the form of buy orders of recent shorts over the last 6 weeks. The key is how far will those buy orders propel this market to the upside? Is there enough supply available to absorb those orders and keep price down? Will new longs step in here and buy the breakout thereby adding to the buy orders? Are there really that many buy orders there at all? Any attempt at quantifying the liquidity up there is totally a guess on my part. I get the feeling that we get the gap up and probably further run up on the EIA number, but at some point we need to stop and take a breath and consolidate the recent run. It has been almost a 10% run in the index in just 4 days. I never like to see price run that far directly into a resistance area, that is just begging for a quick failure at that resistance level. I’d prefer to see a slow, smooth consolidation and buildup here at the 34.50 level for a new leg up toward 37.
Trading Plan for Wednesday: I’m out of the market for the first hour until after the EIA number at 10:30. I’m not a fan of buying the gap up, especially after the run we have had into this supply level. Buying the gap up is just begging to be hung out to dry on the long side. Unfortunately, I’m expecting a good EIA number, which should provide a positive backdrop for today’s action. So basically, I end up passing up the gap up, letting the market work and then likely facing even more up move after the EIA number, but all the while in the background knowing we are due for a rest. That isn’t a good recipe for trading success on the long side. I’ll probably end up sitting most of this day out, even though it appears to be a big green day on tap. Sometimes it is easy to know the direction, but the risk to reward just makes the trade unattractive.
The only way I would get involved in this market this morning is if we have some type of pullback, either a gap up and failure or a move down on a surprise bad EIA number. I’m really not seeing either of those things happening, but I’d be interested in working a long trade if they do and I can get a fairly tight stop on the trade. I would want to use either yesterday’s low of 33.54 or the 8 day moving average of 33.37 to play long off of.
Individual Stocks: I took a small position in NBR at 5.59 with a 5.44 stop. It should have room to work today and I’ll be looking to exit on any run past 6.00. DVN reported good earnings on Tuesday, so my plan of trying to get in at a cheap price for a long trade there vanished. ECR was looking a little shaky yesterday and I have buy orders in for that one at 2.03. Probably more wishful thinking than actual possibility of it getting that low. I have AAV on watch for a sub-5.00 entry. Still not feeling good about the services stocks, but watching PES for a speculative play down in the 1.65 range. One stock that I had completely taken off my trading list was BP. They had a great earnings report and the stock price has moved back up above 40. It is such a low volatility stock, but I think it is time to add that one back to the active trading list.