Oil and Gas Stocks Outlook for Tuesday, December 19
Dec 18, 2017 Trading Blog
Welcome to volatile holiday trading. The XOP made a big move up after four straight down days and the question now is whether Monday was the start of a rally or just a dead cat bounce.
The natural gas stocks might offer a clue as I really think today was a dead cat bounce in those stocks. I had RRC from 15.34 on Friday and cut it loose today at 16.07. I also had ECR from 2.18 and cut it at 2.29. The whole group looked really strong during the morning, but then faded terribly after lunch, leaving almost everyone in the group with an ugly shooting star or inverted hammer type candle. The bounce just didn’t have anything to support it.
The next clue is XOM and CVX. Those two put in horrible looking shooting star candles. Strong out of the gate and then giving up everything by the close, both ending red. Nothing to support the morning run in those stocks, which make up about 40% of the XLE.
The next group of stocks had inside days, which is a day that opened and closed within the trading range from Friday. Inside days basically indicate an equilibrium situation where neither the bulls nor bears can move price out of the previous days range. Stocks with inside days: EOG, HES, NFX, DVN, NBL, RSPP and CDEV. While the price gains were decent, there just wasn’t much in those stocks to indicate anything more than a dead cat bounce within Friday’s range.
For the XOP itself, it was a great move out of the gate for the first hour and a half, but nothing the rest of the day. One other theory is that after four days of price decline from 36 to 34 (about a 6% move), today may have been some short covering at the open. Only time will tell I guess. If you can’t tell, I’m a bit short biased right now and warning signs are jumping out at me from everywhere. I could be completely wrong here and just too absorbed in those signs, but just calling it like I see it.
Outlook for Tuesday – The Inside Day Trade Setup.
Sitting here on Monday night, I’m making a trading plan for a down market on Tuesday. One of my favorite trade setups is the inside day setup. An inside day is nothing more than a trading day that does not move outside the low or high of the previous day’s trading range. I listed a few inside day stocks above. The trade itself is best with the trend (which I think may be down tomorrow), but can be changed quickly if the trend happens to be up tomorrow.
The theory behind the inside day setup is that price will test one side of the range and either fail or breakout. If it breaks out, the setup is no good anymore. However, if it fails at the side of the Friday and Monday edge of the range, then price usually moves to the opposite side of the range, and usually breaks out that side. Here’s an example (and one I will be playing tomorrow):
COG is the stock. Friday’s range on COG was a low of 26.46 and the high was 27.47. Monday’s entire price range was inside the range of Friday with the high at 27.36 and the low at 26.73. Also supportive of the trade is the 50 day moving average sitting overhead at 27.50 and the 8 day moving average just overhead at 27.53. Both of these MA’s will provide resistance, along with the high marks from Friday and Monday. So, the setup occurs when price moves to the 27.36 area where we are looking for our entry. Price should attempt to escape Monday’s range. When it fails and re-enters Monday’s range, we enter short just under Monday’s high. The stop will be 27.60.
On the topside, we have the resistance of Friday’s high, the 50 day ma and the 8ma. Once price fails at Monday’s high, that high also turns into resistance and we also have a clear sign that there isn’t enough momentum to escape Monday’s trading range. With no momentum and strong overhead resistance, we have a VERY high odds setup and short trade. DVN, NBL and RSPP are perfect candidates if the trend is indeed up on Tuesday.
Now, if you feel like the trend for Tuesday is going to be up, then just flip the setup and find an inside day stock that has strong support UNDER it, rather than one with resistance over it like I have shown for the short example. Let it test the lows and then enter long when price shows a failure at the bottom of the price range.
I will also be using this same setup with HES, EOG, NFX, EQT and CDEV. This is a DAYTRADE only, two days at most. This has nothing to do with the quality of the stocks or long term trends or fundamentals, it is pure price action trying to tell you something.
If you have any questions about the setup, shoot me a Tweet on Tuesday and I’ll be glad to answer.