Energy Stocks Outlook and Trading Plan for Monday, January 8
Jan 7, 2018 Trading Blog
It was a slow week to start the year with the wife off work and kids out of school for most of the week due to the weather, but it did give me time to focus on shifting my trading timeframe from my normal 5 minute chart to the 30 minute chart. One of my goals for this year is to move to a little longer term trading and away from daytrading. As the years go by, the market just seems to be getting more and more efficient due to algos, HFT and other computer programs. The 5 minute level has become almost pure noise and trying to read the order flow is more difficult by the day. Most of the real moves have begun to happen during non regular market hours, and the moves that are happening during regular hours are so fast and spiky that catching them has become breakeven at best. And I’m getting old and it is just wearing me out to sit hour after hour during the day. I probably should have made this move about a year ago, but it was difficult to abandon profits. Sorry for the lack of posts, but this shift in timeframe is taking a lot of time.
So what did happen in the energy sector this week? Consolidation. And that is a good thing. Tuesday was a nice XOP up day, but Wednesday was a fairly narrow range bar and Thursday basically closed unchanged. Friday completed the consolidation by making another narrow range bar that ended up being an inside day of Thursday’s range. The upcoming week will start with a test of the 38.89 high or the 38.19 low. I’m not really sure which way we go, but my gut says we test the 38.19 low and then make another run at the highs and probably a little more move up this week toward 40. If you read last Sunday’s post, that weekly study of the WTI/XOP ratio suggests we should be way higher on the XOP than we are currently, the only question is how we get there. The base on that study was WTI 60/XOP 48. WTI hit 62 this past week.
The energy sector has moved in three steps off the bottom. The first leg up in the XOP was from August 30 to September 28 and was about 19%. The second leg up was from October 26 to November 6 and was about 16%. The current leg started December 18 and stands at about 15% so far. A run to 40 would put us at about 17.6%, which is about average of the first two legs. I would expect that there would be some type of buying climax at the end of this third leg signaled by a heavy volume day with a bar that contains a long upper tail (shooting star). We then get a test of that tail and then a move down, probably somewhere in the 36-37 range. The timeframe for all that is anyone’s guess.
Trading Plan for Monday – I’m looking for a test of the low of Friday’s inside bar and then a move up to the highs, and hopefully a breakout of those highs. I’ll be watching the 38.18 area for a long entry and likely looking at 38 as the point to judge whether or not I’m wrong on this trade. If there is truly upward momentum left in the XOP, I wouldn’t expect it to break down too much under 38. If for some reason we get a gap down open, then a long entry is going to be tricky, but probably still profitable.
On the other hand, if the XOP gaps up above the 38.89 mark, I’ll be watching to see what kind of reaction we get when price tests that mark from above. If it can hold outside of Thursday/Friday highs, then I have no problem getting long up there and using 38.80 or so as my stop. I have no desire to short this market right now and if it starts down, then I’ll just be sitting and watching, and gathering my wish list of long entry points on the 30 minute timeframe on any significant pullback toward 36-37.
Individual Stocks: In a strong run like this, I’m more inclined to just play the XOP, but WLL offers some good risk reward and possibly a larger profit potential than the index. I’m not a fan of “patterns”, but many people are going to see a cup and handle formation on the WLL hourly chart. It has a really defined, softly sloping consolidation going on from last week which offers a great setup with a tight risk control. It is still just a 2.3 billion market cap and can easily run 10% if it breaks out.
If COG weren’t a natural gas stock, I’d probably be all over it this week. It has that same sloping setup as WLL which provides a nice tight stop around 28.50 and great profit potential of about 3:1. I’ll be watching this one, but would probably choose WLL as my first option.
Good luck this week.