Oil and Gas Stocks Outlook for Friday, January 12, 2018
Jan 12, 2018 Trading Blog
What a surprise day on Thursday and definitely not what I was looking for. The 6 day range for the XOP was broken to the upside on heavy volume, but still didn’t really offer a confirmation that we are moving up from here. I’m still cautious of this move. As I posted in yesterday’s writeup, I was short XOP going into the day with a stop just below breakeven. That stop got hit and took most of my paper profits, but a small profit was definitely better than a loss. Always use stops in your plan. On the long side, I took a ride in XOG for a nice gainer from 13.73 to taking the first half of profits at 14.05. The second half of the position is still riding, but like yesterday, the stop is now moved up to protect a small profit just in case this sector rolls down like I expect. Be flexible in your market bias and cautious in protecting your capital.
We are presently sitting right on the top channel line on the XOP uptrend. We tagged this channel line on September 28 and November 6, and both times that turned out to be the end of the upmove. The market pulled back both times from those touches. So the question now becomes do we pull back on this third touch, and if so, then how far?
I’m still of the opinion that what we saw yesterday was an upthrust after this latest consolidation. It is one of those classic setups where the smart money can manipulate the market to get short right at the top. Anyone who was short going into yesterday had to buy (I was one of them). Anyone who wanted to play the breakout also was a buyer. Anyone playing the retracement back to the breakout point has likely also bought. Who is left to buy here? The real key though is WHO is taking the other side of those trades? Is the smart money really buying this overbought market that has run 18% right into obvious resistance? I’m going to say probably not. The short term smart money could easily be getting short up here, but we won’t know until we see how price reacts when it dips back down into the range created over the last 7 days. It will either bounce and all the long players will be proved right, or it will collapse and the recent buyers will be jumping ship and selling everything they bought to the delight of the shorts who possibly just manipulated retail into buying up here.
One thing that catches my eye this morning is the EURO, it just broke out of that 1.21 double top area, and did so pretty convincingly. Keep an eye on the EURO and see if it can hold above the 1.21 level and confirm this breakout. I’ve been watching this DXY/WTI ratio lately to try and gain some clues as to oil direction/support. The other currencies haven’t really followed yet, but if the dollar continues to weaken, this could help oil. These aren’t direct correlations on the intraday level, but more so on the larger timeframe.
Outlook for Friday: So, given the above, how do we play it to make some money? I’m looking at two trades. The first is a short on any retest of the highs up around 39.87. I wouldn’t mind putting out a short there on the right setup and betting on a move down. Keep the stop tight in the area just over 40. On the other hand, if we drop down and test 39.05 and it looks like it is going to hold, I have no problem taking a long there and using something in the area of 38.80 as my stop. If the 39.05 test holds, there could easily be a dollar of reward in it in exchange for the 25 cent risk.
Whatever is decided, there must be a plan for each scenario. I have no idea which way this market is going to go today, but I do have a plan for each direction. It is about making money, not about being correct predicting direction.
Good luck out there today.