Oil and Gas Equities Outlook for Tuesday, January 16, 2018
Jan 15, 2018 Trading Blog
Wow. What else can you say about this strength in the XOP and crude itself? There is way more strength here than I expected, but the question remains, how long will this strength last? The XOP is pressing right up against the upper channel line of the recent trend which started back in September, but hasn’t shown any signs of a pullback. I have been waiting on a pullback for the last three days, but so far nothing at all. How much of this run is due to the overall SPY strength? This whole market seems to be melting up with no end in sight.
This situation is a perfect demonstration as to the limits of technical analysis. TA is the basis of my trading, but about 20% of the time it can flat out fail you, usually in places where people call it “overbought or oversold”. These are the places where momentum is usually strongest and usually at places where the technicals tell you it should’t be happening. For the XOP, the technicals say there should be strong resistance in this area, but the momentum is so great that it is completely overtaking the resistance, therefore you get an ‘overbought’ type condition, while the price just keeps rising. The thing about using technical analysis for trading is that you can’t cater to that 20%, it is the exception, not the rule. When you get caught in that 20% area you are just going to have to accept being wrong. The other 80% of the time technical analysis will comply and provide a great trading framework. If you can just figure out when you are in that 20% area, and move to the sidelines, you can escape a lot of damage. When things aren’t working as they should, the sideline is the safest place to be. That is where I’m at right now.
For the last couple of weeks, I have been watching the EURO and that 1.21 mark. Well, it blew right past that level and sits near 1.2260 as of Monday lunchtime. The weaker dollar is definitely a good sign that the strength in WTI could continue. I posted back at the first of the year that I felt oil could hit 70-75, but I had no intention of that happening in January. At this point, I have no idea where oil stops on the current run. When people get excited, they often overdo it, and that appears to be the case with oil. CFTC numbers have speculators with record high long positions in oil. Most times that ends badly when everyone is crowded on the same side of the trade, but so far no cracks are showing.
Also, a couple weeks ago I posted a study showing the average WTI/XOP ratio has been around 1.25 over the last two and a half years. With $60 WTI, that equates to an XOP at $48. We are now at $64 WTI with the XOP showing no signs of slowing down. At this point, it really appears that the XOP is seriously undervalued compared to the historical average. With a $64 WTI price, the XOP could make a case for a $51 price tag.
Outlook for Tuesday: We all know a pullback is likely coming sometime soon, but when that happens is anyone’s guess. At this point, all you can do is ride the wave long and keep the stops tight for the inevitable reversal which will occur. I’m watching that 39.00-39.25 area in the XOP for a long position. I’d be willing to get long somewhere around Friday’s low and place a soft stop just under 39. If price takes out that 39.05 level, then there is a chance this thing could reverse back down to the 37-38 level, although I think 37 is probably the worst case pullback right now until I see more on the downside.
I tried a short on the XOP on Wednesday and was extremely lucky to save a small profit on that one. I could have got completely run over if I wouldn’t have used a stop, always use stops. I’m sure at some point another short opportunity will arise, but I don’t think I’m going to be trying the short side again this week. Just too much momentum, which makes the odds really low of catching the turn. The better play is to just let it pullback and find a nice safe spot to get long for the next run. You don’t have to catch every run up AND every run down. Patience.
Individual Stocks: I’ve cut my daytrading list down to just four trading vehicles for the next few weeks: APA, APC, COP and DVN. I’m still trading the other stocks on my list, but limiting those stocks to swing trading. My focus on daytrading has been getting a little too broad and I need to narrow the focus and keep up with the microstructure a little better on my daytrades.