Oil and Gas Equities Outlook for Thursday, January 25, 2018
Jan 25, 2018 Trading Blog
Wednesday was another day of quiet consolidation just under the highs. We have one of two things going on here, either the sector is consolidating just under the highs getting ready for another big leg higher OR the huge S&P500 run is just propping it up here and there is no run coming and it will turn down sharply if the overall market turns down. Honestly, with oil still ripping up (now around $66), the XOP probably should have already broken out by now with the SPY hitting new ATH every day, and the fact that it is relatively weak is concerning. I’m starting to get the feeling that the XOP has reached the end of its run, especially if it tests that 40 mark and fails again.
Another thing that is a bit concerning is the EURO, it just passed the 1.24 mark. Several weeks ago I was watching the 1.21 level to see if it was going to break out and provide a positive signal for oil. It did in fact break out and oil has kept on running with it. Keep an eye on those two and notice if any divergence develops between them in the coming weeks. The energy equities should also have followed the weaker dollar, yet they haven’t been able to make new highs, even as the EURO rips higher.
Outlook and Trading Plan for Thursday: I’m a bit negative on the XOP today, simply for the fact that it is showing a good bit of relative weakness compared to the massive runs in the SPY (284 and new ATH), WTI at $66 (highest since 2014) and the EURO at 1.24 (highest since 2014). With those three things running like they are, the XOP should be way north of 40 and probably somewhere in the 45 range, but it isn’t and there has to be some underlying reason that I’m not seeing. In fact, if you back up to late 2014, the XOP was trading north of 50 in November of 2014 with those other three things.
So how to trade it today? As negative as I am on the XOP and as much as I’d like to take a short here based on the relative weakness, I’m just not ready to take that short trade. I’m going to give this one more shot long and hope that this is just the consolidation before another big run up. I’m hoping that maybe the XOP is just lagging a little here and will make a sharp move to catch up with the SPY, Oil and EURO. I’ll probably feel stupid if this thing fails again at 40 and I’m long, but the reward on the trade could be 42+, while I can probably cut this thing if it takes out that 39.25 level. The real key here is to get a good entry as close to that 39.25 level as possible to produce the biggest risk:reward ratio possible. Sometimes the risk/reward is more important than the odds of the trade winning, and this is one of those situations. Trade the numbers and math, not your opinion.
My plan today is to scale in long starting with the first dip this morning. The only requirement is that the SPY must stay green, or at least close to it. If the SPY rolls down, then I will not be putting this XOP long trade on today, I’ll be happy to wait to see how far the SPY is going to pullback first. I’m going to take about at third of a position hopefully somewhere in the 39.50-39.70 range, add more on any break under 39.50 and then make one final add on any test of that 39.25 level. If the 39.25 level fails and we take out 39, then I’ll probably cut the whole thing for a loss. This is going to be more of a swing trade than a daytrade (although I don’t mind taking the profits intraday if this thing somehow rips well past 40). This is going to be a bigger trade than what I normally take, but I really think the risk/reward is good here and the odds are probably at least 50/50 that this breaks to the upside if it can hold 39.25 on the next test.
IF this trade fails, then that in itself provides the next trade setup. If 40 fails to hold and the XOP takes out 39, then this latest run would show a clear failed top and the obvious trade upon seeing that is to be short, as we likely make that awaited run back toward the lower side of the price channel around 37. Sometimes the failure of one trade provides the perfect signal for another trade.
Individual Stocks: I cut the JAG position at 14.50 on the open on Tuesday for a 3.6% profit on the position. I would have no problem buying into JAG again if it rolls back under the 14 level. At this point, nothing else really has my attention. I think some of these favorites might run, but the risk/reward profile for most of them just isn’t attractive for swing trades right now, however the next pullback will probably remedy that. I was liking DVN, but it has been really weak over the last couple days, so I’ve moved it to the back burner for now.