Oil and Gas Equities Outlook for Monday, February 5, 2018
Feb 4, 2018 Trading Blog
What a disaster for the bulls on Friday! The XOP finished the day down about 4.3%, closing at 35.51. Exxon and Chevron just crushed the sector with their earnings reports, while the the SPY also had one of its worst days in a long time closing down about 2.2%. It was a perfect storm of negativity for the energy sector. I can’t remember that last time I saw XOM and CVX both down greater than 5% on the same day.
I closed up shop around 11 am Friday, so I didn’t monitor things over the afternoon, but looking after the close I see that my XOP long buy order got hit at 35.53. I’m now holding about 60% of my desired long position at an average price of exactly 36.00. I’m writing on Sunday afternoon, but I’m guessing that we are probably looking at a sizable gap down on Monday morning, so I will likely be looking for a low point to add more. Right now, I have no clue where this might be.
My other current positions are PE (which I’m probably going to get stopped out of), JAG (which is my favorite position and seems to be holding up pretty well) and ECR (which is holding about even and I’m looking to add under 1.95). I’m looking at 22.50 on PE as a likely stop out point. I’ve got 10% of my money in it and a move to 22.50 will be about a 10% loss on the trade. This works out to a 1% loss in the account, which is my max loss on the trade. I think this trade would have bottomed out around 23.40 had we not had the SPY meltdown, but that is trading, you never know what external factors will happen to cause a loss in an otherwise solid trade. It happens, you just have to take the loss and move on. I’m going to give it every chance to hold 22.50, but even if I get stopped on it, I can always re-enter the trade if things bottom out and turn upward. Max loss limits are there for a reason, so you don’t take a HUGE loss and can live to fight another day.
One thing that I expect may cause even more trouble with energy is a change in trend of the dollar. If rates are going to keep going up, the dollar is surely to follow. The first warning sign pertaining to oil could have happened Friday in the USD/CAD. It made a huge bounce and seems like it could be attempting to make a bottom. The CAD/Oil correlation has held up pretty well and if the CAD starts weakening, this could be a clue for the direction of oil. This isn’t a standalone cause for a trade, but simply a small piece of information to consider. If the EURO also starts to collapse in the near future, then we could be looking at a full on reversal of the current dollar downtrend, which would not be good for oil.
So far, the SPY is only down about 4%. Many people are watching for that 5% correction mark. I think the downside could be more than many people are expecting. Many have been chasing yield and have been pushed way further out on the risk curve than they ever expected to be, and when the bottom drops out I think those individuals are going to look around and see how exposed they are and they are going to panic. And like I posted last week, a 5% drop in the market basically erases about 13 trading days of gains, which is nothing. Even a solid 10% loss only takes us back to mid-November. The problem is that we have gone parabolic on the overall market, so using a defined 5% or 10% really doesn’t mean much because all we are doing is erasing some crazy excess.
The important thing now is to realize that this first correction isn’t the one that causes most of the damage. It is the next pullback that is the real killer. The first pullback causes some doubt, but most people are so conditioned to buy the dip that they will all probably at least hold through the correction. But when the market fails to make another high and that second correction starts, the smart money sees it and everyone will be running for the exit at the same time, and that gets really ugly, really quickly. It also paralyzes most retail traders and investors because they have no stops and can’t take a loss, therefore they are locked in to the collapse for the duration. They are constantly advised by everyone in the industry to hold and add, no matter what. I’ve been trading since 1999, and I’ve seen it too many times. Almost everyone thinks they can get out before the market crashes, but hardly anyone ever makes it out alive, especially people who have never had the nightmare of going through it before. I’m still bullish and I’m going to give the SPY a chance to recover and retest the highs, but if we fail that, I’ll be turning bearish immediately on the overall market.
Outlook for Monday: The obvious prediction is likely a big gap down, as the reality of an overall market pullback has been planted in everyone’s head over the weekend by the media. There will be many weak hands that operate out of fear who haven’t seen a down market and they will probably be lined up to sell on the open. Market makers may take advantage of this fear to gap and drop the bottom out and soak up all this fear selling at bargain basement prices. Once that opening supply is absorbed, we could then see a market bounce.
My play for Monday is going to be a long attempt off the opening dive and retest. There should be some type of selling climax to mark the low and then a low volume retest of that point for entry. I will be watching 35.37 as my main point of information. If we gap open below that level or drive below that level, I’ll be looking for price to move back above 35.37 for an entry if I’m not already in, and for an add if I am already in.
If we somehow get a gap up or an opening drive back up, I’ll be on the sidelines watching. These types of gaps up after a big down day are the most dangerous traps in the market. There is a good chance that any gap up is for the purpose of the smarter money pumping price so they can sell higher. If the market gaps or drives up, I’m happy to just sit with what I have and see if the rally can get legs and how much of Friday’s loss it can recover. There is also the chance to cycle some of my XOP at 36 and try to add it back lower. I don’t really like doing this, but if the market offers an obvious trade to get short in the 36 area, I’ll likely take it.
Individual Stocks: I had my eye on XOG early last week looking for a break of the 13.50 level to start in long, but it bounced at 13.55 and I never got the chance. It closed 13.41 on Friday, so I’ll be looking to start a scale in on this one. I’m not sure of the exact prices yet, I really need to see the action on Monday. I’ve already got two Permians and one natural gas Marcellus/Utica, and XOG would spread my exposure and give me a DJ/Wattenberg.
Good luck out there and definitely keep it safe, this could be a very volatile week. Enjoy those Super Bowl parties!!