Decision Time for Energy Stocks, It’s Now or Never
Aug 27, 2017 Trading Blog
So here we are, sitting right near $30.00. What now?
At this point, I really fear we might be looking at another move down. On the above chart, there are three important points to notice: Mid-June at 30.00, Early-July at 30.00 and Mid-August at 30.00. That 30 line was support for most of the summer and we broke that support a couple weeks ago. One of the most basic rules of technical analysis is that when support is broken, it then becomes resistance. This past week we made a very weak attempt to run back up to that 30 level for a test of resistance, but we couldn’t even get there, much less test it. Looking down at the blue volume bars, there really was no interest from the buyers. The move was a low volume drift up, basically just a lack of sellers. Just weak holders who can’t bring themselves to sell yet because they still have hope. We are just down so much and it is all just so cheap, this has to be the bottom right? Right??
Nearly every person who has bought this summer since June 1 (and nearly everyone who has bought over the last 9 months) is sitting right overhead just waiting to hit the sell button to get out even. This puts an incredible amount of supply just overhead. The only way to get through all that supply is if someone wants to buy it all. Right now, nobody appears to want to touch it. So what happens now?
We can clearly see the technicals of the chart above, but what does it actually represent and what type of events might it be setting up? This can go two ways. The bull case is that huge buyers show up and run price very quickly through all that supply. It can’t be a slow move, it has to be a quick forced move. If the price moves fast enough through the level, many of the current weak holders may not sell, choosing instead to think they just hit the lucky jackpot winner and hold. The fast price move will also force any shorts to cover quickly in a panic without time to think clearly, further pushing price up. Lastly, everyone on the sideline who wants in, those guys who all have FOMO, will pile in chasing price without thinking if the price is moving fast enough, adding to the rise. This is really the only bull case that exists. If only a few buyers show and price grinds slowly up, none of the shorts will panic (they might even add more short), most of the existing holders will have too much time to sit and contemplate and worry as price creeps, and most of them will probably still sell to get even. As for the FOMO group, a slow moving price really won’t get them stirred up and willing to chase. They don’t have to chase if price is creeping, they can just wait and buy dips.
For the bull case, we have to ask, given the status of oil supply/demand and price outlook, is there any group large enough who would take the risk to come in strong here and try to force a move through all that supply? Probably not. They could run it up, but I think they all realize at some point when they quit buying, the sellers will all rush in, thereby causing loss on the new long position. But if it is going to happen like this, then the time is now, they really can’t run the risk of waiting and having a selling panic hit if they want price up. Even more likely is that the smarter money wants the XOP to come down here so that they can buy cheaper. They will do whatever they can to cause that to happen. I’d venture a guess that the odds of moving up here and starting a lengthy uptrend are less than 25%.
The other side is the bear case, which I think is what we get. At some point this week, price will make a run at 30 and if it fails there, the real trouble will start. Everyone can see the failure, everyone can see the level, the chart above is very obvious. Everyone who bought this summer (and earlier), and is still holding, may want out if 30 becomes clear resistance. They will recognize it as a brick wall and just give up. And they will want out as quickly as possible before price can go against them anymore. This creates the panic stampede. As we saw last week, there really aren’t any buyers down here, otherwise we wouldn’t be down here. If supply volume shows up, who is going to buy it? What we get is a liquidity gap, increased selling which has no buyers. That gap could take us down past 25.
All of this bear case gets magnified even more if the overall market starts down this week. September/October has historically been some of the worst months, as well as the most common months for sharp down moves. We could get panic selling in energy combined with panic selling in the overall market, the perfect storm.
Long downtrends like we have seen over the last 9 months in energy rarely just turn at random. The most common occurrence is a bottom formed by a climax selling event or capitulation. If the summer buyers all run for the exit at the same time, and the overall market funds run as well, we could very well get that common climax pattern. The climax pattern is what starts the next bull run, it is the beginning of the final transfer of stock from weak to strong hands. Without the climax and capitulation, we just have all these weak hands forever sitting over the market selling and selling and selling, never letting the market rise. The smart money is not going to take a huge position without a clear path to profit. They see all the sellers overhead and they will wait until all that supply is gone before they complete their positions. The smart money will be the buyers on the other side of the capitulation. They will probably even be the root cause of that capitulation occurring.
I could definitely be wrong here and the buyers could all just randomly turn on a dime and come in huge, but I just don’t see it happening. This week is going to be an important one, so watch the action at the 30 level and watch the volume on any move above that level. If volume is light and the level fails and we start down, be patient. Make sure the wish list is updated and there is dry powder ready to be put to use. Good luck.