Oil and Gas Stocks Outlook for Tuesday, August 15 – An Inflection Point
Aug 14, 2017 Trading Blog
The month of August has been an incredibly slow trading month, but Tuesday has huge potential to be a great trading day. The XOP is down about 10% over the last few weeks and is again approaching the lows around 29.90. We are at a significant inflection point where several different groups of traders with different timeframes are all going to have to converge on a single decision making point. This has the potential to produce a much larger than average ATR sized move with high volatility.
The XOP is currently in the ninth month of a downtrend which started on December 12, 2016. The XOP made its first bottom of 29.89 back on June 21, with significant volume of about 33 million shares traded. There was a secondary test of that bottom on July 7 at 29.90, but on much lighter volume of just 15 million shares. The remainder of July and August has continued the range, with a recent run to 34 which failed and now a drop to the bottom of the range where we currently sit at 30. So what now?
Several different groups of traders will be active on Tuesday: longer term funds, intermediate term traders, swing traders and daytraders. While I know these guys are active every day, today is one of those rare occasions where the current point on the chart is more significant than usual to each of these groups. Having all groups active should produce incredible volume/liquidity and volatility. If we know all these groups are active, we then have some reference and reason to predict the shape and form of the daily price action. It really helps to know who you are playing against during each day.
Starting with the longest term traders who make decisions based in months and consume million of shares, Tuesday represents a test of the longer term current downtrend lows and an area of large liquidity. Large funds have to acquire huge chunks of shares, preferably at decent prices, and 29.90 is an area that contains voluminous amounts of stop orders (selling orders). These lows will also bring out other groups of traders, who will also contribute greatly to the liquidity. High liquidity will enable these longer term traders to fill a great number of buy orders without moving the prices up on themselves. It is doubtful that many of these larger funds would be strongly active sellers here at the lows, as they were likely out of any position they desired to exit long ago. There is also a possibility that there may be some players from this longer term group who have been short over the last 8 months and may step in and cover the remainder of their shorts here at the bottom into this high liquidity.
Dropping down a group, we have the intermediate term traders, guys who may be holding positions based in weeks, rather than months. Many of these traders have acquired their positions since that first bottom on June 21, trying to play a long off that bottom. Almost all of them have their stops set just under the lows made on June 21 and matched on July 7. For this group of players, Tuesday will likely represent a test of their position and likely a tagging of their stops. Will they liquidate? Any liquidation by this group will likely end up in the hands of the longer term group in the preceding paragraph. Stock flows from weak hands to strong hands. There may also be some players from this group who will try to get short on a break of the lows, hoping that price continues to fall over the coming weeks. Odds are that any action from these intermediate players all point to selling action by them.
Dropping down another group, we have shorter term swing traders who measure their position in days, rather than weeks or months. There may still be some players from this group who bought the false break out in the last two weeks and could be waiting to see if 29.90 holds. Decision time for that group. On the lowest level are the daytraders and market makers, both of whom will be fiercely trying to catch two way action on the break short and then trying to catch any bounce and retrace of the break long.
Tuesday’s Outlook: So what all this adds up to is a day where this current point on the chart has a higher than average significance to every group of traders in the market, therefore odds suggest it should produce a high volume day, and hopefully one where the larger timeframe traders show their true hand. The situation really feeds on itself, as the lows bring out the short/intermediate term traders, who then bring out the larger traders who need liquidity. It’s much like an ocean food chain really, with whales chasing a juicy school of small fish to consume. I really expect that we will wake up tomorrow to a gap down in the XOP. Market makers could go for the stops right out of the gate and get their business done as quickly as possible, getting as many larger orders filled as soon as they can. Gapping this market down would 1) probably panic anyone who bought Monday, 2) panic anyone using 29.90 as their stop and 3) entice shorts and 4) scare away retail buyers (competition), all events that would get large buy orders filled. I would imagine that they would also go about trying to create as much negativity as possible, so be on the lookout for downgrades or some other type of negative narrative, it always happens at the lows (and it happens for a reason at lows). Everything on Tuesday depends on volume.
The only alternate option that could make this a bottom is a condition known as a Wyckoff Spring. It is a light volume shakeout of the accumulation range which provides a measurement of the remaining selling supply. Should the market dip severely and then completely recover in the absence of any volume, it could signal that there simply aren’t any sellers left after this 9 month downtrend, suggesting that the sellers are exhausted. I’m not really feeling this as a spring, as the accumulation range just hasn’t been that long in duration, but never rule anything out.
Tuesday’s Trading Plan: I’m not looking to get involved on the short side Tuesday, it’s just a very difficult approach, both psychologically and technically. I’m hoping for some true fear and very high selling volume to create a capitulation day. I will be looking for the XOP to create a high volume low at some point in the morning and then conduct a secondary test of that low on very light volume, hopefully making a higher low. That will be the point I will use to play off long. The action on Tuesday will hopefully produce a daily candlestick with a very long tail which some people describe as a ‘hammer’. Tomorrow is one of those days where the best approach is probably to play the XOP rather than trying to guess right on individual stocks, but I do have a couple of very small caps on the radar (which I will post after entry) and will also be looking to pickup some DVN, CLR, PE, APA, HAL and COG on any overdone drops.