Oil and Gas Stocks Outlook for Thursday, August 17
Aug 16, 2017 Trading Blog
An almost 9 million draw on the EIA and the XOP falls to new lows. Painful for anyone who is long based on improving supply/demand fundamentals. But, as we know, fundamentals and stocks are often two totally different entities. Sometimes fundamentals just don’t matter.
So what happened today? The XOP got about 6 million in volume over the first hour Tuesday when the market hit that liquidity under the lows. The total volume Wednesday was 13.4 million shares. Quite a difference. Yesterday, the longer term traders were willing to buy 6 million shares in the first hour, today they were nowhere to be found, they just weren’t interested. There is simply nothing under yesterday’s liquidity level to stop the fall, rather there is a liquidity gap. There really isn’t much to stop the fall until we reach the 25 level. I’m not suggesting that is where we are going, but if price does move in that direction, there isn’t really any group that will defend anything between here and 25. It would probably take some external event to force the market to make a stand, not a chart/technical reason.
The market could easily continue to drift downward on very light volume like we had today. That scenario was the first option that I set out in Wednesday’s Outlook. The action today was more of a lack of buyers than it was active sellers. The sentiment is just so negative and all of the intermediate, swing and daytraders probably all just got burned with their stops getting taken out yesterday. After taking all those losses, nobody is in a good mood and nobody wants to step in and buy this hated market and risk getting slapped down again. So we get more light volume drift down, until someone steps up and wants to buy.
As I covered in Tuesday’s Outlook, there are several different groups that operate in the market each day, but only one of them has the power to stop a move like we have seen from 33 to 29.50, and it isn’t us retail traders. It is the larger, longer term smart money, but the important question is this: Why would they want to step in? If they were truly trying to accumulate a big position at a low price, then why touch the offer at all? There isn’t any competition for shares right now. Simply bid and take what the sellers dump while price drifts down. Pull the bids and let price fall. That is the best of all possible worlds. Would you push the price up on yourself if you didn’t have to?
So what forces them to take a stand, step in and stop the fall? Basically, someone has to be first and they have to buy in big enough size to cause the others to get FOMO. What is FOMO? Fear of missing out. There has to be some tipping point in the market where everyone knows the price is good and they want in. Then it is a rush to get in and the XOP explodes. Sounds easy right? Just buy and wait for the Christmas present. But it just doesn’t work that way. The problem is that nobody knows when or where that tipping point is. It could be tomorrow, it could be next Friday, it could be December down at 19. Who knows.
This is the reason for the old quote, “Never short a dull market”. That explosion can happen out of the blue for what seems like no reason at all. There is a reason, but it has absolutely zero to do with the companies, oil fundamentals or supply/demand. It’s strictly a function of the market participants and psychology.
Thursday’s Outlook: It is pretty much a copy of today’s action, either 1) a slow, low volume drift down or 2) someone gets FOMO and price rips. There really aren’t any other high odds hypotheticals at this point. Number 1 is the higher odds probability. Today, the 9 million draw was the fuse to set the market off and cause a huge case of FOMO, and it didn’t even register. The big money isn’t ready yet, they don’t have the positions they want or they don’t feel like the path to a profit is totally clear yet.
Thursday’s Trading Plan: The only real option that I can play Thursday is a very tightly stopped long trying to catch the explosion. I will be looking for any high volume low that gets a low volume retest, preferably making a higher low, using the first low as the stop. I used to try and “trade with the trend” and short here, but the odds are terrible. Either you make 10-20 cents with that, or you get blown to bits and lose a $1.00. Don’t always believe those “only trade with the trend” gurus, there is more to it than that.
Individual Stocks: I had orders for ECR at 2.26, but I pulled them. I’m just not feeling the need to pick the absolute bottom on that one. This is one of those stocks where I want to play larger than normal. I believe in the company itself and I’m willing to wait for the deal that is just too sweet to pass up. I’m looking at $2 or under for a large trade. If it rips from here, then I will accept missing it, that happens. But, if I’m right and this drops back under 2, I can really get some size with a much more limited downside. The R (risk/reward) on the trade could be huge in that situation. I also have DVN, APA and PE on radar. APA may be the one that gets overdone to the downside as they are the company with the most uncertainty, but that is where the opportunity resides. RRC was strong again today, as per last night’s note.