Outlook for the New Year, Tuesday, January 2
Jan 1, 2018 Trading Blog
Hope everyone had a great holiday break. It was a good time to relax and hang out with family and recharge for the new year. I feel excited to start the new year and will try to make the blog an everyday part of my trading routine. I’ve seen many trading experts suggest that a journal really improves trading results and I definitely agree with that. Just the act of organizing thoughts and reducing them to paper helps.
So where do we start the new year? It was quite a run to close out the year with the XOP making a nice move from 34 to ~38. I missed almost the entire run, I just wasn’t expecting that kind of move over a lighter volume holiday season. I hope you guys caught some of it. At this point, the obvious call is for a pullback and retracement of a portion of that move. My best guess is a minor move back down to at least test the 34-37 range, likely a dip down to maybe 36 where price could retest the 50 day moving average, which is at 35.10, but climbing fast toward price. I would really like to see a pullback toward the 35 level, where I would likely get long in a big way. Either way, I think if you want to get long, then scaling in on any retracement is probably the safe way to play. I think this market could rip higher at some random point and if you aren’t in for at least a starter position, you might not catch it.
So if we do get a pullback, then what? I spent some time trying to figure out where oil might go and from all the reading I’ve done, I just don’t see oil price collapsing any time soon. At worst, price maybe drops back toward $50, but I can’t really picture any situation where it breaks back under $50 for any extended period of time. Actually, I’m starting to join the camp that thinks oil price may rise higher than most people expect, maybe somewhere toward the $70-75 range. I’m not sure when or how that will happen, but the longer we sit in this $60 area consolidating, the greater chance I think we have to make a move up. My outlook on oil will continue to be positive until something comes along to change it.
Another thing to watch might be the EURO and the Dollar Index. If you overlay a WTI weekly chart over a weekly EURO chart, there is a rough correlation that could be helpful. The WTI and EURO collapse in 2014-2015 led to a couple year long trading range for both, and now both seem to be breaking to the upside. The EURO will soon face a bit of a test around 1.21 where it could form a double top. But, if it could easily and clearly break out to the upside, this might be a very positive signal for higher oil prices. It isn’t a direct relationship, more of a play on the inverse oil/dollar relationship, but any extra piece of information is helpful, just don’t read too much into it. The USD.CAD pair also offers a good correlation signal with oil.
With a positive view on the commodity itself, my view on energy stocks is also very positive. Over the last couple of weeks, I had kind of worked myself into a short term bearish bias, as the technicals presented the perfect chance to top out and roll over, but they didn’t. Many times it is difficult to tell when a range is a re-accumulation versus a distribution. The range over the last two months between 34-37 just had a distribution feel to it for me. Many times when a plan or bias fails, that failure offers great trading information if you can adjust quickly enough and admit when you are wrong. The bearish bias I had over the last couple weeks was wrong, therefore it is time to take a step back and admit that the direction may in fact be up. Don’t fight what the market is obviously telling you.
I had some free time, so I went back and did a weekly running ratio of WTI Oil price and the XOP for the last two and a half years, and the results were interesting. The ratio ran at an average of around 1.25 for most of the period. I don’t have space to post the entire study here, but will just show a few interesting points.
June 2015 Oil 59.63, XOP 47.98. Ratio: 1.24
Sep 2015 Oil 44.72, XOP 35.50. Ratio: 1.26
Dec 2015 Oil 35.33, XOP 31.47. Ratio: 1.12
April 2016 Oil 39.65, XOP 31.40. Ratio: 1.29
Aug 2016 Oil 41.92, XOP 35.05. Ratio: 1.20
Dec 2016 Oil 51.45, XOP 43.18. Ratio: 1.19
April 2017 Oil 52.27, XOP 37.22. Ratio: 1.41
Aug 2017 Oil 48.75, XOP 30.43. Ratio: 1.60
Dec 29, ’17 Oil 60.12, XOP 37.18. Ratio: 1.62
The most interesting thing from putting all this together was that the ratio between Oil price and XOP is presently at the highest level in the past two and a half years. Compare the June 2015 top line with the December 29, 2017 bottom line and something is clearly different. Either oil price has to come down, or the XOP is severely lagging and needs to really spike to bring the ratio back down to the 1.25 average over the 2.5 year study. With a 60 oil price and a 1.25 ratio, the XOP would be trading at 48, or about 30% higher than where it sits now. If you look at the top line from June 2015, that was exactly where we were sitting with an oil price of $60 and XOP of $48.
I’m not sure how much statistical significance a study like this has, or what other factors could be altering the numbers that I might be missing, but just as a general ballpark idea, a $60 oil price should probably be producing a higher XOP price along the lines of the 1.25 level it has supported over the past 2.5 years. Just something interesting to think about.
Individual Stocks: One great idea I read was that if we think oil price really is going to rise further than people think, then the individual stocks to own are the players that are unhedged, or lightly hedged. There is more upside gain for them since they aren’t locked in. EOG, APC, APA and DVN were the ones on my standard list that are likely hedged the least. PXD, CXO and HES seem to be some of the highest hedged, but I really need to take a deeper look into the whole list to figure out the exact numbers.
My favorite Oil E&P daytrading stocks for the next couple of months are APA, APC, COP, DVN, NFX and PE. COG, EQT and RRC will be the natural gas daytrading options. SLB, HAL and NOV are the services daytrading stocks, while VLO, MPC and HFC are the refiners I daytrade.
The entire swing trading “Core” E&P list: APA, APC, CLR, COP, CNQ, CVX, DVN, EOG, HES, NBL, NFX, OXY, PE, RSPP, SU, WLL, XOM, CDEV, JAG, XOG, MTDR.
Natural Gas: AR, COG, EQT, RRC, ECR.
Services: SLB, HAL, NOV, HP, FTI, PTEN, NBR, LNG.
Refiners: VLO, MPC, HFC, PSX.