Oil and Gas Equities Outlook for Friday, February 23, 2018
Feb 23, 2018 Trading Blog
The overall market had some underlying strength on Thursday and that allowed some buyers to come in and pick up some bargains. I don’t think it continues, but it was nice to see that the sector isn’t completely dead. The range and volume on the XOP were both about average, with price closing almost exact center of the daily range.
The STACK related stocks (NFX, DVN, XEC, MRO, AMR) were held down again Thursday from the CLR earnings report. It seems that expectations for the Anadarko were just a little too high and now some of the excitement is draining out of the play with stock prices for all involved dropping. This happened a few months ago in the Permian when PXD announced some problems with a few wells and everyone thought the issue was the same for all companies, but it wasn’t. I think we may find that the same thing happens in the Anadarko where these current issues turn out to be nothing more than a blip on the road of development. I’m going to be buying DVN and NFX when the sector makes it’s next pullback.
The XOP actually showed more strength than expected Thursday. The 10:30 EIA number kickstarted the sector and created a quick move up toward resistance at 34.50. I think this was a manipulated move to try and attack shorts, but at least it wasn’t a move down for a day. At this point, just not going down is a good thing, no matter the reason. The manipulation was supported with oil creeping up past $62, while the EURO and GLD showed associated commodity strength.
So where are we now? I think we have some hope of possibly staying around this 33.80 level to finish the week. This area was roughly the lows from Tuesday, highs from Wednesday and close from Thursday. Basically, it is about the midpoint and average weighted price for the week, so to move away from it would take a fairly large supply/demand imbalance, which might not happen on a Friday. Price also closed right on the 200 day SMA at 33.73, which tells me that the market is balanced here by longer term participants who use that moving average to make investing decisions. If those larger participants aren’t interested in making a directional decision right now, then there is a good chance the market just sits here until they get ready to act.
On the upside, I think we probably get one more run at 34.50 before things turn down. There is a huge amount of liquidity up at that level which has developed over the last couple weeks. There are a large number of stops from the shorts sitting up there, as well as a whole group of breakout players just waiting to pull the trigger long. The buying is there, but the question is, how many unfilled sell orders remain at that level? We have tested the level about four times already and each time the level gets tested, that is less and less supply overhead to create resistance. I think the imbalance is probably still in favor of the bears, but you never know and if the imbalance is in favor of the bulls this market could spike if it breaks that level. That is a big reason why I didn’t get my short trade off yesterday, because I never got sufficient market structure to be able to limit my risk. Basically, any stop I would have to use would have been too wide and open to an attack of getting picked by the bulls.
On the downside, the first level to watch is 33.40. After that, Wednesday’s panic low close of 33.01 is the mark to watch. I don’t think we get anywhere near those points if the SPY, TLT and EURO all stay green. However, if all those turn red and the XOP gets some momentum and breaks 33, we could be looking at a quick fall to 31, and probably lower next week. I’ve been extremely bearish, but from what I’ve seen this week, I don’t think we get there in the near future unless something unexpected happens.
Outlook and Trading Plan for Friday: I’m actually looking to jump on the long side of this market if it pulls back early and tests that 33.40 level. It seems like the SPY has stabilized and the TLT could be getting ready for a bounce. All of the lower rates/higher stocks type trades could come back on Friday. I also might be interested in trying to ride some momentum on a run toward 34.50. I think the market really wants to go there and is being drawn by the liquidity there, so might as well ride the wave to that point. I don’t have much interest in getting short today with the pre-market conditions looking like they do. This is one of those situations where risk is just too hard to control on a short. Yesterday was the perfect day to try a short at 34.50, but today is NOT.
Individual Stocks: I’m watching DVN and NFX to possibly drop one more time to try and get in long. APA is another one I’d like to pick up on the next dip. I think there have been some extreme overreactions out there on some of these earnings reports and I’m looking to take advantage for some longer term swing trades when the time is right.