Oil and Gas Equities Outlook for Friday, March 16
Mar 16, 2018 Trading Blog
I see people stepping in and buying energy stocks right now and all I can think is “WHY?”. I know many people are much longer term players than I am, but even if you are, why step out there and buy right now? I mean we are in a spot where there is a very strong resistance overhead and a good deal of space to the downside if things get ugly. If you really want to buy, then why not wait until the sector shows signs of life by at least breaking above 35? The risk to reward is just horrible right now and I see people continue to acknowledge how much the sector is hated, and they still keep buying against their better judgment. Why not either wait for the index to break 35 OR just sit back and wait for everything to collapse and then really get a great entry? Anyone entering in this 34-35 range is just taking the worst of it with little upside and much bigger risk. I know many long term players don’t worry so much about entry, and everyone is trying to “buy low”, but a little patience could pay off huge in spots like this, and you are really only risking about a buck to the upside in the index for that extra $3-$4 luxury.
As for the index itself, every day this week the XOP has been rejected at 35, with the 50 day moving average sitting just above at 35.05. The whole reason for using the 50 day moving average is to get a gauge on what the medium term fund money is doing. The only reason most people even use the 50 day moving average is because funds use it (whether they really do is debatable). If you use it because you believe it represents the action of medium term funds and the XOP clearly got rejected at the 50 day moving average, what does that tell you that the funds are likely doing? Odds are that anyone buying here probably isn’t following the bigger, smarter money. If you use an indicator or tool for a specific reason or to measure a certain thing, then don’t ever forget what you are using it for. If you do, it loses all meaning and just becomes another line on the chart.
In addition to the 50 day moving average, many people use the 200 day moving average. Why do people use the 200 day moving average? Because the longer term mutual funds use it to make decisions (debatable). That’s the only reason that most people use that particular ma. If we look at the 200 ma for the XOP, what is it telling us about the longer term mutual fund money and their opinion of the XOP? Price is about 40 cents above the 200 ma, so that at least says the longer term money might be buying, but if price soon drops below the 200 ma that is an indication that they may not be buying and you really have to ask yourself if you want to trade against the medium fund money and the longer term mutual fund money given the 50 and 200 moving averages relative to current price.
I think it is extremely important over the next few days to watch the larger individual E&P names, integrateds and larger services companies and how they are trading relative to those moving averages. Many are sitting right between the 50 and 200 day moving averages, which says to me that a decision is being made right now. If the smarter money isn’t going to defend and step up at this level, then why bother buying into this sector right now? Going back to what I stated at the beginning of the article, why not sit back and wait for the pullback as the big money steps away from this sector? Most individual traders are so small that we can move in and take our entire positions immediately, so why get in a hurry? If they defend these moving averages, then go ahead and take your position as the market moves up past a significant resistance. If they don’t defend these ma’s then just sit back and capitalize on some great deals on the pullback. Why jump in now before the decision has been made by the people that you should be aiming to follow? Our advantage is our size and quickness, why give that away due to impatience? Let the smart money show their hand here, and then act.
I know our primary goal is to buy low, but sometimes just a little bit of patience can really increase your ability to do so. Right now if you wait to buy until the index crosses 35, you are risking about $1. However, if you jump in now, the risk could be $3-4 dollars if the XOP decides to make a run at the recent lows or if the SPY has another correction. Your entry decision immediately carries a negative risk to return value if you long here. Why not flip that and take the best of it and wait for confirmation that the index is indeed headed your way before buying? By doing so, you immediately lock up a little benefit and give your positions extra room to work. Sometimes just doing nothing is much better than trying to force a trade.