Oil and Gas Equities Outlook for Monday, March 19
Mar 18, 2018 Trading Blog
Friday’s action was interesting. Around 11:30 am someone hit oil really hard sending price up sharply. That move carried the XOP up with it and the index managed to hold most of those gains sitting between 34.40 and 34.60 for the rest of the day. It was encouraging because the XOP was in a dangerous spot where it really could have taken a tumble if it would have broken that 33.75 level on the open on Friday. Monday’s big question will be if this move was real or if it was some type of roll event.
Most of the past week was untradable and price simply moved in a tight range bouncing up and down around the 34.50 level. It was really discouraging to see the 35 level get rejected so many times and for price to once again close the week below the 50 day moving average. I’ve still got my eye on the 50 and 200 day moving averages and price continues to sit right between them. The spread between the two ma’s is tightening with the 50 sitting at 35.03 and the 200 sitting at 33.70. The XOP is clearly using those two ma’s as support and resistance right now, so focus on those two is going to be extremely important this week. The UWT (most use the USO, but it shows the same) did manage to have a weekly close above the 50 ma, but that 11:30 push was the reason and we need to see if that holds, otherwise it is going to move back below the 50 ma.
The 35 level is going to be a tough one to break, but reading over the news this weekend, there is a new piece of information that could push oil prices over the next few weeks. That new factor is the Iran sanctions issue. It appears that there is some intent to limit their production again which would really improve the supply numbers. It is really the only news issue out there right now that I see that could push the XOP through that 35 level. I’d much rather see the XOP move past 35 based purely on organic supply and demand, but if a news issue will help out, I’m all for it.
On the downside, the main factor will be the action of the overall market and SPY. It really feels like the selling volume has dried up in the XOP, but if the overall market starts to correct again, the buyers will likely withdraw, letting the sector fall with the larger market. The SPY had a rough week closing red all five days, but it didn’t seem like anyone was too panicked over this and the volume wasn’t anything excessive. What will be important is to observe whether the SPY can hold the 50 day ma sitting at 273.35. If that breaks, the market could easily drop to the 265 range, which would likely take the XOP down past 33.
I’m still neutral to bearish on the energy sector, but I do think the time may be getting closer to look for a solid dip buying opportunity. The selling volume has been light and if we could get a sharp SPY correction I would definitely be in there buying energy stocks if the XOP dipped back down toward 31-32. It really depends on what happens with the selling volume on any XOP dip. If it dipped on really light volume, I think that would be a great buying signal. If the volume really increases on the down move, then I’d probably stay on the sidelines until a clear climax happened. After watching the last couple of weeks, I really don’t see there being many sellers left out there in energy.
The other factors that I’m watching this week are the EURO and the TLT. The TLT looks like it might be hitting some resistance at the 120 level and it got a clear rejection at the 50 day ma sitting at 120.49. The 50 ma is a big resistance, but if it can break through that, there could be an easy move back to the next resistance at 123. Lower rates would probably help oil right now. The dollar can’t seem to make up its mind which way it wants to go. The EURO has been bouncing around between the 122 and 125 level for the last couple of weeks and a resolution of that range could happen soon. Oil would much rather seen the EURO continue on its upward path and break out of that 125 level. The EURO closed Friday at 1.2289, the 50 day ma is 1.2287, so look for that to be the big support level this week. If that 50 ma breaks, the dollar could start an upward move. The other big commodity, GLD, couldn’t hold its 50 day ma this week either, closing at 124.60 with the 50 sitting at 125.33. Lower gold usually implies a stronger dollar and higher rates, so that move below the 50 ma could be a signal.
In summary, keep an eye on the 50 day moving averages for Oil, SPY, TLT, EURO and GLD. Everything is very close to flat and sitting on these moving averages and consolidating. At some point, the action will pick up and all of these things will likely make a sharp move away from their 50’s. The question is which way, and that I do not know. The key is that the all move together, so be aware of any macro factors that form a divergence.
Good luck this week and be patient!