Oil and Gas Equities Outlook for Friday, March 23
Mar 23, 2018 Trading Blog
Energy stocks just can’t catch a break. We finally get the long awaited breakout of 35 and a move over the 50 day moving average for the XOP and now the SPY decides to roll over. The XOP closed back under 35 again Thursday, but even though the breakout has failed for now, the index did look relatively strong compared to the overall market. I really believe that the index would have made a run at 37 had the SPY held up this week. But that is the environment we have been given, now let’s see how energy recovers.
The XOP is still lagging overall since reaching the highs of 40.20 back on January 24. On that same day, WTI was trading around $66. On Thursday, WTI managed almost an equal high around $65.50, yet the XOP could only manage 35.50. It seems that oil price itself isn’t the factor holding energy stocks back, but rather it is the SPY and the overall equity environment.
So where do we go from here? I’ve been calling for a 245 bottom on SPY and if we get there I would expect that would pull the XOP down to the 31 level, which isn’t bad. More realistically, we probably get a short term SPY bottom today or early next week and I think the XOP will survive holding up above 33, possibly holding the 34 level. In other words, it is probably time to start buying energy before the SPY hits bottom and makes the turn back up. I expect that when the SPY does turn back up, energy could be a leading group and the XOP could rip back up past 35 very quickly and could be at 37 within a couple days of a SPY bottom.
One obvious point to watch on the downside for the XOP is the 200 day moving average sitting at 33.74. That also corresponds pretty well with a short term uptrend line which started on February 9th. If this index is going to survive, that point has to hold. The XLE and OIH both gave up their 200 ma’s on Thursday, but the XOP was able to hold above. On the upside, the 50 day moving average sitting at 34.95 is the obvious upside signal. The only thing that disturbs me right now is that a few of the major leaders like CVX, XOM, SLB and OXY are still below their 200 ma’s. If the generals don’t run, then the soldiers probably aren’t going to follow for long. SLB and CVX actually both dropped below their 200 ma on Thursday’s decline. Moving averages certainly aren’t the controlling factor and many don’t use them at all, but they do offer some rough value in seeing where the weak spots are.
Outlook for Friday: I think the SPY probably bounces today and finishes green, which should push the XOP back up over 35. The morning trading could be rough, but the market should get its act together after lunch and try to finish breakeven to green. Oil is green pre-market 7am and the XLE and XOP are sitting right at yesterday’s close. The EURO and GLD are both green, which is a further positive sign for commodities.
I am looking to buy any dip on the open on the XOP. Ideally, I’d love to see the market drop down and test Wednesday’s low of 34.21, but I don’t think it gets down that far. I’d guess it only gets down to the 34.50 level, which I would probably still take a shot long there. I have ZERO desire to short energy right now. There just doesn’t seem to be any supply hitting the market, but rather the buyers have simply pulled back as the overall market drops. A market that has no supply coming in is NOT a market you want to short. If it does fall, then so be it, I’ll be glad to watch from the sideline and then step in for the deals at the bottom.
Basically, this pullback in the SPY is probably a buying opportunity for energy. The key here is to determine where the SPY bottoms, and then make your move in energy. You just don’t want to be early. I think scaling in small as the market drops is the way to go and then you can always push the chips in when the market breaks back over the 35.25 level or so.
As for individual stocks, I’m sticking with the index this time around. Most of my favorites like APA, DVN, APC and COP just haven’t pulled back much and don’t present a very good risk to reward. I think there is probably more bang for the buck playing the XOP, and if I do miss, then the downside isn’t quite as bad either. I am still considering ECR here at 1.35, but would really like to see it drop down toward 1.20 today. If it does, I’ll probably go ahead and take a position. I don’t like the stock as much as I used to, but around 1.25 or so, I think it is worth a gamble for some big upside. A couple other smaller caps that I think could be nice gambles include JAG, XOG, CDEV, MTDR and WPX.