$COG Trade Errors and Outlook for the Week Ahead
Jul 28, 2019 Trading Blog
It was such a good week, right up until Friday morning and the COG trade. I dropped the entire week’s profits on that trade and had to cut it near the lows of the day. That close near the lows was a pretty good signal that there may be more downside ahead. I can possibly buy it back later. I made several errors on that one and I haven’t had a trade go that bad in a long time. No matter how long you trade, errors still creep in from time to time. It’s a great time to review the entire trading process when you slip and make an error. No shame in making an error, the shame is in not learning from it or correcting it before it is made again. I always learn way more on the losers than I do on any winners. This blog is my place to journal my thoughts, so here is the review on COG, maybe it helps someone else out there.
So what was the biggest error? The biggest error was trading against the larger trend. I’ve been sitting here for several weeks waiting for the XOP washout down to the 21 area and any type of swing long right now is just too early. Daytrades can be good counter trend plays, but I traded COG as a swing. I thought I had a good grasp on the fundamentals on COG and could take a shot there at grabbing a quality stock near a bottom. No matter how good a grasp we may think we have of a company, we are all still outsiders with no real knowledge of what is going on inside the company. Second error was thinking my opinion of the stock’s fundamentals was better than the price action on the stock.
Actually, I don’t think my view on the fundamentals on COG itself was all that bad, the mistake I made was not stepping up one level and looking at the fundamentals of the natural gas E&P’s as a sector and considering what COG was saying about production. The thing that killed COG was the cutback in production. The earnings, buyback, dividend, capex, etc. were all pretty good in the report, the killer was the production decrease. I didn’t give that piece of news enough respect. The street has been asking for these companies to cut back, COG did cut back and the market went totally opposite of what I thought it wanted and decided to severely punish them. I thought the production cutback would be well received by the market, it wasn’t. Price action is always king.
Third error was trying to pick a bottom. I rarely try to pick a bottom on a stock without letting it create some type of bottoming formation. I had just posted that thought on HP the day before and how I had to let that trade go because there was no risk controlled and defined stop to play off of. I should have done the same with COG, but again, I thought my view of the fundamentals was more correct than it was. Price will tell you if your view is correct. It’s usually more profitable to let the market tell you where the bottom is rather than trying to pick it yourself because you think you have a good grasp on the quality of the company.
I did do a few things right though. I had my plan, entry and add down in the 19-20 level which I held to. Once the action showed me I was wrong, I cut it and took the loss. I didn’t add more or try to average down outside of my normal scale in process. Once the stock showed no bounce and finished near the lows, the market was saying the trade was wrong, and that means get out before the loss snowballs.
So what is the outlook for the energy sector this week? I still think the XOP has a washout and this might be the week that it starts. We haven’t had many E&P’s report yet, but if they start reporting the same production decrease decision that COG made, this whole sector may react just like COG did. Earnings calls will be interesting. The week will end with XOM and CVX reporting on Friday morning premarket. Those reports will either save the sector or will set the stage for a big washout the following week. We also have the FED on Wednesday and that could be a sell the news event, or worse it could be a disappointment if the FED is too hawkish. Both results could send the overall market down. A FED disappointment combined with bad earnings capped off by the XOM/CVX earnings could be a perfect storm to send this sector spiraling down the week after.
So how to play it? At this point, I’m not playing it. I’m sitting this week out. I’ve been waiting for a washout on the XOP and trying to trade the long side right now, even intraday, is just going against the overall trend and against my overall opinion. Combine that with all the landmines this week, the FED and earnings, and it makes a fairly unattractive situation. I think the best plan is to see what the earnings reports are like this week, let the FED do their thing and then let the two big dogs do their thing on Friday morning. Once all that news is out, the market should make a decision on which way it wants to go.
I am still interested in getting long this market on a washout, but I’m going to be a little more patient and cautious finding that bottom after seeing how the market treated COG. It was a good warning flag and even though that trade lost, it might well have saved me a lot of money in the bigger picture by showing that the sector is a good bit weaker than I thought.
In summary, I’m going to let the market tell me where the bottom is. My opinion is that it’s in the 21 area, but I’ll definitely be waiting for the market to tell me if I’m right or wrong before putting my cash down.