Oil and Gas Stocks Outlook for the Week
Sep 3, 2017 Trading Blog
Quite honestly, I spent much of the past week being wrong. Luckily, it didn’t cause losses, because I didn’t fight the market or short when I realized I was wrong. And the longs I had from Monday and Tuesday did show a profit on the Thursday sale. But still, most of the week I was just plain out wrong in my opinion about the underlying conditions in the XOP. While I’m not totally convinced that my thesis is incorrect, I am becoming more receptive to the fact that it isn’t as correct as I would like it to be. The market is clearly sending a signal that my opinion has some underlying fault. As the saying goes, “There is no shame in being wrong, but only in staying wrong.”
So where are we now? My short thesis has been built basically off the theory that there is a good deal of supply just overhead in the 30-33 range, which should absorb any and all demand, and once that demand is satisfied, then down we go into the gap somewhere under the lows of 28.96. Great theory, except for the fact that almost all week there just weren’t any sellers to stop the upward drift. The volume was about 10 million shares, still well below the 15 million average for the last couple months. We did run into some sellers on Thursday, but that supply completely disappeared on Friday and there was clearly nothing over the market, as buyers drove price easily to 30.70 on hardly any buying pressure at all. Had there been more buyers, they probably could have made a push toward the 50 day moving average. So we have solid active demand and so far we have less supply than I expected, which led to three solid green days.
So where do we go from here? In last Sunday’s post, I laid out the one possibility that I felt could produce a bullish uptrend, and the action from Wednesday through Friday lined up a bit with that theory. The price move up this week was sharp and quick, perhaps with the intent to force weak holders to stay put, shorts to panic and chasers with FOMO to hop on board in fear of missing the move. I knew this was a possibility, but only assigned it about a 25% chance of happening. Well, that seems to be the way things are trending at the moment. Another market saying, “The market usually does the thing that confounds the most people and causes the most pain to the crowd.” Seems about right to me so far.
At this point, there are two ways this can go: either supply shows up or it doesn’t. The demand side of the equation is there, it has been for the last couple weeks. The buyers are clearly accumulating. A look at the hourly charts shows very distinct Wyckoff Accumulation formations, with most charts containing springs on Tuesday and Wednesday. That is a prime situation to produce an upmove, which is what we got over the last three days. The only factor that will determine how far we go is how much supply is over the market. It appears that the larger players don’t really think there is much supply there at all, otherwise they wouldn’t be pushing price so hard, they would instead be buying on the bid instead of on the offer. Continued buying pressure which is larger than the overhead supply can only produce one result, an upmove. Until supply shows up, we keep going up.
What could lead me back to my original short thesis? The only thing that would put that theory back in play is if we hit some kind of very large supply. Not just a temporary congestion level or a smooth pullback, but rather a very obvious high volume dump that moves price sharply and significantly. And even given that, do the buyers voluntarily step in and absorb it all for a “V” type bar pattern or “Hammer” type candlestick? My attention this week will be on volume, not really on price.
Is there huge supply overhead? That is the question this week. All the news, numbers, fundamentals and opinions don’t matter. All that matters is what is in the path of the buyers. I’m going to lean toward a move down this week, but will not be shorting. I will spend a lot of time watching this week to see if I need to abandon the short opinion altogether or if this is just a temporary counter move against my thesis. Will post again Tuesday night to see where things stand. Good luck this week.