XOP – Another Leg Down?
Jul 30, 2017 Trading Blog
The XOP is currently at one of those inflection points where a decision could be made about the direction for the next 3-6 months. I’ve looked at this from several angles, and at this point, I’m leaning toward another leg down toward the 28 level.
The first thing that really jumps out to me about the XOP chart is the old theory that support, once broken, usually becomes resistance. The XOP has spent most of the last year and a half between 32 and 40. There is a clear support level around 32. We dipped below that level and have now come right back up to test it again. Will that broken support become resistance or can the XOP regain that 32-40 range? The longer we sit below 32, the greater chance that price acceptance will occur below that range.
The next thing I notice about this chart is that a good case could be made that there is a head and shoulders type formation which has been created over the last 10 months, with a neckline up around 34-35. I don’t put much faith in these formations, but many others do. There is a chance we could move up to test that level before falling, but the risk against trying to capture that small move is too great. If anything, I’d set up a short trade on a move up to 34.
No matter how you look at this chart though, the thing that is tough to dispute is that there is a very large amount of supply right overhead and there is somewhat of a liquidity gap down to the lows around 24-26. Based on just technicals, the line of least resistance could very well be down.
On the more fundamental side of things, I see a problem that oil may have hit that psychological 50 level and that could turn into the cap on this most recent run up. It has been a pretty nice move up from that 42.53 level back in June and this market could be getting tired. While the price of oil (and USO) has made a great run on four really outstanding EIA numbers over the last month, the XOP is less than a buck higher than where it was just before that streak of four EIA draws. Given seasonal tendencies, how much longer can we expect great EIA draws to continue to support the XOP? If the numbers turn south, XOP will follow. It is clearly still a hated sector, and while the contrarians may love this, sometimes the herd is correct.
Q2 earnings are starting to trickle out and APC, HES, COP, WLL have admitted that conditions are poor enough to require cuts in Capex, which really can’t be considered a fundamentally good thing. It may be a good thing in the eyes of analysts when it comes to balance sheets, but the basic underlying market in which these companies operate isn’t good enough to allow them to continue spending. These guys simply aren’t making enough cash flow to justify the extra business. If I were to take a long position, I would narrow my focus down to US onshore focused stocks only, as Capex seems to be somewhat safe in that area. And while stocks are always looking to the future, it is hard to argue for an immediate advance in the overall XOP in this situation.
The one thing that does give me some hope is that there is a curious sector rotation going on between tech and energy. On large down days in the QQQ, some of that money is definitely rotating to energy. QQQ looks very expensive right now, so there is a good chance that it could fall, with a big pile of that money coming to the energy sector. This is great in theory, but anyone who has been depending on a decline in QQQ to make money has been completely out of luck over the last few years. Not really sure that hitching my hopes to a QQQ decline and energy rotation is such a high odds move.
It is going to be an interesting week with a ton of earnings being released, but right now if I was forced to choose a path, I’d give the XOP maybe one more attempt at that 34 level, and then I think it is headed down toward 28. Good luck this week.