Tuesday, May 9, 2017

Looking at a Few Trades in the Energy Sector


The energy sector seems a bit interesting here. On the daily XLE chart the ETF has reached a key support level that has held a few times now. It also coincides with the 38.2% Fibonacci retracement from the early 2016 lows. It appears we are close to a bullish MACD cross. If we do get the cross it will also mark a bullish MACD divergence. This is a pattern that we like to trade and has offered a few good entry points in the past (see Rally Time...Stocks go higher for the remainder of 1Q16).



We also came across this article in Stockcharts.com written by Greg Schnell, Natural Gas And Oil Stocks Get Interesting Here.
He writes, “Natural gas was picking up a bullish tone on Friday as it tried to move up to the top of a 2-week trading range. However, Monday moved it back down to the bottom of the range. The typical Natural Gas stocks did not follow the move back down to two weeks lows at the time of writing. I'll just use XOP for this chart.”
“Oil broke 1-year trendlines last week with a big down candle Thursday.”
“On Friday it created a hammer candle and all of the energy stocks soared.”
“Monday gave back most of the bounce in oil but the energy stocks have not followed the pullback at the time of writing. These divergences could mark the bottom of this one-month downtrend.”
“This might mark an end to the big oil and gas companies selloff, or the rally might just die at this trendline and start to accerate from here. It's an important place to pay attention!”
There has been a divergence between energy stock prices and the price of Brent crude. We track the pricing differential z-score between the XLE ETF and Brent crude prices. This indicator tracks the 30-day price performance of each security and compares them on a relative basis expressed as a diversion from the mean. The XLE/crude pricing disparity currently sits below one standard deviation from the mean. This ratio is positively correlated with the XLE price so when it comes to depressed levels, it usually means a good short-term buying opportunity in XLE.
Of course, a further breakdown in oil prices will impact this trade negatively so we need to watch our stops. This article from OilPrice.com goes on to justify the current levels of oil prices are right where they need to be.
“WTI oil prices plunged to almost $45 per barrel yesterday. That was a downward adjustment to where prices should be based on supply, demand and inventory fundamentals.”
“Analysts invent narratives to explain why things happen after we already know the answer. In this case, oil prices fell supposedly because of falling confidence that the OPEC production cuts are working, fears of increasing U.S. shale output, and weakening demand from China.
None of those factors is new nor did they seem to affect the market a few weeks ago when prices were above $53 per barrel.
The real reason that oil prices have fallen is that they were too high and needed to adjust downward. Comparative inventory analysis (Bodell,2009) suggests that the correct price for WTI right now is about $45 per barrel”
A few stocks we’re looking at for this trade.





A few stocks that we bought for this trade.

Joseph S. Kalinowski, CFA
Email: joe@squaredconcept.net
Twitter: @jskalinowski
Facebook: https://www.facebook.com/JoeKalinowskiCFA/
Blog: http://squaredconcept.blogspot.com/
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