A Strategy for Obtaining Energy Sector Exposure

By Jim Farrish | November 25, 2008 | 9:07 AM | 2 Comments

OPEC continues to attempt damage control with meetings to reduce production on crude oil. The last move was to cut production by more than 2 million barrels per day. There is another meeting planned to cut production again. I am of the opinion oil is trading relative to the economic data and market outlook currently. This means the supply/demand card that had been driving oil is now focused on what is happening in the U.S. and global economies. If the outlook improves the price of crude rises and if it deteriorates it declines. This is a psychological shift in the thinking among traders and analyst. Therefore, as an investor I have to play the market based on what analysis or strategy works during the current trend.

 

 

 

Outlook - The energy sector has been in a significant downtrend since July. The 50% decline has cleared the decks of speculation to the upside, but has now swung the other way to the downside. The current base being constructed is either a stopping point and we are going to reverse back to the upside or it is consolidating prior to continuing the downtrend. The statistical odds favor the downside continuation, but it is important to let the market decide that point versus speculating or guessing. This is an opportunity to put the sector on our watch list and play the short term movement or develop a longer term strategy should it play out. I would expect oil to trade in the $45-60 per barrel range near term and that should keep the sector in a trading range as well. Take what it gives and play with discipline the short term moves until the next trend develops.

Trend - The dominate trend is down. A simple look at the chart shows the move lower in July confirming the long term and short term trends to the downside. The five year uptrend line which started in 2003 was broken in May and the sector has continued lower since. The only question mark currently is the short term trendline. It would take a move above 500 on the index to take the trendline out. The six week consolidation we are currently in will give a clue on the trend when it breaks - up or down. For now we are consolidating short term to determine a trend break or a continuation of the downtrend. The longer term downtrend line would take a significant move to the upside to break.

Strategy - A close below 357 would be a continuation of the downtrend and a opportunity to be short the sector. A move above the 435 opens a buying opportunity short term. Anything longer term would need to gain momentum to the upside or accelerate to the downside. The simple fact is we are at a decision point. I like what is taking place in the sector technically. The longer the consolidation period the more people who will see it, write about and anticipate the move. That makes the breakout stronger and the play more predictable. Fundamentally the sector is better off with lower oil prices near term to ease some of the cost structure built into the higher price of crude. This ‘timeout' allows the companies to make better deals for the future and the refiners to start making money again. Look for the breakout of the trading range short term and play based on a strategy that fits your risk tolerance. (NYSE: IYE) (iShares S&P 500 Energy ETF) is the ETF for the long side of this play and (AMEX: DUG) (ProShares UltraShort Oil & Gas ETF) is the short side of the play. Remember the two times leverage on DUG and adjust your play accordingly. Stay disciplined with any play short term. Define your entry, exit and target.

Confidence is the New Buzzword

By Jim Farrish | October 29, 2008 | 3:39 PM | 0 Comments

Plenty of talk today around the concept of confidence stepping up. That may be true, but I am not buying into the confidence measurement of the media. One big up day doesn't cancel all the negative sentiment and skepticism we have experienced over the last eight weeks. Crude prices rise on... confidence. Yen rises on rumored rate cuts in Japan sparking... confidence. Libor rates fall below 3.5% on... confidence. Fed rate cuts inspire... confidence.

Wednesday's Breakouts & Breakdowns (10-22-08)

By John C. Lee | October 23, 2008 | 1:33 AM | 0 Comments

We’re broken “the triangle”, that dreaded zigzagging consolidation zone where most stocks made zero progress for the past 10 days. Today’s gap triggered it all by breaking through two short-term resistance areas and being unable to fill the gap, had no other choice but to “flag and fail”. We also hit a short-term intra-day selling climax which was very visible from 3:00-3:30PM. Is it the bottom? I don’t think so. We have a much greater chance of testing 1) October 16th’s low and finally 2) October 10th’s low.

Today's Breakouts (10-20-08)

By John C. Lee | October 20, 2008 | 8:50 PM | 1 Comment

Emphasis is placed on breakouts rather than breakdowns because today is the first day where I’ve seen more breakouts than breakdowns in a very long time. We are at a weird stage in the market right now. Many stocks have broken out to the upside, but most stocks are still within consolidation. Given that we have hundreds and hundreds of earnings reports this week, the market will continue to be volatile. Even today, the market zigzagged, forming an ascending triangle, which later broke out. Again, I am seeing considerable strength in the materials and industrials sectors and they are leading whatever rally we do get.

Most break outs, including the ones listed below are at a point where they are going to test 1) the 20-day MA, 2) September’s low, and then 3) the 50-day MA. The 20-day MA is not some magical indicator, but it’s what most stocks primarily follow during uptrends and is a secondary indicator for downtrends. These three present key resistance levels that need to be broken for stocks to climb out of their hole. It won’t be easy, but here are several names to focus on:

Mr. Tree, Meet Mr. Forest

By Roger Nusbaum | October 20, 2008 | 12:43 PM | 0 Comments

From 30,000 feet I am a bull on oil and have been for quite a while. The big macro for me is the global ascendancy theme unfolding in fits and starts around the world. The stat for this concept is that the US uses about 25 barrels per capita while China uses about two and India a little less than one barrel. These numbers, and for other ascending countries, are going higher over the next few years.

Today's Breakouts & Breakdowns (10-17-08)

By John C. Lee | October 17, 2008 | 10:28 PM | 0 Comments

We rallied, but failed toward the end of the day. What we’re seeing is a symmetrical triangle form. This is one of the ultimate forms of indecision consolidation for market participants. We may be consolidating in this range for most next week which will make it not as favorable to trade. I, myself, have gone into 100% cash going into the weekend. I’m not going to risk all my gains for this week to some possible moving news that comes out over the weekend. FYI - Friday’s low and Tuesday’s high marks the range’s boundaries. Volume has been terrible and remains weak. During a consolidation, volume dries up, so that’s how I know we’ll be zigzagging for a few days. Make note of any massive explosions or serious declines in volume.

Today we had 6 new highs and 246 new lows. This is a major improvement, but in the short-term it doesn’t matter because of the consolidation and therefore, does not have any significance right now. I was able to find 5 clean breakouts, mostly from the industrials/materials sectors. They did lead the rally for most of today and the reason why I picked them in my last article is because they displayed enormous strength yesterday which was not demonstrated in price action, but volume. I always say that volume confirms price action, but price action doesn’t have to confirm volume. I advise all traders who are very short-term to be very cautious of extremely whipsaw next week.

We’ve had many breakdowns, but this time, they were harder for me to find….a good sign for longs. Before, I could have closed my eyes and randomly picked one and it would have been a breakdown. The market is easing up and consolidating from its major loss last week so I don’t expect many breakouts or breakdowns for the next several days. Like before, I’ve added my comments on how to prevent having your stock end up on my breakdown list unless you’re short.

Hedge Fund Deleveraging Is Likely To Continue

By David Enke | October 17, 2008 | 10:16 AM | 0 Comments

Banks are continuing to ask for more collateral to back past hedge fund lending, causing more funds to liquidate their positions (see WSJ article). When added with investor redemption, bank-induced liquidation is forcing hedge funds to step-up their deleveraging. Such selling is continuing to put pressure on the market, generating more requests for bank collateral and investor redemption, in what amounts to a catch-22 that continues to spiral the market downward. Such selling has been occurring for a while, as fund have been unwinding exposure to financial and energy stocks, both of which continue to suffer as crude oil continues to drop, and the credit crisis continues to unfold. While Hedge Fund Research recently reported that the level of hedge fund market exposure has decreased by one-third over the last year, I suspect that this still may not be enough. As mentioned by Antonio Munoz-Sune, head of the U.S. for fund of funds EIM: "The combination can take anyone down."

Unfortunately, it is difficult to tell where we are in the hedge fund closing and deleveraging process, with many hedge funds still appearing to use every rally as an opportunity to sell. I suspect that until we see the VIX (INDEX: $VIX)approach more normal sub-30 levels, stop seeing the DJIA and S&P 500 Index (NSDQ: SPX) post intra-day percent swings in the high single digits, and see crude oil stop falling in price, it is unlikely that the market will stop feeling the effects of hedge fund selling, allowing for a long-term and lasting rally. Like most bottoms, we won't know for sure that it has occurred until we see it in the rear-view mirror, but I will be watching the VIX, the price of crude oil, and the Dow Jones and S&P 500 index percent swings for clues.

Today’s Breakouts & Double Bottoms

By John C. Lee | October 16, 2008 | 9:49 PM | 0 Comments

I have to say we did well today by forming a double bottom. I went 100% long into the close given the strength of the rally (which didn’t breakdown in the last half-hour). Looking at a 10-day chart (below) what’s so bullish about this is that the right bottom formed slightly higher than the left bottom and we only needed the nearest support level above Friday’s lows. Another great signal for the right bottom is that today’s particular intra-day bottom formed an Adam-and-Eve bottom. Adam’s arespikes down and Eve’s are rounded cups. Together, the Eve bottom formed the higher low that I needed to confirm entering long positions.

We did very well today forming 7 new highs and 865 new lows (that’s an accomplishment this week). We also had stronger volume than yesterday, but still weak comparing Friday’s bottom. That should be your worry going forward – volume.

I found only one clean breakout and it was AirTran Holdings (AAI). All of the airlines jumped double-digits today as oil fell below $70 today. What’s great about technical analysis is that all you need to do is look at the chart and notice the breakdown at the 40-day MA then the 50-day MA and you’ve steered clear. If not, you probably listened to all these pure-fundamental guys preaching on the way down that “it’s just gotta go back up”! The chart tells you exactly how it is and what all market participants are thinking and that’s represented by price action and volume. IF we do go back up, the chart will tell you if it will hold. AAI has one more resistance area at around $3.50 before it’s able to spike to $4.25. Most importantly, remember to do your own due diligence.

Instead of featuring mostly breakdowns like I have for several days now (like I had a choice), I opted to profile several stocks that exhibited a possible “double-bottom” pattern. This is not to say they’ll all go up, but given the volume and price representation, there’s a good chance that many of these stocks will spike higher (most are in the industrials/materials sector). It could last for only a day or several weeks, who knows, but for the very short-term, I think they’ll be ok. Please use the 20-day MA as initial (major) resistance after (if) they breakout of consolidation resistance.

Bear Markets Should Make You Feel Uneasy

By Roger Nusbaum | October 16, 2008 | 12:28 PM | 0 Comments

I have been writing about Statoil (NYSE: STO) as a client holding for several years now. A couple of times I have shaved a little off as the stock moved way up. The first time I shaved some off was in April 2006. Crude oil was just getting to $75 for the first time and STO was around $33. The next sale was in May 2008 when the stock was around $43. That May sale represented about 25% of clients' positions.

So two and half years ago oil at $75, STO at $33. Today oil at $69 STO at $16 and change. The trade today was the number of shares sold in May at $43 times two. I was able to buy twice the number of shares for fewer net dollars, not sure my average price yet, but obviously far less was spent today than taken in six months ago.

Buying stock in a crash does not feel good. The next big move from here could be down and if that happens then the timing, short term, will turn out to be poor. 

However I have done some exhaustive research and it turns out we still need oil. Not only do we need it but a lot of other countries need it too. 

If the move to $147 was over done so too might the selloff be overdone.An important thing to remember is that the chance of something (oil, an oil stock, the broad market) going down a lot is much less after it has gone down a lot. Oil peaked at $147. Even if it goes to $50 (not my prediction), that would be a $19 drop from here. It has already dropped $78, the vast majority of the decline.

Unless you think we're all done with oil.

Again, this is uncomfortable. I don't know about any bottom but I know I bought after a huge decline.

Weekly Sector Wrap-Up (Oct 6-10)

By John C. Lee | October 12, 2008 | 7:53 PM | 4 Comments