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.

Don't Buy GM Despite the Bailout

By Chip Hanlon | November 14, 2008 | 1:54 PM | 6 Comments

Thinking of buying GM (NYSE: GM) based on a looming bailout from Washington? Well, you're right in one sense--a bailout is a virtual certainty. Just came from an interesting meeting with an elected official who shall remain nameless... the gist was: Democrats are absolutely going to vote for an auto industry bailout as payoff to the UAW-- no big surprise.

Gold Reminder from Saville

By Chip Hanlon | November 13, 2008 | 2:20 PM | 2 Comments

Steve Saville penned another interesting piece for subscribers yesterday, and in it he made a point with which I agree:

A Call for New GOP Leadership: John Boehner Must Go

By Chip Hanlon | November 06, 2008 | 11:13 AM | 4 Comments

Today, I co-authored a call for a change in the Republican leadership in Congress, a follow-up to our warning from earlier this year titled, "We Refuse to Support a Permanent Minority." It follows: MEMO TO REPUBLICANS IN THE HOUSE OF REPRESENTATIVES: CHANGE YOUR LEADERSHIP NOW By Rich Wagner and Chip Hanlon November 6, 2008 

The "Hard" in Merk's Currency Fund is a Misnomer

By Chip Hanlon | November 04, 2008 | 3:14 PM | 3 Comments

As with a lot of investments previously considered "safe" by investors this year, the Merk Hard Currency Fund (NSDQ: MERKX) has had a rough go of it of late. This fund, which is merely meant to represent a basket of foreign currencies other than the U.S. dollar, has reminded folks this year how aggressive the movements in foreign currencies can be (the fund is down 21% from its February's highs).

October's Subscriber Letter Scorecard

By Rob Hanna | November 02, 2008 | 11:22 PM | 0 Comments

October may have been the worst month in a long time for the stock market, but it was the best month ever for the Subscriber Letter. The primary strategy responsible for the oversized trading profits were the Catapult trades, which combined comprise the CBI. They also performed well during the January and March selloffs, but suffered an unusually difficult period during the June/July selloff. Before revealing the results, some important notes:

Late-Day Market Surges

By Rob Hanna | October 31, 2008 | 10:01 AM | 0 Comments

For the 2nd day in a row the S&P 500 saw a sizable move in the last 10 minutes of the day. This time, though it was to the upside as the index gained nearly 1% from 3:50 to 4pm. We saw yesterday an example of how overly strong reactions are many times overreactions. Tonight I looked at the sharp upside reaction as opposed to last night’s downside reaction.

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.

Potential NASDAQ Plays

By Jim Farrish | October 20, 2008 | 3:33 PM | 1 Comment

On this week's Sector Exchange podcast the NASDAQ was one of the four major indexes covered with both a long term and short term perspective. I wanted to look  at the short term view with the chart below. As you can see the $29.30 mark is the low on October 10^th with the retest of that low on October 16^th. The question posed by many, is this the bottom? My job isn't to find the bottom, but to find a tradable point and manage the risk. So, with that in mind a look at the bounce off the low followed by the move higher does give me some options.

First, there is a potential play for a retest of the recent high of October 14^th at $36.09. This would mean taking a position now and playing that potential move with a stop at the previous closing low of $30.60. That is a simple play with modest risk attached to the play.

Second, there is the potential double bottom in play. The last leg of the ‘W' is forming now. If it follows through and clears the $35.13 mark we could establish the next leg higher with a target of $42.70. The technical crowd will be following this play as it is obliviously visible. Important to note as well the role of the 20 day moving average on the downtrend. Breaking above that level would be bullish as well.

With that said, the real discussion would be any fundamental reasons for owning the NASDAQ 100 index (NSDQ: QQQQ). Earnings are a challenge looking forward as the third quarter data is compiled we have seen a number of companies abstain from forward guidance due to the uncertainty. This isn't helping with the sentiment or confidence. Based on the current data the index would be relatively cheap looking forward. The challenge will be how much revenue, earnings and margins will be adjusted as we move through the fourth quarter. For now I will go with the relatively cheap and see how they play out.

As with any plays I discuss here practice discipline before buying anything in your portfolio. Entry, exit and target are the keys to starting with simple discipline. An example on the first potential play: Entry = $32.30, Exit/Stop = $30.50, Target = $36.10. This allows you the discipline to play and know the risk/reward relationship. You can track this on SectorExchange.com daily.

Weekly Sector Wrap-Up (Oct 13-17)

By John C. Lee | October 18, 2008 | 2:32 AM | 0 Comments

The important thing to note is that there may be considerable volatility next week. This is especially true with the XLF with a 35% consolidation range. Traders/investors who cannot stomach volatility are better off in cash. Next week will be difficult to trade because of the market's neutral stance.