Here’s your trade on the oil patch. (October 13, 2014)
I want to look at the oil patch ( NYSEARCA:XOP ) today just real briefly; if I was Cramer I would be hitting the “Don’t buy, Don’t buy, Don’t buy” button. Here’s the thing, just last Friday on Option Market Mentor I was looking at various things and I said, “You know I think we’re getting close to a bottom here, let’s look at buying some long-term calls.” So what I suggested was some long-term calls, although actually they’re not that long, out to January, a bull call spread, 65.70.
That turned out not to work real well except we’ve got a spread, so we’re actually short the $70.00 call, so we’ve got a really, really nice profit on that. It’s just that that profit is out weighed by the loss that we have on the 65.00 calls, it’s called a hedge. That leads me to this video, so how am I going to make that trade?
If this thing keeps going down then finally I’ll just say forget it and then close the trade. But what I’m looking for is some kind of a bounce, some kind of a bounce similar to this one here, this guy, only the next time hopefully that’s going to happen. Hope isn’t a method I know that, but it’s used by many, for profit by few. But if we look here at the weekly chart you can see, this thing is just ugly. If you look at oil it’s kind of got the same little trajectory there. At some point these drillers and producers are going to be really, really good buys, they’re just not quite there yet.
So what I’m suggesting you do is stay away from this stuff. It’s accelerating to the downside, it just looks like it’s going to go straight to zero by Friday. So instead stand back, look at this stuff, Weatherford ( NYSE:WFT ), this is picking up steam. This looks like it’s going to be a $12.00 stock by Friday, it probably won’t be, if it is buy some.
Halliburton ( NYSE:HAL ), again, it just looks like, this looks like the end result of somebody throwing a rock off a cliff; it’s just going almost straight down. Nabors ( NYSE:NBR ) same thing; all of these are really good companies. Chesapeake ( NYSE:CHK ), really good companies that are going to be worth a lot more than they are now, at some point. But I wouldn’t be buying these, I’m not one to buy falling knives. I know there are some folks that say, “Oh it’s going down I going to start buying now and well golly gee if it goes lower I’ll buy more.”
Well that didn’t work well for those who were buying Enron because it just kept getting cheaper. At some point you have to realize, maybe a stocks going down for a reason, and maybe I don’t want to be buying on the way down, because all I’m doing is being philanthropic and taking people that want to get out of the stock, I’m taking them out of the trade.
Maybe you want to just stand aside, let everybody do their puking, and then after you get a big spike in volume, and a big intraday reversal, I mean one that just goes back up, that’s when you buy. Because you think about this, let’s say you’re going to buy at $17.00; you say, “I think 17.00 is the bottom that’s when I’m going to buy. I think 17.00 is the bottom so I’m going to buy right here.” Like $17.00, that’s where you’re going to buy.
Now one of two things are going to happen, actually one of many things can happen but let’s just talk about two. The stock can go down to 17.00, you can buy, goes up here, you’re a genius; you bought right at the low, what a happy day, what an awesome trader you are. Or this could happen, you buy at 17.00, it keeps going down, you buy more at 15.00, it keeps going down, finally you’re going “Oh my gosh, something’s wrong here.” You don’t buy any more and you don’t sell, you’re just going to be stubborn.
The stock starts trickling down, finally around $13.00, maybe $12.50, the stock finally makes an obvious reversal, huge volume big reversal, and ultimately does this, just like it could have done if it had just bounced here, right? Here’s the difference, on the first scenario you bought right at the bottom, rode it all the glory. On the second scenario you were in Helga’s house of pain for who knows how long and hurting, and hurting, and hurting. And by the way, all the time when you’re riding this down you’re feeling so bad and maybe you don’t have a lot of other money, you can’t take advantage of other opportunities that are elsewhere in the market.
Instead you’re looking like a fool at Chesapeake Energy ( NYSE:CHK ) every single day hoping for it to hit a bottom. Finally when it does and it goes back up above where you bought it, seriously you’re walking around with your chest out thinking that you did something good. What I’m saying is that’s a horrible way to trade because of all of the opportunities you missed and all the pain that you have.
Riding a loser down only to have it ultimately turn around and be a winner, to me that’s just excruciating; that’s hard duty there, you need overtime pay for that. I would rather just stay out of a stock, just let it keep going down and then once you get the big reversal then say, “Okay, now I’ve got a place where I know I can put my stop, I’ve got a logical place to put my stop. I’ll buy it here, if the stock reverses and falls lower, well I took my shot, I risked this much money, I bought here, that was my risk, I lost money.”
But at least you knew what you were going to lose, what you were risking before you got in. But you buy this here, now you’re in here, right about where you ratcheted in on the way down, now you’re in here; you bought at a lower level, and you get to enjoy the nice part of the ride. You didn’t catch it at the exact low, but buying at 17.00 like a fool, didn’t catch it at the exact low either.
What you want to be doing is buying the bounce, not anticipating the bounce. I’ll say it again, what you want to do is buying the bounce, not anticipating the bounce. Case in point, the S&P, 200-day moving average, I’m going to buy it at the 200-day moving average because it’s sure going to bounce there. Let’s look and see how that worked out, if you had bought the SPDR ( NYSEARCA:SPY ) at the 200-day moving average.
The S&P is 190.000000, so let’s look at this intraday. Here’s where we close on Friday, 190.00 that’s where? Right where it closed, right? So you’re buying in the morning, 190.00 because it’s, “Oh my gosh, look it’s two 5-minute charts here, this is a bounce, I’m in.” Well that’s not working too well because 15-20 minutes later the market’s down, the S&P’s down below the 200-day moving average. Now what are you doing? You’re still going to stand there and hold this position. So maybe right around here, when it’s down just a couple dollars, maybe you’re still in, that’s fine.
Then the S&P starts moving up again and you’re kind of nervous, and you’re not really feeling too great, because for crying out loud 190.00 isn’t holding, the 200-day isn’t holding. Then we get back above, this is the noon time hour; this is when the fools and the drunk people are trading. Now it’s back up above 190.00 and you’re saying, “Oh my gosh, this is totally the bottom, I’m in.” You’re getting in more, then what happens?
We got a sell off from 190.00, let’s do it this way, we got a sell off, like a 15 point sell off, something like that, we get a rally back, now we get a break down below this level, and another 15 points. The idea is, you’re counting on the 200-day moving average holding, because well golly gee it’s just got to hold right? And it did for a very brief period of time all the way up until the time that it didn’t.
That’s why I say technical analysis works as well as the person using it. If you’re looking at this and you’re just saying, “Well this is going to bounce here,” and then it doesn’t, if your take away is technical analysis doesn’t work, I humbly suggest that’s the wrong take away. Because everything about technical analysis is an “if then proposition.” If this happens then that; if this doesn’t happen, then a different that.
So what you’re looking for here is, if this 200-day moving average holds, and the VIX is really high right now, then this is probably a good time to buy; because it’s a logical place for the market to bounce. But if the 200-day moving average does not hold this is not a good time to buy, because a lot of lemmings got sucked in right at the 200-day moving average, hopefully you’re not one of them, but if you are just improve next time.
A lot of lemmings got sucked in right here. That turns out to be a bull trap, the S&P rolls lower and now they’re under water and they’re looking to sell when? When they can get their price back, “I’ll sell when it gets back up here.” Well it ultimately may get back up there but maybe it’s first going to go down here. Are you going to ride this all the way through? So that’s the conundrum of traders who have bought at this 200-day moving average.
What I’m suggesting is, you don’t do that in the future. Respect the market, like I was saying with the XOP, with all these energy stocks, don’t try to pick the bottom, don’t say it’s gone down far enough; you just don’t want to do that, because you don’t get a vote on that, you don’t get to make the determination what’s gone down enough.
As far as the energy stuff, ultimately these things are coming down and they’re going to be a great buy. We have to wait for the trade to come to us, we can’t push, we can’t force the trade, we can’t say, “Well I know I’m supposed to sit on my hands but maybe I’ll just buy a little bit.” Why do you want to do that? Wait for the bounce then pounce.
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