ESP Tuesday - Dipping into the Oil Sector as We Wait for the Fed

The Wolf Trading Approach - Focusing on what’s working while keeping our eyes open for not so surprising surprises.

If there’s anything we’ve learned over the last month is that just when you think things area bout to get worse, they usually do. So, any change in that vibe would be a welcome and bullish development. Nevertheless, rather than being bullish or bearish, as I described this weekend, the best approach is to become a wolf trader – one which is always vigilant and ready to pounce when opportunity arises.

Image courtesy of northernwilds.com

Market Update

The rally in stocks is taking a breather, in a surprisingly orderly fashion this morning. Certainly, the uncertainty about what the Federal Reserve will say and do after the current FOMC meeting wraps up is weighing on the markets. Meanwhile, the geopolitical situation continues to swing with the potential for more fireworks after an upcoming phone call between the U.S. and Russia later today.

And two of the best looking sectors of the current market are natural gas and the midstream sector of the oil patch. Quietly, natural gas is replacing nuclear power as the go to fuel to satisfy the rising demand for electricity from data centers and electric vehicles. Midstream stocks, which involve fuel transportation and pipeline companies are poised to benefit from the changes in energy policy coming out of Washington.

I’ve been adding natgas stocks to the Weekender Portfolio, which is aimed at traders who like a steady pace to profits. But this morning, I am adding a new midstream stock to our ESP portfolio. This company is emerging from a significant downtrend and has just crossed above a meaningful resistance level, gathering steam and possibly setting up for a nice move up.

Technical Details

The New York Stock Exchange Advance Decline line (NYAD) is testing its 50-day moving average. If, as I expect, NYAD moves above this key resistance level, I am expecting an acceleration of the upside momentum in the short term.

That’s because despite the two day reversal we’ve experienced, everyone remains bearish (CNN Greed/Fear Index at 21). This is uncanny and suggests that there are plenty of traders who are still short this market and their bearishness will provide upside fuel when they cover their bets. Of course, this is not guaranteed since there are so many external variables which could turn the market environment negative again – not the least of which is the Fed.

Meanwhile, the U.S. Ten Year Note yield (TNX) is nearly motionless near its 20-day moving average while remaining above its 200-day moving average, stuck between 4 and 4.5%. Moreover, the Bollinger Bands are squeezing tighter around TNX which means that a big move is coming. If there is good news, expect bond yields to drop, perhaps toward the 4% range. Bad news would likely spur a move above 4.5%

The S&P 500 (SPX) is testing the upper bounds of a critical support range between 5450 and 5550, defined by a moderate sized VBP bar. Note that below 5450, the size of the VBP bars shrinks. That means that the support in those price ranges is tepid and that prices could well fall below them if the selling pressure picks up steam.

Note that the S&P 500 (SPX) is still rangebound between 5450 and 5650. Its first foray above 5650 stalled at 5700. Yet, as long as SPX remains inside, preferably toward the upper range of this consolidation period, especially if there is an unexpected news item which roils the markets, the worst may be over.

A break below 5450 would be a very negative development.

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