Energy Has Been Beaten Down—Way Down.
Many opportunistic traders/investors are contemplating taking advantage of these low-energy prices.
After all, starting off the week, U.S. oil benchmark crashed to $1 per barrel for its lowest close and biggest one-day fall on record.
This just might be a juicy opportunity for investors willing to ‘buy and hold.’ Needless to say, we are more than likely setting the stage for a significant bottom in oil.
The old adage “don’t catch a falling knife” should generate a healthy dose of fear to any consciously wary trader. And at the very least, it should trigger a responsible flight instinct.
Nevertheless, the reason investors are eager to place their financial necks on the proverbial chopping block is because oil is down—and by a lot. The price of each barrel is off more than 70% from December 2019.
The shale drilling revolution unleashed a production rush that eventually allowed America to become the number one oil-producing nation on earth—and that includes the U.S. out producing Saudi Arabia and Russia, too.
U.S. oil futures have dropped to their lowest prices since early 2002. Gas prices have hit a 10-year low. The average national price for regular unleaded gas stands around $1.785 per gallon at the time of this publication.Prices throughout the energy sector are down across the board. But, indiscriminate, unfocused buying is not a prudent approach to responsible investing—especially in today’s extreme market environment. Picking bottoms never work.
With a proper technical and fundamental understanding, a spectacular opportunity of gain may await those ready to wade into the bloodied oil fields of today.
But for some, placing hard-earned profits in the energy sector makes a stomach a bit squeamish—and rightfully so. Many analysts are expecting a wave of bankruptcies that will keep the lawyers, courts, and accountants busy for years dealing with the aftermath.
Companies were formed, loans were taken, equipment was purchased, and wells were dug. Companies are being murdered in this environment. The question is, who will die on the vine and when will it happen?
Six years ago, a basket of stocks from the oil services group (OIH) peaked at $57 per share—up from $20 in 2008. EOG Resources (EOG) went from $20 to $120 during the same time. Yummy, right? Well, today it hovers around ~$40.
The breakdown of the energy sector was technically obvious to us skilled traders. Longs were closed out when key support levels were violated. The savviest of traders have been short in this sector and now looking to buy-to-cover to lock in some nice profits.
The opportunity we may have before us to buy oil right now is certainly tempting, and crude oil lows may be getting close to being set. When it’s time to buy, we expect gains to deliver significant upside potential.
Entering this market will require a high skill level in technical analysis. Price action will show us a trend reversal pattern to key on. This is critically important.
Here is what we know: oil will not go to zero. Today we crashed below $1, down from $107 only a few years ago. The growing pursuit of alternative energy will not wipe out international demand for oil for decades. And a few select companies, even operating under incredible stress, will thrive and survive for decades (e.g., Anheuser Busch survived prohibition).
Keep in mind that bottom fishing, to this degree, requires more than simply buying a basket of energy stocks and hoping for the best. We must be more intentional and savvier in our investing approach.
Although, XLE and OIH are down an incredible amount from their 2014 highs, over the next several years, large buckets like these are not expected to outperform the stronger sectors such as technology and healthcare. In other words, it might be smarter to target individual equities instead.
Consider the following technique to potentially increase your probability of success:
- Identify and research fundamentally strong stocks within the energy sector
- Watch the weekly charts on the baskets, XLE and OIH. Wait until a trend reversal pattern (i.e., double bottom, triple bottom, inverse head and shoulders, or falling wedge) is identified.
- Buy an equal amount of, say, six stocks. Expect up to four of the six to eventually go bust. But the others, which do not, will probably pay extraordinary gains.
Within three years you will most likely have made a barrel of money.
In short, if you are short term look at the daily charts. If you are more long term, watch the weekly charts and identify a sector bottom, place an equal dollar amount into six stocks, and wait two to three months or roughly three years or so.
This strategy is not a spectator sport. Watch the charts on various timeframes to when to buy, and when to exit to maximize profits. Expect a short-term payoff in as little as two months. But the big play is waiting, say, three years after purchase. And, if Christmas comes early, reallocate your profits into other juicy trading opportunities.
To help you, below are six securities for you to research (in no particular order):
- TC Energy--TRP
- Cabot Oil--COG
- Genie Energy--GNE
- Magellan Midstream--MMP
- Matrix Service Company--MTRX
- Drill Quip--DRQ
You NEED a professional trader to mentor you. That’s the secret. This is precisely what Mark (the Meerkat) and I have found to be true in our own trading development. We both have been mentored. Matter of fact, I had two mentors. Successful traders are developed by other successful traders. Period. You can’t learn to ride a bike in a seminar or ask a book a question. It’s about being mentored. https://www.groktrade.com/tradingmentor.html