Regular readers of my ramblings will be aware that I am usually neither a fan nor a follower of conventional wisdom. When an idea is repeated frequently, and seemingly by everybody, trading in that direction is foolish, especially if that narrative has held sway for a while. So when every pundit in print and on TV started saying that energy stocks were the place to be when the stock market fell so spectacularly a couple of weeks ago, I was skeptical. Now that stocks in general have rebounded but the energy sector has got left behind, however, there are some opportunities.
That doesn’t mean that I am ready to jump in feet first, but some stocks are setting up for a risk-controlled trade that can be used to establish long-term positions at advantageous levels. The idea is to find something that can be bought in expectation of at least a partial short-term bounce with the intention of taking a partial profit, thus leaving you long well below the market. Phillips 66 (PSX) looks like the best fit for that amongst the larger oil companies.
(Click to enlarge)
As you can see from the chart above, PSX has lost over fifteen percent since the high about a month ago but has formed a double bottom at the previously significant $89 level. That doesn’t guarantee a bounce, but it makes it likely, especially given that oil is holding above $60.
The idea is to buy PSX at current levels around $91 with a stop just below that level, say at around $88, that would keep potential losses to a manageable amount should stocks, oil or both start heading downwards again. What looks far more likely from here, though, is that PSX, along with other energy stocks, starts to close the gap on the broader market. Retracements of big moves like that can be patchy, so I would want to take some profit somewhere and be left with a long position at a good average. Around $100.50 would represent a 61.8% retracement which is significant from a Fibonacci perspective, so that would be the initial target.
If we get there, I would look to sell around half of my initial position. The remainder would then be at an average of $81.50. That position would then be protected with a stop at around $80, just below the launch point for the move up back in August. Again, that keeps potential losses to a minimum, but it also allows plenty of room for volatility, thus enabling that to be run as a long-term position.
There is, of course, no such thing as a trade that is guaranteed to make money, and this is no exception. Given that simple fact, what you should be looking for is a setup that has limited risk but a high potential reward. I am a big believer in planning out a trade under any circumstances, but in a situation like this where you attempting to buy on a dip that could continue, it is particularly important. PSX looks cheap here, but the cautious strategy outlined above is the best way to take advantage of that.