Trader's Daily Notebook: Oil Futures Rouse Dip Buyers

 | Mar 17, 2017 | 7:00 AM EDT
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Thursday's E-Mini S&P 500 futures auction, while offering a couple of nice trades for buyers stalking the 2372 to 2374 support zone highlighted in the morning's Trader's Daily Notebook, didn't produce the follow-through buying bulls want to see. The fact that bids materialized in the mid 2370s is a positive development. But if Thursday's responsive demand fails to spur initiative (breakout) buying above the mid-2380s over the next few days, I suspect bears will have another shot at breaking beneath 2350. 

Daily S&P 500 Futures Volume Profile

The recent decline in light crude oil futures has begun to trigger interest among potential dip buyers in the energy patch, as several readers have asked for thoughts on when and where to consider purchasing shares of the VanEck Vectors Oil Service ETF (OIH) . As you review the daily chart below, keep in mind I don't see any evidence oil stocks are about to surge back toward late-2016 highs. If you're stalking longs in the OIH, or any individual oil stock for that matter, I believe you've time to put your plan into action.

VanEck Vectors Oil Service ETF (OIH) -- Daily

Oil service stocks have obviously not performed well during 2017, but that doesn't necessarily mean they're headed back to early-2016 lows. In studying the chart above, you should be able to spot the resistance between $30 and $31 (shaded in yellow) that buyers had to work through between late April and late October last year. Buyers sustained a break above the $30 to $31 resistance area about the same time the 200-day simple moving average (SMA) turned higher. And as you know, we like to see rising timeframe moving averages when we're going long. 

Fast-forward to the present day and we find the OIH bouncing around the 200-day SMA, and trying to stabilize within the prior $30 to $31 area. While it's impossible to know whether the OIH will ultimately hold its ground near current levels, I believe we can design a trade plan that will offer decent upside potential with a tolerable amount of risk. 

Higher timeframe traders looking to get long the OIH could do so near current levels (Thursday's closing print was $30.71), using a multiple of volatility as a logical protective stop loss. In this case, if one bases their purchase around the 200-day SMA, I'd consider using a stop of either 1x or 2x average true range (ATR, based on something between a 50-day and 200-day average true range). By allowing 1x or 2x ATR beneath the 200-day SMA, we're trying to ensure we aren't forced out of a position due to random noise (volatility or wiggle room). 

As far as the numbers are concerned, a 1x ATR under the 200-SMA would amount to an initial risk (1R) of approximately 3.25%. A 2x ATR stop would amount to a 1R of 5.7%. If you believe the OIH can trade back to $35 (the January highs), risking between 3.25% and 5.7% to make 14% probably isn't a bad move. 

Moving on to Friday's Es auction, we'll end the week with a focus on 2380.25. An open or sustained trade above that level opens the door to a test of 2384.75. As price gains acceptance above the mid-2380s, bullish continuation toward 2393 and 2398 becomes our baseline expectation. 

5-Minute S&P 500 Futures Volume Profile

Failure to sustain a trade above 2380.25 encourages continued pounding against the mid-2370s. As we did on Thursday, we'll continue to look for bids to build between 2374 and 2375.25. However, if value begins to migrate beneath 2374, the potential for an end-of-week decline toward 2360 will begin to spike. 

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my Twitter feed @ByrneRWS

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