Everyone knows it: The stock market had a gangbusters start into 2013 with the S&P 500 up almost 5.00% and thus far the party is continuing as mutual funds and others with mandates to chase markets higher keep the music alive. To be clear, I do think markets potentially have more upside into early Q2, however in the immediate term, things are so overbought that it is nearly impossible for a high probability trader to play the long side. As such I am left looking for quick short-side opportunities until the overbought conditions have somewhat abated and we are again offered better risk/reward on the long side of the market.
One such at least near-term overbought stock is Cabot Oil & Gas Corporation (NYSE:COG), which offers better risk/reward on the short-side than the energy index as a whole. Before looking at the stock’s chart, please see the below chart of the Energy Select Sector SPDR ETF (NYSE:XLE) in orange overlaid with that of the SPDR S&P 500 ETF Trust (NYSE:SPY). While the S&P 500 broke higher some time ago, the energy sector did so just a few days ago and thus remains lagging behind the broader market. For a time-frame of at least a couple of months this sector has plenty of upside potential left.
On the chart of Cabot Oil & Gas Corp., however, the near-term prospects of continuing a vertical price ascent don’t look good. The stock’s already steep slope off the June 2012 lows literally went straight up over the past two weeks of trading.
Yesterday, Thursday, Jan. 24, the stock finally also gave us a buyers’ exhaustion signal by the way of a shooting star candle. Traders bid the stock higher intra-day but failed to close the stock at the highs as it sold off to close way off the highs. At this point a 5.00% mean-reversion correction or thereabouts looks likely, which would take the stock closer to the $50 area before it may ultimately look more attractive from the long side again.
Traders looking at this setup have very clearly defined risk in the trade capped at yesterday’s intra-day highs at $53.60. Considering the longer-term still positive stands of the energy sector, for a high probability trader this short-side trade offers better risk/reward than shorting the energy sector ETF itself.