Short COG in an Overbought Market

The overall energy sector still has some upside, but a reversal looks likely for COG

   

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.

1 25 13xle vs spy 1 300x202 Short COG in an Overbought Market

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.

1 25 13 cog steep slope 2 267x300 Short COG in an Overbought Market

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.


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