Assets across the board continue to fly high … everything except for oil, that is. Black gold could be going for its seventh down day in a row today. Since peaking at $51.67, it’s down 21%.
Hello bear country!
Thus far energy stocks have escaped the oil spill relatively unscathed, but their luck may be about to change. The exchange-traded fund SPDR S&P Oil & Gas Explore & Prod. (ETF) (NYSEARCA:XOP) looks vulnerable here.
Though XOP has retreated from its recovery highs near $38, it remains in the wide trading range that has defined its movement since April.
The 50-day moving average is flat confirming the noncommittal posture of its intermediate-term trend. The 200-day moving average is equally neutral. But here’s the deal — the Oil and Gas ETF has quietly descended to the lower end of its range on the heels of this oil slide.
And though prices have held firm thus far, a breakdown could be in the offing … particularly if crude keeps biting the dust next week.
![XOP](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Yet another feather in the bears’ cap is the trio of distribution days cropping up over the past few trading sessions. High-volume down days suggest the big boys are liquidating, which may continue to weigh on XOP.
The XOP Stock Breakdown Trade
As with any potential trade idea, we need a trigger — a signal that the expected move is commencing. With support looming large in the $32.50 zone, let’s wait for a breach of that before executing the trade.
Currently XOP options (like every other ETF) are dirt cheap. Let’s keep this trade straightforward. Buy the Oct $34 puts if support gives way. The price should be around $3 which limits your risk to around $300 if the Oil and Gas ETF sits above $34 at expiration.
The reward is limited only by the stock reaching zero, so consider your profit potential unfettered.
At the time of this writing, Tyler Craig owned bearish positions on USO.