Bears roam oil patch

10/02/20
  • Trading in PXD puts outpaced calls on Thursday
  • Down-trending stock recently broke support
  • Vulnerable to renewed weakness in crude oil market?

In early trading on Thursday, oil and gas exploration stock Pioneer Natural Resources (PXD) showed up on the LiveAction scan for high put-call (P/C) ratios, trading 2.7 puts for every call:

Chart 1: LiveAction scan: Highest put-call ratios, 10/1/20. Unusual options activity. PXD puts outtrading calls.

Source: Power E*TRADE


It was far from the highest P/C ratio on the list, but that may have actually inspired some traders to drill a little deeper. Because while extremely high P/C ratios can sometimes signal the type of panic selling that occurs at significant price lows, more moderate (but still elevated) put trading can simply be a sign of bearish sentiment.

There’s been no shortage of that in the energy sector, which despite a 10-week rebound off its March lows (and a crude oil rally that extended into August) is still the S&P 500’s worst-performing sector over the past…well, pretty much pick any time horizon you’d like.

A quick check of PXD’s price chart shows the stock’s rebound peaked in early June after shares had more than doubled to $116.81. The stock then pulled back to repeatedly test support around $90–$91 before breaking down last week:

Chart 2: Pioneer Natural Resources (PXD), 3/18/20–10/1/20. Pioneer Natural Resources (PXD) price chart. Broke down below support/retracement level.

Source: Power E*TRADE


Fib fans no doubt noticed that support level was also the 38.2% Fibonacci retracement level of the March–June rally. The stock has mostly consolidated over the past several days, but has continued to sag closer to the 50% retracement level, a test of which would potentially entice buyers looking for a short-term technical bounce—and a failure of which could have them scrambling to get out and scanning the downside for the next likely target.

When discussing oil stocks, you always have to remember the “oil” part of the equation. As the following charts shows, stocks like PXD are typically highly correlated to oil prices:

Chart 3: Pioneer Natural Resources (PXD) and Nov. WTI crude oil (CLX0), 3/18/20–10/1/20. Pioneer Natural Resources (PXD) and Nov. WTI crude oil (CLX0) price chart. Oil still above Sept. lows.

Source: Power E*TRADE


In this case, while PXD outgained November WTI crude oil futures (CLX0) throughout much of the rebound, the stock has been leading oil to the downside since August. Notice that oil is still above its September lows even though PXD broke below that level last week.

As discussed in “Oil tests consolidation principle,” the crude oil market faces ongoing demand challenges. It briefly rebounded in mid-September after posting its biggest sell-off since April. On Thursday it dropped more than 5% intraday before paring its losses. If it does, in fact, break below its September lows, it may be difficult for stocks like PXD to fight the short-term momentum.

Today’s numbers (all times ET): Employment Report (8:30 a.m.), Factory Orders (10 a.m.), Consumer Sentiment (10 a.m.).

 

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