Tuesday, January 3, 2012

PXP: Playing the gap

The first day of trading has opened with upward gaps.

Running the charts was like spending a summer day on a crowded public beach. There were big gaps, little gaps, gap wannabes, gaps of all shapes and sizes.

And many were dejected gaps, spending the day in sad disappointment as the bullish promise of the open gave way to a sinking despair.

For today's analysis, I ran a 16-symbol bracket, much like the college hoops championship. From a universe of 63 bullish picks, ranked using the Zacks system, I selected 16 at random to seed the bracket, and then compared charts.

The final four were SE, PXP, BA and TWX, and then PXP beat out BA for the championship. TWX won over SE in the consolation match. They were all very close matches; it was hard to choose between the charts.

PXP is the symbol for Plains Exploration and Production Co., a Houston-based company that does just what its name says: Explores for oil and natural gas and then produces it by yanking it out of the ground.

The stock opened with a 2.8% gap, at $37.76, and then built on that for a rise to $39.24, before pulling back to the mid $38 range.

This sets PXP apart from most of the other stocks I analyzed, which tended to open with a strong gap and then sink, a classic hook pattern that I read as bear prints, even if the gap set a higher high, or even a highest high.

In doing so well PXP is following crude oil, which also had a significant opening gap and a continuing rise thereafter.

PXP, like most highly liquid shares, is recovering from the market downturn that reached its nadir in early October. From that low, $20.25, the stock rose to $36.91 in early November, dithered in a sideways move through mid-December, and then began a rise.

Today's gap marks the first significant break beyond the resistance levels set in November and December.

With average volume of 2.5 million shares, PXP has sufficient liquidity to support a full range of options with sufficient open interest for quick turnaround.

The company has a low return on equity -- 6.4% -- and a fairly high debt-to-equity ratio of 1.1. Institutional ownership is 88%, a level that ensures plenty of analyst attention (a good think for traders).

In terms of practical trading, I'm reluctant to open any position immediately after a gap. A gap means a lot of traders who bought in before the gap will be taking quick profits, one reason why stock prices tend to retreat and "fill in" the mid-point of the gap.

Yet, the recent heating of the Iranian nuclear dispute suggests that there are good reasons for short-term bullish plays on energy, especially for a company like PXP whose mineral resources are within the United States.

If Iran shuts down production, then the price of crude rises, and PXP, with its resources outside of the Middle East, will be among those who prosper.

So I want to get in, but I'll wait and see what happens post-gap. If the price exceeds Monday's high, now $39.24, then I'll treat that as an entry opportunity. A drop into the gap, followed by a rise above the gap would also signal entry for me.

Decision for my account: No trade now, but maybe later this week.


Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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