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Energy Equities Outlook and Trading plan for July 1-5

Energy is still languishing way behind the rest of the market, even with the recent attempt to bounce off the bottom. The SPY is hitting new all time highs, WTI is flirting with $60 and the E&P’s are still doing nothing. What else do we really need to know? This holiday shortened week should see a solid open on Monday and maybe catch a little continuation on any positive OPEC news, but it is all likely a temporary move.

 

This week is pretty much a wasted one for me. I’m out Tuesday and Wednesday, Thursday is a holiday and there likely won’t be anyone returning to trade on Friday. On a light week of trading, there could be some exaggerated moves on lighter than normal liquidity, especially on the OPEC meeting/news.

 

The G20 meeting between Trump and Xi was positive on the overall headline, although how that matches up with the market’s expectations will come later tonight on the 6pm open. I’m guessing we get a nice gap up and likely further buying on additional OPEC speculation. It was nice to see good China news, as the China play that I’m in (LK, Luckin Coffee) should get a big pop on Monday. I might trim that one on any move over 20.50. If it shows no reaction to the news, I might take what profits are there and wait until the next round of China talks commences.  It should be a positive week for energy stocks, but we will see.

 

In the larger picture, I’m looking to establish a short position in the next week or two. The China deal news and the OPEC meeting should provide some nice hype to possibly get the XOP into the 28-29 range. I’d like to start scaling in on a short around 28.50. That range from January through late May should cap the price for awhile, as there is quite a bit of supply between 29 and 31. The first of that supply should show around 27.80. If I can get an overall entry around 29, I could give this trade about 2 points of run against me before I’d have to consider stopping it on any break of 31. If the market starts falling again, the profit potential is likely a test of 24 and then 20 if that level breaks. The odds on the trade are about 2.5:1, possibly more if things overshoot to the downside. If the trade is successful, it would provide a good pad to flip and go long when these stocks wash out at the bottom.

 

Oil stocks seem to be caught in a difficult position compared to the rest of the market. The primary issue right now is demand, which is a direct consequence of economic health and activity. Everyone wants that rate cut from the FED, but it is going to take some depressing economic numbers to push them to more cuts, and depressing economic numbers is not what oil wants to see. On the other hand, if the economic numbers are good, then the FED will not cut and all stocks will probably take a tumble. This likely hits oil stocks a little harder because any delay in rate cuts will likely cause some strength in the dollar, which would be another headwind for oil. Watch gold for any hints on dollar strength and clues on rates. If gold starts to tank, the other commodities might have no choice but to give up the FED rate cut gains that they have already priced in.

 

XOM and CVX are my two biggest watches right now. The 128 level in Chevron and the 84 level on Exxon are high water marks for energy stocks. Chevron is getting close and well above most of the relevant moving averages, but Exxon is lagging and still under most moving averages. COP is lagging about the same as XOM. If you look at the larger cap E&P’s: COP, EOG, OXY, CXO, PXD, CLR, DVN, they are all still well below the 200ma and many of them are still below the 50 ma. This recent bounce has been nice, but realize that this little bounce off the bottom is at a time when the SPY is hitting new all time highs and WTI is still near $60. The relative weakness between oil stocks and the overall market is still fairly extreme and the fact that WTI is still around $60 and these energy stocks still can’t get off the bottom is very concerning. What happens if oil price falls under $50 on depressed economic growth?

 

It’s the same story with services stocks. SLB, HAL, NOV, BHGE, HP all still well below the larger moving averages. Natural gas E&P’s have been an even bigger disaster. The refiners have had a nice couple of weeks, but the big three of PSX, MPC and VLO are all still below their 200 ma’s. I guess my point here is that we are dealing with a sector where all the individual stocks are still depressed well below the 50/200 day ma’s while the rest of the market makes new all time highs. The sector has problems. If the bargain hunters were going to hit these stocks, they likely would have already done so by now. And all this with oil looking at $60, so the sector can’t really blame a low oil price for their troubles.

 

On a longer timeframe, I think the play here is to let energy stocks bounce as far as they can while the SPY keeps rising, but when the overall market shows any reversal, the short in energy stocks is on and on BIG.

 

I don’t plan on doing any daytrading this week, I’ll just be watching on Monday and Friday. Good luck this week and be really careful about getting caught up in any bullish bounce. FOMO is a dangerous thing.

It’s time for an afternoon at the winery, some live music and a couple of good bottles in the warm sun. What better way to spend a Sunday afternoon.

 

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