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Weekly Energy Equities Review, Market Outlook and Trading Plan for May 3-7

Another very short writeup this week. Some months are just packed with too much stuff to do and this is one of them. High school graduation activities have taken up the last few weekends and probably the next couple as well. Just wanted to get a few things down on paper so I could look back on what I was thinking this week.

 

This is such a strange market. Technical analysis is not really working that well lately. Almost everything I look at suggests the market should be topping out and getting a much needed correction. However, there just seems to be this odd force behind the market that is extremely difficult to read with traditional methods. I don’t use indicators, but I actually took a look at a few this morning and they aren’t working either. There are divergences on almost every chart and indicator levels all suggest a reversal and correction, but the market just keeps on running. At some point, you just have to trash all that stuff and try to read the flow and structure as best you can without it. That’s where I’m at right now with this market.

 

I’ve written over the last couple of months that I’m looking for one final blowoff top, especially in the IWM, however it really hasn’t come close to happening. The IWM is sitting right in that 226-234 area and showing no intention of making a parabolic run at 250. SPY and QQQ are pushing right up against new ATH but just can’t seem to get that final push up to establish a blowoff top either. Just as the market needs that final capitulation selling climax to form a solid bottom, it’s my opinion that the market also needs that same buying climax action to form a solid top. We just don’t have that yet. If this market turns down without that buying climax, that’s probably a good clue that there’s more upside left after the dip.

 

SPY – Thursday’s action produced what candlestick chartists call a “hanging man” pattern and Friday’s action put in a confirmation of that pattern. The concept behind it is that when the market is at highs and the buyers pullback, the bottom falls out because there’s no support under the market, kind of like a gallows I guess. It suggests that the total buying is being done by just a few in number. When those few buyers pulled orders on Thursday, the market showed no support and it fell quickly. When those buyers returned, the market shot right back up quickly. It basically shows that the buying is concentrated in just a few forces that for whatever reason don’t want this market to fall. Someone is holding it up, but when they pull their orders, there’s nobody else willing to buy. The point to watch early this week in the SPY is 416.30. If that level breaks, there could be a quick move to 410-411. If that area breaks, the correction could be on.

 

QQQ – Tech showed the same action as SPY on Thursday, but it wasn’t as defined. However, it did show the same confirmation on Friday. Watch the 334 area this week for support. If that breaks, there’s really nothing to stop the fall down to 314-315. On the upside, the 342-343 area is the point to watch. Like I said earlier, I’m looking for one final blowoff and if tech can take out 343 the euphoric top could be coming.

 

IWM – This is the concerning market for me right now. That head and shoulders type pattern continues to evolve and the action on Thursday and Friday was a clear right shoulder. The 226-227 area has been a huge level over the last few months and it failed completely on Friday. Can the bulls mount one final push to take out 234 and get that parabolic blowoff top or has IWM simply run out of steam and headed for a correction? The levels in IWM are cloudy. There’s an area around 221-222 that needs to hold early in the week. There’s another level below that at 215 that absolutely must hold, otherwise price is probably headed for that neckline of the larger head and shoulders pattern around 207. If 207 were to somehow break, there’s nothing to stop a fall down to 170-175. ThisĀ  market seems to be hanging by a thread and risk management has to be the primary concern this week. Protect yourself.

 

TLT – The TLT got the pullback that I was looking for in last week’s writeup, but it found solid support around 137. If that’s big demand, then the TLT could be getting ready to make a major trend change to the upside, which might be a negative signal for the equity markets. Money could be about to flow from stocks to bonds in a big way. Watch the 140-141 level this week to see if the TLT can establish the start of an uptrend.

 

GLD – Gold continued to move in tandem with TLT. It pulled back most of the week, but found solid support in the same area as the lows in December and mid-February. Watch the 168-169 level to see if GLD can breakout and establish an uptrend with TLT. If traders start moving into gold, that could be a further sign that money might be starting to look for some safety. GLD hasn’t been that safe haven lately, but if some panic shows up, gold could live up to its old reputation as a safe store of value.

 

UUP – The dollarĀ seems to have found a bottom with Friday’s price action. If the dollar starts an uptrend, that could be a negative signal for oil. Much like GLD, if there starts to be a bit of panic in the market do traders move into the safety of the dollar?

 

In summary, we could be seeing the beginning of a move into bonds, gold and the dollar with a move out of stocks. If that happens, there’s also a good chance that traders move out of risk on categories like oil. There’s a possibility that we get a dip this week, but as always, the question is whether it’s a buyable dip or the start of a larger correction. I think this time it could truly be a correction that might last a little longer than the normal “dip”.

 

Energy, USO, XLE, XOP

Having said all the above, you can see I’m a bit negative biased on the overall market for the coming week. However, that doesn’t translate to energy. I think a dip in the overall market could provide a golden opportunity to get into XLE at a great price for a solid risk/reward trade. If I’m wrong on the trade, then all you can do is just tip your cap to the bears, take the defined loss and move on. The market only offers a limited number of opportunities so you can’t skip the good ones.

 

So what’s a good entry for XLE? The first level I’m going to be watching is the 48-48.50 area. I posted the Wyckoff accumulation chart on Friday showing a pullback to the last point of supply, which is around 48. That would be a perfectly normal occurrence if this is truly a Wyckoff accumulation. It’s one of the prime entry points for any Wyckoff trader. I’m willing to start in long there, but it will probably be for a bit smaller position than usual.

 

Then next entry point that I’m watching is the 46.50-47.50 area. If the last point of supply fails on the Wyckoff pattern, there’s the possibility that the larger players are going for one final shakeout to establish their long positions for the next run up. There should be a ton of stops in the 46 area in XLE. I wouldn’t be surprised to see them take the market there for an easy stop hunt accumulation before taking it back up toward 50. The key here is to size the long trade at 48-48.50 small enough to where you leave yourself enough room to add to the position near this 46 shakeout point. I’d probably start the entry around 46.50-47. The total scale in long should give you an average price of around 47.50 for the trade, which provides a great risk reward.

 

If the trade is wrong, you can probably stop it around 45. The risk on the trade is about 2.50 and the reward is a potential move back to that 54-55 level for about 7 points of profit. It’s nearly 3:1 on the trade as a whole. I’m willing to take those odds every time. And like I said, if the trade fails at 45, just take the loss and wait for it to hit a bottom somewhere in the low 40’s and give the long trade another shot there. I’m absolutely willing to try the long trade again around 42 for what would be incredible odds for a run back to 54-55.

 

As for the USO itself, the obvious pattern is a double top. However, it’s really just a similar pattern to what’s going on in SPY and QQQ. You either get a cup and handle type formation here and a parabolic run higher or it corrects. There’s really not much in between. Watch the 44.50 area for a test early in the week. Oil should move with stocks, so keep an eye out for any divergence between the two.

 

That’s really all I have for this week, but I may put together a wish list later today if I have time. If this market does take a big dip, it’s important to know what you want to do ahead of time and which targets you want to hit since most corrections have snapped back very quickly over the last year. My primary watch is 48-48.50 in XLE for the scale in long play, and then the 46.50-47.50 area for completion of the position. I’ve also still got the IWM short play up at 250 on the radar, but I don’t think it gets that move this week. I’m also still watching a small cap play in WTTR. I’d like to see it get closer to 4 to start in long, but I may enter sooner depending on the action in XLE early in the week.

 

Like I said above, this is one of those weeks where you really have to play it by ear because technical analysis hasn’t been effective lately. I’ve only got a few moves this week and my primary concern is risk management and avoiding getting caught in any market correction. I know the correction is coming, and it could be a large one. I’m willing to let some profit go in favor of capital preservation. Always keep the powder dry for the bigger opportunity. Good luck this week and definitely make protection your primary focus.

 

 

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