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Weekly Energy Equities Review, Market Outlook and Trading Plan for July 13-17

The overall market put in a very strong week and it looks like we are headed up to test the recent highs for the SPY in the 323 area. I was expecting a pullback to 307.50 last week, but the market never really got close to any kind of pullback. The lowest it could make was 310.68 and the bounce from that point was very sharp, which indicates the demand down there was big. Last week was basically a consolidation in the 314-317 area and it looks ready to break to new highs. This week is going to be an important one, but I’m still cautious. If this thing tops out at 323 and heads down, that’s an obvious failure and the stampede toward the exit could begin. The most important piece of advice I can give this week is to use those stops and keep them tight if you are playing the long side. This is one of those spots where a failure to hold to your trading rules could get really expensive.

 

Technically, the points to watch on the upside this week for the SPY are 317.88, 323.41 and 332.58. I’m watching 315.15, 312.75 and 310.68 on the downside.  The SPY (and QQQ) are being carried by the FANGMAN stocks (FB, AMZN, NFLX, GOOGL, MSFT, AAPL, NVDA). Keep an eye on this group and if there’s any weakness it might be time to get cautious. When the entire market is being carried by a handful of stocks, things can turn quickly if money bails out on those. There’s a lot of money looking for a safe place to hide in tech, but the higher these stocks go, the less safe they become.

 

The concern I have for this market is the IWM and XLF. While the SPY put in a nice consolidation based on the FANGs, IWM put in a clear downtrend last week opening Monday at 145.31 and moving down to touch a low of 137.24 on Thursday before getting that Friday bounce.  The relative weakness in small caps was high compared to the large caps. I expect that the IWM should take another look at the top of the range around 145.50, especially if the SPY breaks out. If the SPY breaks out and the IWM never takes out the top of the range, that divergence would be a big red flag. The XLF showed the same trend as IWM, but the bounce on Friday almost recovered the entire week’s losses. If this market is going to keep rising and take out 323, the financials must participate in a big way. Keep an eye on the 22.50-23.50 range in XLF this week. If the XLF can’t take out the highs of this recent two week range, then that’s another red flag on the market’s overall health.

 

Energy XLE WTI CVX XOM

Energy had a really bad week and just looks horrible compared to the rest of the market. The Monday through Thursday downtrend was much stronger than the rest of the market, but we did get a Friday bounce. I picked up a handful of names on Thursday hoping that this recent breakdown was the final move lower and that the sector will bounce sharply if the SPY does take out the highs. The trades looked good on Friday, but it remains to be seen whether this Friday bounce was just an oversold rally or the start of a new uptrend. The 36-36.25 area is going to be big for XLE this week. If that area rejects and fails, then price should quickly move back down to test last week’s lows at 34.24. Those lows last week were also an important test of the May 14 low point of 34.30. That’s almost three months worth of trading above that support level and if price breaks that level it’s probably going to start a new leg down and destroy any hope of this being a Wyckoff consolidation pattern.

 

I was able to get a long position in XLE at 34.54, but if price moves below 34 I’m probably going to be forced to cut the position, as well as all the other names from Thursday. I’m willing to hold the positions for a retest of the May 14 and July 9 lows, but if those fail I’m probably going to be out. If those low areas fail, I think the sector likely falls to a much better level for possible entry into these names. The next level down is 31.

 

The scenario that concerns me the most this week is if the SPY makes a move to 323 on Monday, gaps up Tuesday and then fails around lunchtime with a collapse Tuesday afternoon. If that SPY move happens at the same time XLE tests 36 and fails, then that likely causes an XLE test of 34.24. If the SPY continues to fall the rest of the week, that likely pulls XLE down about 10% toward the 30-31 range. I’m not saying that happens, but it’s definitely something to keep in mind. Also, if this did happen, I’m not interested in trying to short any energy names. The plan is to wait and let them fall for new long positions at better prices. I really don’t see a market collapse anytime soon, but a pullback to 300 isn’t out of the question.

 

I think the only thing that saved energy names this week was the move in WTI back above 40. I’ve been watching that rough head and shoulders top pattern in WTI and right now it looks like it has failed to evolve. The oil price move toward 38 was met with solid demand and WTI has actually setup nicely for a test of the highs this week. Keep an eye on the dollar to see if it supports an oil move. I’d really like to see UUP keep dropping and take out the late December 25.93 low and early June low of 25.88.

 

The majors were very weak Monday through Thursday, but did manage a bounce on Friday. XOM needs to get back above 43.50 and CVX needs to reclaim 87 for the sector to gain momentum. If XOM can reclaim, then it could have room to move to 46. In CVX, any reclaim of 87 could lead to a move back to 92. BP and RDSA have very similar patterns.

 

For the E&P’s, I’m watching the 38-40 range in COP for direction. The VWAP off the March 23 bottom comes in at 37.75. There could be a nice reclaim long trade setting up in COP one day this week on any gap down. The name that surprised me the most this week was EOG. It’s very weak and didn’t get much of a bounce on Friday. Of all the positions I took on Thursday, this is the one I’m most concerned about and it’s probably the first one that will get dumped this week.

 

The service names were decent and HAL is setting up a nice long trade opportunity at the 11.50 level. Watch NOV around 10.50 for another trade possibility. I’m in SLB at 17.34 and the bounce and close at 17.79 gives me a little breathing room on this one. Once I see what the XLE and SPY want to do this week, I’ll be building the position once it crosses 18.25.

 

The refiners were a bit of a mixed bag. I missed a great trade in MPC, but it just didn’t setup like I wanted. I also tried to pickup some PSX premarket on Friday around 57.50, but somehow never got a fill. I took a position in VLO at 50.97 Thursday, so I’ve got a little breathing room in that one too with the 53.65 close on Friday. The action around 56 will be important.

 

I still don’t really like the natural gas names but EQT is setting up for a nice long trade in the 12.25 area. I’d like to maybe see a gap down one day this week for a reclaim long trade in that name. COG looks ok too in the space, but EQT is just a better setup.

 

Trading Plan for the Week – This week all depends on the SPY and the action as it approaches 323. I’d be surprised to see a down day on Monday, but it isn’t impossible since almost everyone is expecting that 323 run. There could be some long opportunity if Monday gives a pullback and traders bailout thinking the 323 move isn’t going to happen. If I play that pullback on Monday, it will likely be with IWM. There’s some decent support around 140 for a long play.

 

I’m focusing strictly on energy this week, so I don’t have any setups in any other sectors or stocks. The only thing on the radar outside energy are the casino names. I’m still interested in MGM and possibly LVS/WYNN. I’m surprised that there’s been no talk of any casino shutdowns, but I think it’s still a possibility.

 

In energy, I’m probably just watching on Monday to see what happens with XLE around 36-36.25. My main focus this week is trying to build the small positions I took on Thursday for an XLE run up to 40. I think there should be some good setups on Tuesday and I’ll try to do a separate writeup Tuesday morning if that develops. Same thing on Wednesday. Sorry for limited setups and trade ideas for Monday, but I just don’t see much. Once I see what happens with the SPY on Monday and then the early premarket action on Tuesday, I think there should be some great opportunity for the rest of the week.

 

In summary, I’m watching SPY/IWM, possibly playing long on an early Monday pullback. If there’s no pullback, then I’ll be on the sideline watching as XLE approaches 36-36.25, at which point I can make some better trade plans for Tuesday.

 

It’s a beautiful day here, headed out for a run and then a trip to the winery. Let’s hope this market can show us something good this week, but I’m still going to be cautious and probably a little tight with my plays. The little voice in my head that is warning me of a big market pullback based on fundamentals is still there. Good luck this week and play safe.

 

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