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Trading Plan for Thursday, March 21, 2019

A huge EIA draw and an incredibly dovish FED really pumped up the energy sector on Wednesday, but given the magnitude of those events, the move should have been larger. Those two forces probably should have pushed XOP out the top at 31.60, but the market gave up the gains and finished at 31.03, which is barely above Tuesday’s high. The difference in Tuesday and Wednesday should have been much greater considering the news available on Wednesday, versus what we had on Tuesday. So many people focus on just the news and they forget to observe the reaction of the market to that news. When the reaction doesn’t match the news, that’s a useful signal. Let’s see if the hesitation at the top of the range follows through into Thursday.

 

SPY – The overall market still finished the day in the red, even with the dovish FED giving the market everything it wanted. That’s not an encouraging sign. The SPY was sitting around 281.15 at the time of the announcement and finished the day at 281.53, after reaching a high of 283.50 on the announcement. This wasn’t even close to Tuesday’s high point of 284.36 and that $2 roll back from the highs probably shouldn’t have occurred and might be a signal that the market has run out of steam. In fact, the SPY barely closed inside Tuesday’s low of 281.41 by 14 cents. It’s possible that many were expecting this move from the FED and the announcement functioned as a sell the news event. The only way to know for sure is to observe the action on Thursday. Bottom line here is that the SPY should have held those gains and probably finished at a new high after that FED announcement, yet it didn’t, and that’s a red flag.

 

XOP – It’s the same story with energy, more so with XLE than with XOP. The EIA draw was huge and combined with the dovish FED (especially the Dollar reaction) the energy market should have made new highs and held those highs, but it didn’t. XLE made a new high at 67.42, but tumbled back inside Tuesday’s range. The XOP made a new high by 6 cents and barely managed to hold above Tuesday’s range. I gave the XOP a shot short at 30.97, but cut the trade at 31.01 for a small loss. The entry was too early, I should have waited for the FED announcement to filter through a little more and tried to get an entry closer to the top of the range around 31.50. The better short would probably have been the XLE because the EIA number affected the E&P’s way more than the larger cap names. Most of the small cap E&P names that make up the XOP really got a bounce on that EIA draw. I should have considered this and moved to the XLE for a short and that was my mistake.

 

The true health of the XOP will show on Thursday. If there is real strength here, this market should easily take out Wednesday’s highs of 31.43 and then close well above that level. Any failure at Wednesday’s high is a huge red flag and the warning gets more serious if the XOP can’t hold above Wednesday’s range. The further down in Wednesday’s range that the XOP closes, the larger signal of weakness that would be for me. There should be solid support down at Wednesday’s low of 30.05 with the round 30 level and the 50 day ma sitting at 30.16 and the 20 day ma at 29.99. I feel fairly certain that the XOP will hold 30, but would also be concerned if it got anywhere near that area.

 

If there truly is strength in the XOP, it shouldn’t dip much below 30.80 on Thursday morning. After a quick test there, it should easily take out the highs at 31.43 and then challenge the 31.60 level for a breakout of the Jan-March highs. I’m going to consider it a disappointment if the market doesn’t make that move today, as it has great EIA numbers and an incredibly dovish rate and dollar environment to work with. If this information can’t push the XOP out the top of the range, then I’m not sure what could, as it doesn’t get much better than this for oil and the E&P’s.

 

So given that outlook, how to trade it? I’m looking for a pullback under 31, preferably close to 30.80 to get long for a run at Wednesday’s highs. That’s my ideal trade. Most likely though, the XOP is going to open with a gap up, which makes a more difficult play. If it gaps close to the highs, I’ll probably let it break out and then hope it drifts back down and retest Wednesday’s range at the 31.43 level, where a long trade should set up. Not my preferred type of trade, but if I want to catch a breakout run toward 32, that’s going to be the safest way to do it. So, two choices basically 1) let it pullback close to Wednesday’s VWAP in the 30.85 area and get long OR 2) let it go ahead and show the breakout strength and then let it pullback to the breakout point for a long. Anything in between those two options is simply guessing and will likely chop you up if this ends up consolidating all day.

 

On the short side, I’d probably wait for a clear failure signal before getting short. If the market puts in a clear failure at Wednesday’s high of 31.43, I’d probably try a short using that point (or today’s intraday high) as my stop. Pulling back and looking at a chart from early December until current, we are clearly sitting at the top of the range and any failure is going to send us back into that range, possibly to the opposite side of that range. I’m probably leaning about 65% long and 35% short on today’s trade possibilities. It’s going to take a very clear signal to send this market down and if we don’t get it, the natural flow and inertia might keep pushing the market higher.

 

The only individual stocks I have an eye on today are XOM and CVX. They absolutely did not participate in Wednesday’s strength and CVX even somehow managed to finish in the red, down about -.5%. If these two aren’t going to run, then the XLE isn’t going anywhere. COP was also a bit of a concern finishing the day barely green at +.3%. Also, the refiners were a weakness with MPC finishing barely green at +.3%, PSX -.7%  and VLO almost unchanged. The refining portion of the sector was definitely hurting Exxon and Chevron. Keep an eye on the refining subsector today to see if it can bounce back and carry XOM and CVX with it.

On the macro level outside of energy, keep an eye on the 123 level in the TLT.  Watch the XLF to see if it bounces back today in the face of lower rates. Also, keep an eye on gold to see if money wants to keep moving to commodities. Watch the EURO to see if it can hold the 1.1335 level. If the EURO starts failing again, that could take gold and oil back down with it.

APVO – Big volume on this small biotech and another couple of 13G’s filed on Wednesday. This one is looking more interesting by the day. Long at .87 and will be looking to add on any dip below .80.

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