Weekly Energy Equities Review, Market Outlook and Trading Plan for August 10-14
Aug 9, 2020 Trading Blog
Short writeup today. Spent 5 hours rushing my daughter’s cat to the animal hospital. Cat resting but not in great shape, kid is in worse shape. They have been together for 15 years, so it hurts my heart watching this unfold. I’m sure there’s a lesson in here somewhere.
SPY – It’s creeping closer to that 339.08 high from February. I’m pretty sure we get there, but it’s the reaction to the new high that will be important. Do we blow right through it on the the way to 400? Do we form a rough cup/handle type formation with a slight pullback or do we get a total reversal? Having seen the QQQ cut through new highs, I’d say the SPY probably does the same thing. I think the worst case is maybe a 10% pullback toward the 200 day ma around 305, but I doubt we see that, there’s just too much FED liquidity and Congressional stimulus coming. One thing that might cause a little stumble to begin the week is the Trump executive order on the stimulus package and payroll tax. I think the market priced in a juicy stimulus package and this smaller package might be a disappointment that may have to be repriced down Sunday night.
IWM – The small caps continue to lag, but the breakout move on Friday could be the first step in a run toward the 165-170 area. The IWM sat consolidating on the 200 day moving average for 13 trading days before starting its move last Monday, which gained 6.3% for the week. A breakout in small caps is a great signal for energy. The 158-160 area is going to be important this week and if price can break through that area it should be clear sailing to 168. If the 158-160 area fails, that’s an immediate red flag for energy.
QQQ – Not much to say about tech, it just keeps running with no top in sight. The thing to pay attention to here is what happens when it finally does top out? When tech stocks start getting sold where does that money rotate to? It’s also important to look a little further under the surface in tech, below just the FANGMAN stocks. The second level newcomer tech stocks like CRWD, FSLY, DDOG, NET, WDAY, DBX, WORK looked extremely weak and could be a sign that the ultra-fast money is pulling back on the highest beta tech names. The megacap AAPL and MSFT type stocks have become a bit of a safe haven, but these second level stocks are pure speculation and growth right now, so don’t ignore the signal they are sending.
GLD, TLT and UUP – I’m not sure the dollar/gold signal sent on Friday was really noticed by the market. The dollar finally caught a bid late in the week and gold may have topped out for awhile after a big down day on Friday. If the dollar does reverse, then keep an eye on the commodity plays like XLB, XME, GDX and USO, as well as the financials like XLF and KRE. The market has really liked the weaker dollar and any reversal of that trend could cause the SPY to pullback this week. Also be aware that the TLT is sitting right at the April highs and this could be a prime spot for a reversal. Is it a coincidence that both the SPY and TLT are sitting at a location where a double top could occur? Will they continue to move together or does the correlation break here?
WTI – The WTI/UUP inverse correlation was very strong this week. As the UUP bottomed on Wednesday and then started to move up, WTI gapped up Wednesday forming a top and then headed down Thursday and Friday. See if that correlation continues this week. I expect that we probably stay in this 40-42 WTI area for at least a few days. I’m starting to see many $60-70 calls on oil, but I think those calls are premature. I agree that there’s eventually going to be an oil price spike, but I think we may be further away from that than most are thinking right now. It’s coming, but the timing will be difficult to get correct.
XLE – Price remains stuck in a very tight range between 35.50 and 38.50, with most of that action being squeezed even more into the 36.50-37.50 area. I’ve been watching a very rough head and shoulders type pattern which started in April, and what we are dealing with since late June could be the right shoulder of that pattern. At this point, I really have no idea which way this range is going to break, but it is taking a little too long to develop, so that is encouraging that the pattern may break to the upside. One note, I’m not a big fan of “patterns”, I just find that using these terms like head and shoulders and cup/handle is an easy way to convey the idea in writing. Never let the pattern name define the action, always keep focus on the underlying supply/demand.
I’m watching 38.50 at the top of the range this week. If the IWM and SPY continue to run, XLE should make a run at 38.50. The 50 day moving average sits at 38.40, so that is going to be an important signal that everyone is going to notice. If it can break 38.50, then 41-42 is a possibility by Friday. However, if the overall market does double top, then attention shifts right back to that 36-36.25 area and then to the 34.50 neckline on the larger timeframe head and shoulders formation.
On the lower timeframe, the important points to watch in the XLE are 36.90 (last week’s VWAP), 36.81 (Friday’s VWAP), 36.70 (8 day ma), 37.90 (last week’s high) and 36.40 (Friday’s low). As you can see, there’s a lot of different measures in that 36.70-36.90 area, so any significant move away from that fair value area is going to be important. This thing is coiling and I really think the break from this range is going to be huge, let’s hope it’s upward.
XOM/CVX/RDSA/BP – The majors seemed to stall out the second half of the week after a nice run from the July 31 lows. The one thing that impressed me about these four is that they all made an effort to move above the 8 day moving average on Friday. Much like the XLE, they are sitting very close to short term fair value and it’s probably going to take some big volume to move them, therefore any large move away from that fair value is going to be a significant signal.
EOG – This stock probably gave the best signal in the entire sector on Friday. I passed on buying the dip and may have totally blown that call. Price dipped near 45 on the open and then managed to rally all the way to 49 by the close. There was big demand sitting under EOG and they weren’t scared to chase it back up. When things have fundamental reasons to tank and then they don’t, that’s a valid signal that should be noticed.
COP – This one still looked bad. It’s trapped below some larger supply and seems to be having a difficult time recovering the important 39-42 range. Watch the 37.50 area this week for clues.
SLB – Schlumberger really looks like it’s getting ready to breakout. I’m watching the 20 level and might put on a long term swing trade Monday if there’s any decent pullback to 19. It’s an easy stop out at 18.75.
VLO/MPC – The refiners are a confusing group right now, but I’m leaning toward putting on a long trade in VLO Monday. I’d like to get a pullback where I can use last week’s 50.73 low as a stop. There’s also a solid level at 49.87 to use as a stop. If this one bottoms out here in the low 50’s, there could easily be a 20% upmove in the next couple weeks, which is an excellent risk/reward. I also read an interesting article about the biodiesel part of their business. The article implied that VLO could be the refiner to own if Biden takes the election this fall since he’s a big proponent of greener fuels.
MTDR – MTDR is a very interesting play. It currently has one of the highest short interest numbers in the entire sector at ~22%. That seems like an overly large number for a company that has good prospects in the Permian. Just the buyout potential should make the short interest a very risky proposition. If the XLE and WTI catch one of those early June type bids, then MTDR is going to rip higher in a short squeeze. The beautiful part of the trade is that there’s a fairly solid stop you can use at 8.50 to control the risk side of the trade. If it gets caught in a squeeze (or even if the sector just pops) then this one could be at 12 very quickly. An entry in the 9 area could be a great risk/reward.
Non-Energy Plays
I’m writing on Sunday morning and many of these plays will depend on the Sunday night open. I think we could be looking at a nice dip to start the week, so these ideas were formed with that in mind. Things could change quickly, but I think these ideas offer some opportunity in a flat to down Monday open.
My favorite sector this week is the financials. I specifically like C. If the dollar continues to catch a bid and the TLT does top out, then the financials should benefit, especially if traders bail on tech and that money starts looking for a lagging sector like XLF to call home. I’m looking for any pullback toward 51 with a stop around 49.
In the staples area I like PEP for a breakout this week. I’m looking for an entry Monday around 136 with a 134 stop. This one has been consolidating around the 50 and 200 day moving averages since mid-April and could be ready for a move to new highs around 146. Another idea in the consumer staples area are the tobacco stocks, MO and PM. Both are making large bases and could be getting ready to break to the upside. Watch the 78 level in PM and 43 in MO. These XLP type plays could catch a defensive bid if the SPY and QQQ top out this week.
I’m watching DLTR in the retail sector. It’s basing nicely and could break out into the 107 gap from December. It’s a little difficult from the risk management perspective, but if there’s any type of reclaim trade play this week, I’m taking it long.
VZ is another one making a very nice base. It made a solid move Friday to break above the 200 day moving average which has been tested a couple times since April. It was good to see price finally break through and the 200ma provides a great stop on the trade. See if there’s a pullback early this week toward that 200 ma around 57.50 and give it a try long.
NKE was in last week’s trade plan and it worked nicely. There might be even more upside this week. This one based out for a couple of months just above the 50 and 200 ma’s and got some momentum the second half of the week. If it can clear that 104-106 area, there’s nothing but blue sky above. Be careful with this one though, it can hurt you, so size a little smaller.
The last non-energy trade I’m watching this week is the XLU. It has formed a four month base and finally broke above the 200 day ma on Friday, with the 50 ma sitting just a couple dollars underneath. I’d like to get a price in the 60-61 area and use the 50ma down at 59 as the stop on the trade. This is another one of those rotation trades where money might come out of tech and move into more defensive names like staples and utilities.
Sorry for the short writeup this week, I know it’s more bullet point form than the usual posts. Who knows, maybe people like bullet point type posts better. Let me know which you guys like better and I’ll do either. Kids are great, but it’s now time for mom and dad to relax and hit the winery for an afternoon of adult beverages, live music and then definitely a nap LOL. Enjoy the rest of the weekend.