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Oil and Gas Equities Outlook for Monday, April 9

The XOP and XLE both made nice recoveries Friday afternoon to end the week in fairly decent shape. Things could have really got out of had late Friday, but there seemed to be some bargain shoppers sitting down near the bottom of the range that has formed over the last 5-6 weeks.

 

I think I’m more concerned about the XLE than I am about the XOP. The XLE gave up both the 50 day and the 200 day moving averages on Friday and the big three of CVX, XOM and SLB are showing no leadership at all. The XOP gave up the 50 day ma, but it did manage to hold the 200 day, as well as the lower channel of the tight bear flag that began back in mid-February. I don’t see energy stocks going anywhere until the big cap leaders get some support and buying. If you use the 50 and 200 ma’s, then remember WHY you are using them. Most people use them because they think these ma’s represent the actions of big money decision making and institutional positioning. If this is true, then what are the moving averages telling you right now about energy? Also, there is a group out there whose mouth is just watering at the thought of the 50ma crossing down below the 200ma. Use these things to your advantage.

 

Last week I put three possibilities on the table for the XLE and it seems like all three were true to a degree, they just didn’t happen in the order that I thought they would. On Monday, we got the dip down and test of the lower edge of the range at 66 and a nice recovery. It really seemed like this was a nice Wyckoff spring which should have led to a nice rally, however it only led to a test of the upper side of the range at 69. That move turned into number 2 on the list, which was a painful bull trap at 69 which then collapsed quickly all the way back down to 66.46. That move left many new and impatient bulls trapped and scrambling to get out. The key this week is to see if that decline continues or if it is merely a shakeout of some weak buyers and retest of the Wyckoff spring which formed Monday.

 

That XLE spring move Monday was on about 19 million shares. Any retest and confirmation of that spring should be on much lighter volume. The volume on Friday was about the same 19 million, which leads me to guess that this might not be a retest, but rather the beginning of a new leg down. The 66-66.25 level is going to be a huge test on Monday, and the volume on that move is most important. If that holds on light volume, we could get some buyers and another run at the 50 day moving average at 68.52. If the 66 level fails and the volume is heavy, then I’m guessing we move straight back down to Monday’s low around 65, and from there who knows.

 

The XOP is in a little different position and it offers some hope that the XLE condition isn’t as bad as it appears. The XOP is showing some relative strength compared to the XLE and instead of a Wyckoff type pattern it has formed more of a softly sloping uptrend with a few higher lows, which is really starting to look like a bear flag. The problem with these bear flag type formations is that they rarely break straight out into an upmove. They usually need that sharp breakdown and reversal before price moves up. Friday somewhat met that condition, but it wasn’t sharp enough or long enough to really shake out the weak longs. The two key points on the downside for the XOP are 33.87 and 33.31/33.36. If those two break, it could set off a move back down toward 32, which I am really hoping for because that would be a great spot to get long.

 

On the upside for the XOP, 35.74-35.88 is the level to watch. Price has touched that level a few times on different days, which marks the top of the range. The only problem is that the last hit was well inside the upper upsloping bear flag channel, which is a signal of weakness. I fear that the next move up toward that level is going to be another stop hunt and reversal which will trap many novice bulls. Playing that breakout is NOT a good odds play. There is plenty of time to let it breakout, pullback and retest and then get long. The problem I have though with that long trade is that there really isn’t enough reward to justify the risk. There is a solid supply level sitting right at 37 which will likely stop any run cold. So what you end up with is a long attempt right into a stop hunt which is sitting just under a major supply level. That is a bad combination for a long.

 

Outlook for the week – Unfortunately, I think we are probably heading down this week. Oil is somewhat shaky and seriously looks like a double top up at 66, which could lead to a break back under 60. The SPY looks like it is hanging by a thread and could make a move toward 245 in a matter of days. My thoughts have been that 245 is probably the low point for any correction, but I’m really starting to rethink that opinion and I fear that the downside might be lower than 245. We were sitting at 208 the night before the presidential election, which shows just how far up the euphoria took us. The 50%-61.8% Fibonacci retracement on that move is 240-250. In older days (pre-algo days), things would probably proceed more predictably, but given all the computerized trading and algos out there now, I really think this market could severely overshoot to the downside with the amount of money that will be headed for the door at the same time. I’ve been looking at mutual funds and noticed that they basically all own the same handful of stocks. That concentrated ownership is what took us up quickly, and that concentration will be the death of the market on the downside. The volatility in the SPY is incredible right now with moves of 6-7 dollars at a time, and that fits with the theory that volatility increases at major market turning points.

 

I’m still bearish energy, as well as bearish the overall market and oil, so it will be difficult for me to trade long this week. I will still do it if things become clear and a bounce is obvious, but if things are in any way cloudy, I’m sitting on the sideline or possibly going short. I’ve been saying this for weeks, but I still think it is way too early to get long energy and the odds of getting long in this 34-35.50 XOP range are terrible. This last group of longs from this past week is now finding out just how hard those positions are to hold on to and most will probably get stopped out soon. It is just a loss for them that wasn’t worth the limited upside. They are impatient and have a huge case of FOMO. Just be patient. If the market drops down to 32 range, you get some great deals. If the market does take off without you, then it will hit a supply level and will come back and retest the breakout point. There is plenty of time to get in, and while you might not catch all of the move, you will catch the safer and more predictable part of the move.

Good luck this week, and be patient!!

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