Trading Plan for the Week of March 11-15
Mar 10, 2019 Trading Blog
I posted the decision tree chart for $XOP on Twitter. I’ll go into the details here.
The plan for the next couple weeks takes a look at five different paths for the XOP, three of them are tradable, two of them are not. The two untradable paths:
A) The XOP catches a bid Monday and rips straight up and out of the top of the range at 31.50 this week. This one isn’t really tradable (or likely in my opinion). Given the weakness in $SPY and oil, combined with the huge supply sitting in that 29.50-31 area, I just don’t see the market being strong enough to run right through that to new highs. There is a fairly concrete stop placement around 27.70, but the profit target just isn’t big enough to take the trade, as it could run into supply anywhere above 28. The uncertainty and small size of the reward doesn’t really justify the stop required, especially with the danger of a gap down any day this week.
B) The XOP simply consolidates sideways between 28 and 30. This is the second untradable situation. Not interested in getting chopped up in a tight range.
So that leaves three paths that are tradable:
1) Total collapse. The market dropped to a low of 27.83 on Friday, which was a test of the February 8 low of 27.80. It held, but the bounce wasn’t that encouraging, closing at 28.06. I expect we get an early test of that low and if it fails, the next level of demand is around the Christmas lows in the 24 area. A short is possible for this path. I’d find an entry that I liked and use Friday’s high as my stop. There was a huge gap down Friday morning from Thursday’s close, so the short should work as long as XOP stays out of that gap area. So use that 28.60 area for a stop of about 50 cents and try to catch the break down under 28. If the market does collapse, the trade could be worth as much as 3-4 dollars, which is pretty good for only risking 50 cents.
2) Bounce, Failure and Move down. This path assumes that we find a little strength early in the week as bulls try to hold that 28 level and then make an attempt at getting back in the 29.50-31 range. This can be played two ways: either try to get long on any move down Monday morning and play for a bounce toward Friday’s 28.55 high (which might also capture Option A above which I said wasn’t tradable) OR second, let it bounce toward the Friday highs and when it fails to get into that Thursday-Friday gap, short it using the intraday highs as your stop. I don’t like the long option, but I might give the short option a try hoping that it fails around 28.50 and then moves down taking out 28 for a big move. This trade could have an even bigger R (reward to risk) than number one above. You could probably work with a 25 cent stop around that 28.50 level and profit twice that much with just a move back to 28, plus a big home run if 28 breaks.
3) Bounce, Consolidation, Retest, Move up. This path is really just a variation of number two above. If you are longer term bullish, this path might set up a great trade to the long side. I’d look for strength and a bounce early Monday to that 28.50 area, a failure there, then a weak low volume pullback to 28. The trade then sets up at what would be a third test of the 28 area. If it looks like things are going to hold, get long using 27.70 as a stop. If things look weak, then find a safe place to get short using the intraday highs (likely around 28.50) as a stop and play for a breakdown similar to 1 and 2 above.
One other thing to keep in mind here is the weekly XOP chart. That 24 area is meaningful because that was the low area established back in early 2016. At that time, oil was trading low 30’s and even dropped to around 26. Oil closed about 56 on Friday, so you can see the disparity we are dealing with. In 2016 we had an XOP of 24 with oil sitting 30, 2019 we are looking at an XOP of 24 with oil sitting 56. That makes it very difficult to use levels in the XOP. For instance, if oil did drop to $30-40 range in the near future, you would think that the XOP would move pretty far under 24. Basically, the valuations are very different now than they were in 2016, so using that 24 level as support is going to be tricky.
The weekly chart does show one positive thing for me though. Most of what I do is based on Wyckoff principles, and if you take a look at the weekly XOP chart, it is setting up a beautiful Phase C Spring possibility after a long accumulation. If we assume that to be the case, then the disparity in pricing above works to our favor for a great longer term bullish setup. The logic is that with oil sitting 56, the XOP shouldn’t be sitting anywhere near the lows established when oil was sitting 30. If this is indeed a spring forming, then it is the final shakeout before turning up sharply and taking out 31.50 for a run back to the top of the range around 44. If I see any evidence at all over the next month or so of this being a spring, I’ll be loading up heavily long and will be adding big on any breakout over 31.50. No clue if this really is a spring, but that’s the plan for now until evidence says otherwise.
One last thing, these aren’t predictions, they are simply options and possible setups. Things can change very quickly in the energy world. The point is, if you are going to trade then have a plan. Sometimes the plan works, sometimes it doesn’t. But I can definitely say that having a plan definitely makes success more possible than simply shooting from the hip every day without an overall view of what you are doing. I have no idea if the market will actually do what I have set out above, but I do know what I will be doing if it does, and that makes all the difference in trading.
Overall, I’m starting to lean a bit bullish in the market. I’m not immediately looking long, but I think if SPY approaches the 263 level, you have to start thinking of grabbing a few longs. Oil had a great day Friday, making a strong recovery and putting in a nice candle on the chart. Oil had the opportunity to collapse, but it didn’t. I’ll be watching that 54.50 level, it should be important for the upcoming week.
One other interesting thing to watch is the XLE. On Friday it dropped right to the 50 day moving average. If you take a look back to the February 8 lows in energy, notice that the XLE stopped right on the 50 day moving average on that day also. See if that 50ma holds this week and how price reacts to it. I’ve traded a the XLE over the last couple months, but recently it has become nothing more than XOM and CVX movement. Almost all the money coming to energy right now is in the big caps and most of that into the big four: XOM, CVX, RDSA and BP.
I only have two positions right now. I’ve got CDEV which has grown to about a 125% position averaged around 9.77 and PE which is only about 20% position at 17.15. I was too early in the CDEV position and it has been eating me up this last couple weeks. Definitely hurts, but I still like the small Permian theme and will continue to pursue it with PE, MTDR, JAG and CDEV.
Other stocks that are getting close to buy zones for me: HAL, EOG, APC, RRC.