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Trading Plan for Thursday, April 4, 2019

The energy sector had its first significant down day in awhile with the XOP dropping 2.3% and the XLE down 1%. The question now is, was this just a normal pullback day or the start of something more serious?


The concern for me is the increasing relative weakness and continuous divergence of the energy stocks from the overall market. On a day where things looked so bad for energy stocks, the SPY was still green. It was the same story on Tuesday when the XOP was down about 1% and the SPY again was green. Are energy stocks flashing an early signal for the overall market? Is the threat of a slowing economy showing in one of the most economically sensitive sectors of the market?


At this point, I’m going to say that Tuesday and Wednesday were just a normal pullback within the range we have been in since mid-January. Another day or two of decline though would change my mind. The decision point for me in the XOP is 29.61. If this is truly just a move back down to the bottom of the range, then price should stop and bounce there. If this is something more serious, then price will break that level and then move to 28 for another decision there.


The problem for energy is what happens if the SPY finally rolls over and makes a significant pullback? Given the run since Christmas, a pullback has to be expected soon. The energy sector is showing weakness with a strong SPY and if the overall market rolls over, things could get really ugly for energy. The same logic applies to oil itself. The SPY/WTI correlation has been fairly high and those charts look very similar. WTI hit 63 and the underlying energy stocks still rolled over with oil up there. If the SPY AND WTI both roll over, there’s almost no way the XOP survives that. It seems the fate of the E&P’s right now rests more with the action in the SPY and WTI than with their own fundamental condition.

A secondary watch is the TLT and the test it is making at the 123 level. If that level holds and the TLT starts running up again, the XLF should roll over and could take the SPY with it.


XOM and CVX are still above the 50 and 200 day moving averages and staying above those levels will be a big clue for future sector direction. If the leaders crack, the others will follow. For the E&P’s, many of them broke down below their 50 day moving averages Wednesday. EOG, OXY, APC, CXO, APA, FANG, PE, MTDR, JAG, MUR, RRC, SM, WLL all broke the 50ma on the same day and that’s a pretty powerful signal. I also posted the COP chart yesterday showing the 65 level as a significant signal point, so watch the 65 level today for E&P directional clues. Several of the services names are also sitting right on the 50ma. SLB broke it Wednesday, HAL tested it and failed, NOV has been below for awhile. The OIH should test the 50ma today. Refiners show the same pattern with MPC and HFC already below, PSX rejecting the 50ma on Wednesday and VLO sitting right on it for a test today. The key for Thursday will be if all these stocks can fight and regain the 50ma or if they just collapse and move away from the 50ma quickly and easily on heavy volume with funds throwing in the towel.


So how to play it today for a trade? This is either going to bounce today or it isn’t. I’m watching Wednesday’s low of 29.99 and the 50ma at 30.17 for clues. The sector found some difficult resistance around the 50ma area for the last couple hours on Wednesday and that level will be important today, either as support if price can get above or resistance if it fails to get above. If price can get back above the 30.17 level, the next area of supply will be at Wednesday’s VWAP of 30.48. If the market can clear that level, then a full on bounce and recovery could very well take hold and a move back to 31 is possible.


However, if 30.17 fails and price breaks below 29.99 I think this easily moves to 29.61 for a test of the bottom of the range. There will be a big fight there and it could bounce a few times. If it ultimately fails, price should move to 28 very quickly. The next signal around 28 will likely take a few days to play out.


Thursday’s Trade:  It’s 6:30ET right now and the market isn’t showing any direction. Depending on where this opens, I’m looking to set up a short play off the 30.17 area and will use Wednesday’s VWAP around 30.48 as my stop. I’d really like to get short somewhere in the 30.20-30.30 range for a breakdown to 29.61 with the possibility of the home run to 28. The stop on that play is about 25 cents and the reward is likely about 75 cents, but could be as much as $2.00. If this market gaps down and I still wanted to put on a short trade, I’d probably use the same logic to get short using 30 as my entry point and 30.17 as my stop area. I don’t like this setup nearly as much, but it’s really only way to get short on a gap down with any risk control.

The only place that I would be looking to try a long trade today is around the 29.61 level. While the XOP could open strong, there is just too much supply over the market right now to trade freely to the upside. I’m not saying it can’t run up, but simply the odds on that trade just aren’t very good. The better play long would be to let the action play out around 29.61 and hope the bottom of the range holds for a run back to fair value in the middle of the range or maybe even a run back to the top of the range.

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