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Trading Plan for Monday, April 8, 2019

This past week was difficult for me, as my overall bias for the E&P’s was bearish, which is exactly opposite of the action toward the end of the week. I didn’t think they would break out past 31.55 so easily and I missed the move. I think the most aggravating part of the week was when I got long after Wednesday’s EIA number, but got shaken out only to see the sector rip up Thursday and Friday. The EIA number was terrible with a huge build, yet the initial reaction was a rise in price.  Someone was using the bad EIA number to load up and once they were full, price drifted down for the rest of the day and shook the weak holders (ME!) out. I saw the positive signal, I just didn’t have enough faith to hold through the pullback.


The energy sector has been diverging from the overall market so severely that I’m not sure if this is a true breakout or simply the energy sector just catching up with the rest of the market. Either way, the E&P’s are going up. My bias is bearish, but it’s just foolish to fight such an obvious uptrend. If I see a breakdown, I might try a short, but it would have to be perfect and very risk controlled. The long side is the correct side this week.


Trading Plan for Monday: The plan for this week is simple, find a comfortable place to get long and just sit tight for the week. I do a lot of shorter term trading, but this week isn’t one of those times where it pays to be in and out so often. A trend seems to be starting, so just get a solid entry long and ride it out until the sellers show up. I like the XOP this week, but I’m also going to place some money on the XLE. I’d really like to see a slight pullback to test the 31.44-31.62 area for an entry long. Anything I could get lower than 31.44 would be a bonus. I’ll probably start scaling in as it dips under 31.50 and save some ammo for any dip near 31, although I don’t think it dips that far this week. On the upside, there doesn’t seem to be much supply between 31.50 and 34. Once price hits the 34 level there should be some supply that it will need to absorb for a few days. If it can chew that up, it could make a move toward the 200 ma ~36.


The only problem this week with getting long is that I’m really not sure where I’m wrong. I think the first warning would be Friday’s VWAP at 31.54. If that broke then Friday’s low of 30.88 would be a huge red flag that my long trade is wrong and I’d probably be forced to cut it. The 50 day moving average is down at 30.22, but I don’t think I’d wait that long to get out. The 30.88-31.00 area probably says the long trade is wrong and would stop me out. If this market is truly strong and breaking out, then price just shouldn’t pull back that far.


I usually don’t play individual stocks in a situation like this, but COP is definitely a play for me this week. The reason for the interest in COP is the concrete stop at 65. If that point fails, I know I’m wrong and can cut the position without any hesitation. The upside on this one is probably 70. If I can get in around 66, that’s a $1 risk for a $4 return, which I’ll take any day.


My only concern with energy this week is if it opens with a gap up or a strong opening drive and fails. We have been in this range since early January and all clues point to this being a re-accumulation (actually an accumulation which was distorted by the sharp drop at Christmas). The concern is if this range was actually a distribution and we now see an upthrust at the end of this range which leads to another leg down. Friday’s action would have probably shown that clearly and it didn’t, which makes me feel better about the long side. It’s just something to watch out for. If we get through Monday with a solid green day, then it should be clear sailing for the rest of the week.


There’s also the chance that the SPY tops out this week around 294 for a BIG double top. I don’t think the odds of this happening are very high, but it is a possibility to watch out for. My guess is the market runs up to the 294 level early in the week and then spends a good bit of time forming a handle type pattern and consolidating around the highs for at least one more try at a breakout higher. This market could easily hit 300 and once the meltup and FOMO kick in, there’s really no telling how far this market could go. The worry I have with this is that it could morph into a blowoff top which then becomes the head of a HUGE head and shoulders type formation. But that’s probably a long way down the road. Just enjoy the bullish environment for now and ride that trend until there’s a clear signal to abandon ship.


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