Trade Plan for the Week of May 13
May 12, 2019 Trading Blog
I haven’t been following the energy sector as closely as usual over the last couple of weeks simply because the trading range has been so small that the opportunities just aren’t there for me. The XOP has moved for the first 30-60 minutes most days and then just nothing for the last 5-6 hours. However, this week could offer a great longer term trade and possibly some good trending action for daytrading scalps.
I’m still bearish on the XOP overall and I’m looking for a longer term SHORT trade this week. The E&P’s have been stuck in the 29-30 range for the last 7 trading days. If you look at the past, this ETF has a history of doing this within a strong trend, and it is usually a continuation pattern.
There is a huge demand level in the 28-28.50 area and I think the market will test that area soon. I have no idea if it will hold, but my gut says it probably won’t and we may be looking at a free fall to 24. On the other side of the coin, if it does drop down and test that 28 range, I don’t think the bounce will be sharp with a 7 day range of supply sitting just overhead, which should allow plenty of time to get out of a short trade safely. It is one of those situations where the odds of breaking down are much less than 50%, but the payoff on the trade is probably 5:1 if it does.
So how to play it? I think this moves up before it goes down. I’m looking for an early week run up to test the upper side of this 7 day range. If that happens, I’ll be looking for a defined failure pattern up around 30.25-30.50. If price gets above 31, then I’m probably wrong on this trade and I’ll be way more cautious about trying a short up there. Any short up around 31 would have to be an almost perfect pattern with a concrete tight stop.
If there is a failure pattern, start scaling in on the pattern in the 30.25 area and then add heavily as price comes back into the 7 day range around 29.90. When price gets back in the range, it should move to the opposite side of the range at 29 pretty quickly. There is always an option to pile more size into the trade on a break of 29 for a very large sized overall trade with a target of 24. If 29 breaks, then bring the initial stop down toward the top of the range around 30.25, if price has enough strength to bounce at 29 all the way back across the range, then this isn’t as weak as expected and I’d probably cut the trade and see how it reacts to another test of the upper side of the range. The trade can always be done a second time.
One thing I’m NOT looking to do is start the trade on an early week break of 29. If the trade moves straight to that point Monday morning then I’m not interested in this trade. That kind of action could be a test of the bottom of the range and any failure would probably lead to a very sharp bounce that I just don’t want to get caught in. I’m looking for the upside test and failure first, not a downside test and failure first. Everyone sees the demand at 29 and the novice shorts are going to hit that and it’s about 90% likely that any run to that level early in the week is a stop hunt and a trap if it occurs before a test of the top of the range. Don’t get trapped with the anxious retail traders. If price does run to the bottom of the range and breaks through, then I’ll just miss the trade, that’s fine. There will be another opportunity to enter when this makes a timid bounce off the 28 level back toward the breakout point at 29 for a short setup.
Much of this depends on what happens with SPY and WTI. The overall market put in a bit of a bounce late last week and I think there might be an early week attempt at an up move, but I’m not sure how much strength is left in this market and if there are enough buyers still around to push this higher. The 290-291 area is big. A move up and test with a failure in the SPY would coincide nicely with a move up and test failure in the XOP. One other thing to watch is XOM, it is sitting right on support at 76. It has been in this rough 76-84 range since early 2017 and what it does here could be an early signal for the entire sector. If it drops below 74, that’s a huge warning.
If the XOP does trend down, I’ll be looking to pick up a few names when it hits the bottom. I like OXY and if it gets caught up with the rest of the market in a downdraft it could turn into a real bargain under 50. My second favorite name on a pullback is HAL. This one has been absolutely crushed since earnings day up around 32. I’m also watching MPC in the refining sector as it gets close to testing that 50 level.
I’m still a fan of the smaller Permian names, but they just won’t come down to an attractive entry point, which I guess is a good signal that everyone else likes them too. PE, MTDR, JAG, CDEV are all still on my radar. PXD, CXO and FANG are also on there, but I like the smaller names better than the larger ones.
A few secondary names on my list are CLR, CLB, PBF, PES, GIFI.
Good luck out there this week. I’m off to finish the weekend with a couple good bottles of Nebbiolo Rose’, a Sunday afternoon nap and ending with watching Billions tonight. That’s a good day right there.