Energy Equities Outlook and Trading Plan for June 10-14
Jun 9, 2019 Trading Blog
It was a crazy market week and I’m just going to be honest up front and say that I don’t understand it at all. I do have a theory though. Also, it seems like the Mexico tariff issue has been resolved, so this market is probably going to gap up huge Monday morning and run for at least two days, which could be enough to take out ATH. Monday is going to offer some really great clues on the health of this market. Let’s take a look at the SPY first.
The SPY started selling off on May 1. On almost every day, the market would start at the lows and finish on the highs, or form a large hammer type candle, both of which are definitely bullish characteristics. However, if you pull back a level, all those days combined formed an overall downtrend. Each individual day had strong demand, but that demand was buying into an all you can eat buffet of supply, therefore the overall trend was down. That is a clear distribution situation. Somebody with large holdings wanted out, yet there was enough demand to soak it up with the SPY running from 293 down to 273. Near the end of May, something happened. I think those sellers decided price had dropped too far. On Monday, June 3, they stopped distributing, however the demand was still there. With the FED news coming out, the sellers picked the perfect time to remove the supply. Anyone who was short just couldn’t find any supply to cover and the speed of the FED induced rally caused them to panic and drive it even further. The smart money knew if they pulled back the supply at exactly the right time, the shorts being forced to cover would pay any price out of panic, which was exactly what happened with the price move. Smart money used the FED news, panic of the short bears and FOMO of the bulls to let the market breathe and rise to a level where they could start distributing again. If I was distributing and wanted better prices, I would have done the same and let the market recover.
The real tell comes early this week. Do those sellers return and start distributing again near the highs or are they done? It’s my opinion that they aren’t done and that they return. They were able to distribute for a month from May 1 to June 3. If they started distributing again, they could probably get another week or two of distribution done on the way up to ATH, then another three or four weeks of distribution back down to where price was on June 3, around 273. An even better tell is where this market stops on the up move. I posted last week that the most painful move would be a quick rip to 296, as that would squeeze EVERY remaining short out of the market. Rallies in a downtrend are brutal for shorts. All the stops are just above the all time highs around 295. Once those get picked, the market could head straight down.
This is just my theory. I’m not shorting the market anywhere ahead of 295, and I’m probably not going to short on any breakout toward 300. The above is simply the only scenario I can come up with that makes sense regarding what happened last week. I do believe this bull market is getting close to the end. Now, whether it ends here with a triple top or if this is the start of a blowoff top, I really don’t know. What I do know is that I’m going to be more cautious on the long side for the rest of the summer than I have ever been. The FED used a bullet last week, and that is one less bullet they have for later. Once this rate cut hysteria wears off, and it will, the market will need another fix. Will the market get it and will it be enough to continue past ATH? Most crashes and bear market beginnings happen in September-October, maybe that is what we are setting up for.
Another thing that concerns me is the IWM. It isn’t following SPY at all and isn’t anywhere near ATH. The IWM is a sensitive measure of economic growth, just as oil is, for the overall economy. The IWM has been moving very closely with XOP, which screams economic weakness. It seems as if the big money is shifting all their holdings to large cap safety and out of small cap growth. Watch that 148 level this week.
Enough on the overall market, and on to energy. The XOP is in bad shape. There is just huge supply at that 26-26.25 level. I posted a chart yesterday on Twitter showing the VWAP over the last couple of weeks and the sellers have clearly been in control on every test of that level. And remember, this is with the SPY ripping straight up to ATH and the E&P’s can’t even get off the bottom near all time lows. That says a lot. I’m still looking for the XOP to make a run at the 24 level, however, I’ve moved even more bearish and I think it probably overshoots to the downside, especially if the SPY gets rejected at ATH. If the SPY fails, the XOP could easily collapse to 20. I don’t think the chance is large, but it is getting larger every day as the XOP sits at lows while the SPY rips. The relative weakness grows and the signal is getting louder.
The XLE has been better, but that is strictly because of XOM and CVX, which make up 43% of the XLE. Those two S&P and DOW components have gotten caught up in mega cap focused rip to ATH, but the rest of energy is weak. The XLE is hiding that weakness because it is so concentrated on two mega cap stocks. When the common fund manager wants to own a piece of energy, it’s usually going to be Exxon or Chevron. Those two stocks are going to be the barometer for energy this week. If they roll, the whole sector comes crashing down. Don’t let the XLE fool you as to what is really going on in energy, the XOP is a much better overall gauge of health (or sickness in this case).
Trading Plan for the Week: I sold all my holdings on Friday. They were only 20% positions, as I was trying to scale in as the market moved toward 24. Had I known the Mexico issue was going to be resolved, I definitely would have held, but that was impossible to know. So I’m 100% cash and my plan is still to wait and let these energy stocks drop to test 24 and evaluate there. If 24 looks weak or if the SPY rolls over, I’ll probably wait even longer to start scaling in. The perfect storm of falling oil prices, slowing economy and a crashing SPY could totally crush E&P’s down to levels that are generational lows. I DO NOT want to be early in that situation. I’ll still be scalping moves, but I’ll be extra slow in establishing large, longer term trades.
Bottom line is that I’m extremely bearish on energy right now. I think there is the potential for things to get really ugly and many companies just won’t make it. I’m sticking with quality on any longer term trades and I have no desire to drop down to any mid or small cap energy names, it’s just too much gamble for me and it isn’t really necessary as the quality names will still produce large percentage moves. My ideal targets are XOM, CVX, COP, EOG, SLB, HAL, MPC, basically the biggest and most solid. The next level down for me includes NOV, VLO, OXY, DVN, PXD, CXO, MRO, CLR, PSX, COG. The third level is speculative with PE, MTDR, NBL, HES, RRC, JAG and CDEV. I’ll post prices as I enter these positions.
As you can see, I’m not excited about this SPY move up. I think FOMO has a very tight grip on a lot of traders and those guys are losing sight of the bigger picture. The market moves to cause the most pain possible and I have no desire to get caught in that. At the end of the day, it’s a risk versus reward situation. Is there enough reward left in the market to justify the growing risk?? Not for me.
Have a great week.