Energy Equities Outlook for the Week Aug 5-9
Aug 3, 2019 Trading Blog
$XOP is getting closer to that final washout and this past week’s price action was encouraging. There was a huge volume day on Thursday of ~56 million shares traded that took price down toward the 23 level. That was followed by a much lighter volume day of ~30 million shares on Friday, which was able to close back above Thursday’s low. Friday’s low was only about 30 cents below Thursday low, which isn’t much considering the action in the $SPY at the time. Those are signs that the selling pressure may be declining. Thursday’s volume was the largest volume that the $XOP has seen in years. That could end up being the selling climax which initiates an accumulation area. Much of my trading is based on Wyckoff formations and sometimes the selling climax and the lowest price do not coincide. Sometimes the low price will occur several days after the volume selling climax. Only time will tell if this occurs in the E&P’s.
Another encouraging sign was the volume after lunch on Friday, it just disappeared. The sellers were gone. $XOP did about 5 million shares from 12:30 to 3:30, which is well below average, and that’s occurring after a 56 million share day on Thursday and a 21 million share Friday morning. There was 4.3 million in the last 30 minutes, but even that isn’t much above an ordinary day. Did the sellers run out of supply?
The fascinating thing to me is what is going on in the media and places like Twitter. It’s 100% bearish. I think sentiment is getting it wrong and when it turns the move will be extreme. The tricky part is catching that turn. As we saw on Tuesday, you can wake up any day and this sector can rip to the upside. There are likely still a lot of short positions, probably increasing given the action on Thursday and Friday. Those shorts entering later in the week are probably late to the party and their covering could be the first spark to ignite a rally.
Also, one thing on the Twitter hype/sentiment issue, I’m probably going to back away from Twitter a little during the day and try to limit myself to a couple posts during market hours. It’s starting to mess with my judgment during the trading day. It’s dangerous how you can develop a bias of sticking with an opinion after you post it for others to see. As a daytrader, my opinions change extremely quickly and any bias or ego trying to be right isn’t good. When something becomes a distraction, it’s probably time to put it on the shelf for awhile. I love the entertainment of Twitter and it’s a great place to journal my thoughts, but distractions aren’t productive. Twitter is an addiction that I think many traders have and they don’t realize how it affects their judgment and open mindedness.
I’ve been very bearish on the E&P’s, but after all the things set out above, I think we are getting close to a tradable bottom. I think we could see a couple more down days that may washout the remaining weak holders and the volume on those days will be important. I’ve been saying 21 as the bottom of this move. I’m not sure if it can get there, but it could get close.
I posted an interesting chart Friday (and an update of that chart on Saturday) on Twitter of the current broadening formation in $XOP that started back in mid-July. The concept behind that pattern is that volatility is increasing, which could very well point to a larger trend change. The swings in that pattern were 8-10%, which is pretty volatile. Volatility is a signal that retail could be capitulating and larger, smarter money is beginning to take a position. If this market was going to washout, it should have happened on Friday. Earnings from the two biggest $XOM and $CVX weren’t great, other earnings during the week were disasters and the $SPY was a on a very negative three day run. The 56 million share day on Thursday should have been followed by another huge volume day and it also should have produced a day that closed at new lows, it did neither.
This week’s plan: I’m looking for the $XOP to open the week with some selling pressure which could take it down to the 21.50-22.50 range. I’m not sure how far into that range it will get, which makes it difficult to find an entry. The best option is to use a scale in approach and enter in pieces and just try to get a good average price. The key on the down move will be volume. If the volume is heavy, I’d be way more cautious with the entry. If the volume is light and it’s clear that the decline is more a lack of buyers than an increase in sellers, then I’d probably be a little more aggressive with the entry. There are many retail type traders that will read the news over the weekend and make decisions on that, most of those decisions will be to get out of energy. The market will take advantage of that and force those weak traders to sell at low prices, possibly on a gap down. Once those early week shares are absorbed, it could turn quickly. If size hasn’t sold by now, I really don’t see them dumping way down here, it’s the smaller players that the market will take advantage of early in the week. I’m looking for a low volume Monday/Tuesday and then a turn upward.
As for a profit target, we saw on Tuesday/Wednesday just how fast this market can rip to the upside. It’s compressed like a coil right now and even a little pressure caused a nice move. The first target is the 24-24.25 area, then 24.75, then 25.75-26.
I took a few positions this week in individual names. The biggest position was $CXO at an average price of 78.15. I get the issues they had, but they are one of the best of class of the Permian. The basis of what they are really saying is that they are making a decision to pull back a little and live within their means, and unfortunately the market punished them for being responsible and doing the right thing. The market did the exact same thing to the best in breed natural gas E&P, $COG. Money is heavily skewed to the quality names, hence the premium, and when they disappoint the faster money moves on. $CXO is now a quality name priced without the premium. It was a 20 billion market cap on Wednesday, I got it for 15 billion. Also, this wasn’t an industry wide decline, it was more specific to $CXO. It will work it’s way back to par with the others. I’ll put one of those in the longer term portfolio any chance I get. I’m also looking at getting back in $COG this week as it moves close to 18. I’m mostly a daytrader, but ignoring the longer term opportunity is just crazy. I’ve been trading this sector long enough to remember that it is an incredibly cyclical sector, booms and busts. I think many people are getting a little too caught up trying to let their ego predict “the death of shale.”
One other point on $CXO, I’ve also seen some people mention a buyout on this one by $CVX. I don’t really think it’s going to happen, but it’s just another little bonus reason to buy. Also, I don’t see $CXO being an acquirer since they already bought $RSPP, so the chance of getting penalized holding an acquirer is smaller. I’ve seen the same rumors for $PE being a buyout candidate. While this is no reason to buy, it can always be a nice little benefit if it happens.
I also picked up another Permian, $PE at 14.95. I’ve got about 25% of what I want there, but I’m hesitant to move in any further until I see earnings on Thursday. I really don’t want to get into a $CXO type blowup if I can avoid it. Actually, I’d love to see a 25% decline in $PE, I’d load up on that. My other large position was $XOP and I scaled out of most of that on the open on Friday. I’ll be reloading that one on the open Monday. My other purchase was $HAL at 20.95. I’m about 30% in on that one and will add this week if it declines.
I’ve got a few on the radar: $MTDR any drop under 16, $MPC any drop near 48, $SLB near 35, $COP near 54 and one fun microcap speculation $MR under 2.50. I’m sure the upcoming week will open up more possibilities and I’ll try to post them on Twitter as I see them.