Energy Equities Outlook and Trading Plan for August 19-23
Aug 18, 2019 Trading Blog
E&P’s finally got a bounce late in the week and could be looking to make a move for at least another 2-3 days before hitting some supply. I don’t think they have seen the final bottom, but this was definitely a great opportunity for a nice long side trade in a market where sentiment has gotten way too skewed to the bearish side. There were a lot of traders caught offside on Friday, both in XOP and SPY, and that caused a very sharp move. When the shorts get trapped, the bounce can be extreme. We saw this a couple weeks ago on a two day move up near 25 and then the market just absolutely tanked. If we get another decline somewhere starting around lunch Wednesday, I’d say the move Friday was more short covering than real buying. There are a lot shorts out there and those guys have to ring the register for profits too.
Looking at the week as a whole, I really don’t understand the extreme bearishness out there in the media and Twitter. We had two big up days and two big down days and actually closed pretty close to where we opened. If you would have read the news without knowing what the market was actually doing, you probably would have thought we were down $20-25 on the SPY. We were down a mere $2.77, which isn’t exactly a bear market. It’s just an extreme herd mentality out there right now, but that kind of environment is where you can find some of the best trades. Also, oil really held up pretty well for the week and still remains squarely in a consolidation pattern after a failed attempt at a breakdown. The Friday close on the XOP was 21.44, which was well above the prior week’s lows, so it held the range pretty well.
I think sometimes people get way too focused on the news and fundamentals. This week’s big headline was the “inverted yield curve”. To anyone paying attention over the last couple months, this wasn’t really news, but it did stir up some panic in retail traders and the bigger money took full advantage. Anyone watching the TLT break at 123 has probably been focused on this latest move since it passed that major point. The bond market had some issues, but sometimes the activity in one market just doesn’t spill over into stocks.
One thing that has really surprised me is what has happened to energy Twitter (as well as FinTwit overall). Over the last few months it has just gone downhill. There used to be some really great independent opinions out there, but it seems like it has turned into a complete group think. Any time someone posts anything bullish, the bear herd just attacks. It’s turning into TSLAQ Twitter. Several of my favorite posters have just quit posting altogether. I’ve noticed that there are a lot of accounts that have been opened in the last six months or so and almost all of those are voices just screaming blindly on the bear side. It has just turned into a mob of tin foil hats all calling for the end of the world. It’s pretty amazing to watch, but the end result is always the same, those guys will inevitably fade into the darkness never to be heard from again when the market turns. The only decent thing to come out of it is the short squeezes we seem to be getting at certain intervals. Don’t get me wrong, I love a good short too and most of you know I’ve been trading the short side most of the way down, but you have to have balance and an open mind.
I’ve got three open positions coming into the week: XOP (21.05), HAL (18.40) and SLB (32.30). The positions were built over three days and I imagine I’ll scale out over the next 2-3 days. I’ve got breakeven stops on all three. I don’t really mind if those get hit, as I’ll probably be entering those same trades again at better prices. I had another couple great positions in MTDR and JAG, but I cut them on Thursday and consolidated down to a more simple strategy of just the three holdings split 1/3 services and 2/3 E&P. Really wish I would have held those longs, but honestly, the JAG position had already run up about 6% profit and the MTDR position was doing nothing. I just didn’t expect much more run with JAG and took the profit and gave up too soon on the MTDR position. It happens.
Outlook for the week: I’m looking for a strong open Monday and likely a continuation into Tuesday, possibly Wednesday morning. There was also a big Barron’s fluff energy article over the weekend, so be on the lookout for a gap Monday. A few points of interest: Week Low 20.56, Week High 22.68, Week VWAP 21.44 (which was also the week’s close).
I’m watching that 21.55 point, which was the release point on the SA announcement. The market reacted to that point a few times on the move down and it was also the EXACT stopping point on Friday’s big run. Tuesday’s big run started at 21.58 and the big gap down on Wednesday opened at 21.52. There is definitely a good bit of interest in that level and VWAP for the week finished close to it at 21.44.
Probably the most fascinating chart to me is the USO chart. It is still holding that consolidation pattern. I’ll post the chart on Twitter. It is holding that lower formation very tightly while hitting an upper level right on that .618 retracement. I don’t put much faith in retracement levels, but it has pulled back to that level five times in this consolidation pattern, with the sixth time being a bit of an overshoot of the 11.55 level on Tuesday (along with everything else spiking). USO closed the week right near that retracement level at 11.40. Oil still looks well supported. If it breaks down out of this pattern, my view will change, but as long as it holds, I think the E&P’s will move sideways to up.
As for individual names, I think there are a lot of people getting energy wrong. The bearishness isn’t warranted…yet. I think a large number of traders are going to be slow on the turn and will get themselves trapped in some of these names. When the crowd starts thinking that it is a one way market without risk, that’s usually when a big turn can happen. I don’t think we are there yet, but it’s coming. I like quality names at this point in the cycle. I’m looking to buy COP under 50, EOG near 70, MPC near 40 and OXY near 41. I would absolutely load the truck on XOM near 61. CVX is a bit of a tricky one, as that seems to be where the biggest money is hiding out. There could be more decline in CVX than there is in XOM. I’d wait on buying CVX closer to 105. I really doubt most of these names will get to these ideal levels, but we can hope.
One name that really fascinates me right now is HES. It has been one of the strongest names in the sector, which is a bit surprising since they will be moving to a more gas heavy mix with their South American project with Exxon. That stock should be coming down, but it just won’t budge at all. Their Bakken competitors like CLR, MRO, OAS and WLL have all just been crushed, yet it holds in. I’d keep an eye on this one for a buyout, possibly by Exxon itself.
Another name is RDSA/B. It’s at a very big level at 55 and has just been crushed lately. If you like dividend plays, this is your stock.
In the overall market SPY, this one could go either way right now. A larger pullback is coming, I’m just not sure that now is the time. The 278-280 level is going to be big this week. If it breaks that, there is room down to 270-272. There’s also a really good chance that this thing just rips right straight back up past 300 soon. There is going to be large supply at 295, but if it gets through that there are going to be a HUGE number of trapped shorts that could take this right out the top. Also, if you do short SPY or XOP (or anything really) you have to constantly be aware that any resolution to the China trade situation is going to completely blow you out on the short side. That unknown is really making shorting an expensive proposition right now and is a factor that I think many shorts aren’t calculating into their risk/reward numbers.
It might be a sideways week, but that wouldn’t be such a bad thing right now. Just keep those stops tight. I’m headed out for a couple bottles in the warm sun with some live music, my favorite way to spend a Sunday. Enjoy the rest of your weekend.