Energy Equities Outlook and Trading Plan for August 26-30
Aug 25, 2019 Trading Blog
Energy stocks were looking good most of the week testing the top of the latest range a few times and seeming like they might break through, but the China trade issue just derailed everything. Trading is hard, but it’s really hard when trying to trade around Trump Tweet bombs and FED events. This week might not be much easier.
I had a decent plan going into the week of exiting my existing positions and then trying to establish a new long XOP position on what many were probably going to consider an inverse H/S right shoulder on a pullback to XOP 21.55. The exit part of the plan went well and the profit on the XOP, SLB and HAL trades was about 6%, which isn’t a bad return for five days of holding. The new XOP long trade never gave an entry signal because the downward momentum was just too much. The XOP gapped from 22 down to 21.50 Friday morning, moved sideways for a bit and then just fell off the cliff from 21.50 to 21 in about 30 minutes. I ended the week still sitting in 100% cash with no positions, and at the end of the day I was definitely happy about that.
USO is still holding up surprisingly well. It closed the week at 11.19, which wasn’t too much lower than the previous week’s close of 11.40. Losing only 21 cents in week like we just had shows there is some demand under there. On the downside, 10.75 will be an interesting level. On the upside, 11.90 is the one to watch. If oil can stay in this larger consolidation pattern, the E&P’s have a chance to recover. If USO collapses out of this consolidation and takes out the 10.50 level, things could get ugly.
So what are we looking for in energy equities this week? I think we probably see a test for the E&P’s of the low at 20.56 early in the week, possibly on the open Monday. There is some real panic out there right now, especially from retail, and I wouldn’t be surprised to see the market gap down and shake out almost every long position. I’m not sure how far down E&P’s would have to drop to accomplish that, but it’s in a prime spot to completely wash out, maybe even to the 19.50 range.
If we get the washout down under 20, I will definitely be establishing a long position for a nice bounce. It will be a very short term trade though, not any type of longer term hold, maybe 4-5 days at the most. The key on the trade is the corresponding action in SPY. There is possibly a big test coming in the 280-282 range this week, which correlates to a 20.56 test for XOP. The overall market is in control right now and there’s really not much chance that any sector is going to be able to diverge from it, especially consumer based sectors like energy and retail. By the way, those charts for XRT and XLE are still the two most correlated sectors in the S&P500 and they were two of the three worst performers Friday (SMH was the other). I think SPY could dip down to the lower 270’s this week and still recover, but if it cracks that 270-272 level, things could get bad and repairing that kind of damage might take awhile.
There weren’t many bright spots within individual energy names, but if you take a look at the list, almost all the E&P’s had an inside week. They tested the prior week’s high and failed, but they were strong enough to also hold the prior week’s lows and close within the prior week’s range. The market was negative, but not negative enough to produce new weekly lows in most energy stocks. Surprisingly, the weakest individual names were the larger cap names: CVX, COP, OXY, EOG, VLO. These names are where the bigger money is hiding out. Most of the smaller names have been beaten up so bad that there just aren’t many true sellers left (mostly new shorts), but the larger cap names making new weekly lows is likely true selling. Money usually washes out of the sector beginning with the weakest names and moves up the quality ladder until the last sellers exit the quality names and that seems to be where we are headed. There is also the issue of these quality names being highly indexed, so when the SPY tanks, the larger energy names take the hit harder than the non-indexed smaller cap names.
My favorite target this week is EOG. I think it is probably the E&P with the most quality money hiding out in it. When non-energy funds purchase energy names, they pretty much stick with the surest bets, and that has clearly been EOG. The problem is that when those non-energy funds decide to start selling everything, they dump indiscriminately and the mass exit out of a stock like EOG can be devastating. EOG is actually a thinly traded stock for its market cap size. The spread is always about 7-8 cents and it only trades about 3.5 million shares a day. Compare that to a more liquid name like COP which usually has a penny spread and trades about 6 million shares a day. It’s much easier to exit COP than it is to exit EOG and that’s why overreactions can occur in more thinly traded names. I’m hoping for one of those overreactions and looking to pickup EOG in the mid to upper 60’s. It’s not so much a play on the fundamental quality of the stock, but rather a play on the lower liquidity causing an oversold condition which can be played for a nice bounce. CXO was another example of this type of play, as it is even more thinly traded than EOG and the overreaction there was severe.
My second favorite target for the week is PE. It has been holding up well lately and seems to have strong underlying demand in the 14-15 area. If it gets back under 15, I’ll build a long position, possibly for a little bit longer duration term trade than normal. I think this company survives and it’s still the top stock on my buyout list.
I also still like the service names for periodic bounces. HAL and SLB are my two standard plays and I’m hoping for 17 and 31 on those to make another trade. One other service name that is getting interesting is HP. The rig count numbers Friday were surprising, losing 16 rigs, and that’s a direct hit to HP and PTEN. I don’t think it is a long yet, but if it gets down under 35 it might be time to take a shot at a big bounce. I don’t have much interest in the refiners. If oil prices do get some type of upward movement due to lower rates, the higher input cost combined with lower demand is going to be a real killer that I want no part of. I’ve never had a good grasp on the precise fundamentals that drive the refiners, so sometimes that area is just a no trade for me unless the technical picture is clear, and right now it isn’t.
The natural gas E&P’s are just a disaster. I keep waiting for a level to take a shot at COG, but it just never seems to get any kind of real demand. EQT, RRC and AR have just been demolished and trying to pick a bottom in any of those is just futile right now. I am going to take a speculative trade on MR at some point under 2.50. It’s an extremely risky play, but the latest earnings report and the guidance report before that were both excellent. If natural gas does find some type of bottom, MR could be an easy double.
One last thing, I’m a very short term trader. I get a lot of guys viewing my Twitter and thinking my views are for the longer term. If anyone is using my views to trade the longer term, that’s a mistake. I play a much different game than most of the investors on Twitter and that creates a little friction. My timeframe is completely different from most. Also, I use a strictly technical view, while most of Twitter uses a fundamental view. If I ever disagree with anyone, it’s usually because we are each trading on a different timeframe with a different basic focus approach. Most of my plays are liquidity driven opportunities and have nothing to do with the fundamentals of these companies. For me, the stock and the company are two totally different things. Knowing that, it’s much easier to have trading discussions if both sides understand the timeframe and approach of where the other trader is coming from.
So that’s the summary for this week, prime watches on individual names are EOG, PE, HAL, SLB, HP and MR. The top trade idea on XOP is a long bounce play on any washout to the 19-20 level. On the upside, 22.68 is still the level to watch. Enjoy the rest of your weekend.