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Energy Outlook and Trading Plan for September 30 – October 4

It’s time to get very concerned about the future of E&P stocks. There has been non-stop selling every day for the last two weeks. Who is doing all this selling way down here AND right into the face of incredible geopolitical issues? Pull up an XOP chart and we’re at all time lows on it. Why sell or short here? What do they know? I thought we might get some type of bounce in energy this past week, but we got nothing and closed almost at the lows of the week. If last week’s total dismissal of geopolitical risk was a loud signal that energy stocks are sick, then this past week really confirmed that in a big way. I’m getting more bearish on energy each day and I really think there is a big drop coming, something possibly in the 17-19 range on XOP. I’m not sure of the timeframe, but I think it could happen within the next six weeks. I see absolutely no reason to get long in energy for any trade that might last longer than a couple days. There are some great smaller waves to trade, but the tide is still down for longer term investors.


I think the key factor for energy right now is the slowing economy and recession risk (on the horizon), and the steep drop in demand that could result from those conditions. The supply is still there, even with the geopolitical events, and E&P’s can flip the switch at any time to increase production. We saw another handful of rigs cut this past week, but the DUC’s are still out there. I saw a great chart the other day and I wish I would have saved it, but it showed the 2015 drop of about 50% in rig count, but total production was only down slightly. As technology advances and the backlog of DUC’s grows, production really has less and less to do with actual rig counts.  There are so many things that are different these days in energy. These companies have a completely different set of drivers than they did in the past.  These things put a real cap on price. Unfortunately, there is no switch they can flip to increase demand and I think that’s how the market is positioning now.


Gasoline prices saw a spike up over the last two weeks, but that wasn’t demand driven, it was panic driven. One thing that I’m sure the government is keeping an eye on is how rising gas prices caused by non-demand factors will contribute to the slowing economy. I think there is likely a hidden agenda for the government to take the course of action that will keep energy prices low, which doesn’t help the future for E&P stocks.


As for the overall market, I looked through charts in every sector for an hour and almost everything is setup to start a move down. I can only speak for myself, but I’m starting to get burned out on all this headline risk and all the Tweet risk just spiking the market in all directions. I can only guess how big money is feeling about this. The market can only take so many surprise events until traders give up and start to go risk off. I could see this market tanking as traders are just tired of getting blindsided every day, especially in October, which isn’t a great month anyway. Traders could pull in and protect the gains for the year. There was some talk in the last month about rotation to less favored sectors as a way to make some quick year end gains, but those trades really fizzled out quickly. There could have been way more supply in those areas than big money expected and the potential for gains was a lot smaller than they expected.


I’m watching the 280 area in SPY. I think we could be looking at a move to that level in October and possibly 270 on an overreaction or unknown event occurring. I don’t think the market is ready to evolve into a bear market, but a healthy pullback could be coming. Small cap companies (IWM) clearly rejected the 160 level again and they never even got close to making new highs like the SPY did, which is an important negative divergence. The QQQ also had a negative divergence with SPY, as tech failed to take out the August highs on this latest move up. Technology, especially software, is showing cracks. So many of these funds and ETF’s are just stacked with tech that any move down there will have an outsized effect on the market.


If you look at all the E&P charts, they show the exact same pattern. Almost everything spiked two weeks ago and have since moved straight down every day with many sitting near the August lows. All geopolitical gains have been given back. I’m looking for the whole group to move back down and test August lows sometime in October. I think there is a good chance that those lows break and we finally get that high volume capitulation that has eluded us so far.


This week’s trading plan: I think there is a bounce coming. I also thought that last week, so I was wrong. The important spot for me this week is once again that 22.68 level. Price really tried to get back above it on Friday, but just didn’t have the demand. If price can open Monday and break and hold that 22.68 level, I think there is an opportunity for a quick long trade back toward the 24 level. Just don’t get caught chasing with FOMO. If the entry is missed, just let it go because the move up could be met with supply very quickly at any time. The trade can use 22 as a stop, maybe even last week’s low of 22.23 if you want to size up and use a smaller stop. If the market takes a shot at 22.68 and fails, then things will probably get ugly for the bulls.


On the downside, I’m watching 21.55. Remembering way back, that was the level where OPEC stepped in and tried to support the oil market in August. Price reacted off that level several times throughout the month and I think there will be some memory there on the way down. I’m not really interested in shorting the XOP this week because the headline danger is just too great and risk is difficult to control with that. If the 21.55 level breaks, then it’s probably going to be a quick drop back to the August lows around 20.50. If I had to put odds on which way the XOP goes next week, I’d probably say it’s a 70% chance it ends the week down and about a 30% chance it ends the week positive.


If no quick long play develops on Monday, I’m probably going to move to the sideline in energy for the rest of the week. The IWM and KRE are providing a much better trading environment right now, so I’ll be trading there. I have no problem with simply waiting things out in energy to see if we get that severe drop. My larger goal is to get some money into energy with a long term outlook. If we capitulate down to the 17-19 level, I’d love to put some money to work there for a longer term play.


There are a couple of individual names that are starting to get attractive on the next dip down. I like PE and really gave some thought to taking a shot in the upper 16’s on Friday for a quick swing long, but the overall market just talked me out of it. If PE drops to the lower 16’s, I’ll start scaling in long. I also like EOG near 70, FANG near 82 and HAL near 17.25. One stock that I would avoid is NBL. Their Leviathan production facilities and transport facilities near Israel are vulnerable to an attack if terrorists want to strike something American owned to send a signal.


The most important stock to watch this week is CVX.  It broke the 50 day moving average on Thursday and then gave up the 200 day moving average on Friday. That’s where the larger money has been hiding out in energy and it looked shaky this week.  Sometimes that 50/200 combo can be the first warning that the longer term money is on their way out and could possibly stampede for the door. I’m watching the 114-115 area for a signal on which way the sector might be going. If  Chevron breaks below that, I expect that the rest of the sector will follow. XOM is the weaker major and it has clearly been rejected at the 200 day moving average a couple times this summer. COP is another one of the big money favorites at a pivotal point. That 57 area has been tested a few times, so keep an eye on how it handles the level, especially if it confirms any CVX move down. Also, XLE turned right at the 200 day moving average on the gap up two weeks ago and gave up the 50 day on Friday. The 200 ma has been a very dependable signal for XLE over the last couple years.


In summary, the only play for me in energy this week is a very quick long play if 22.68 holds. I’m not interested in shorting. If the long play doesn’t develop, I’ll be trading something else until things settle out in energy. I just don’t like the sector right now and getting blindsided almost every day hasn’t been fun or productive. I’d rather trade something easier. I think there is a big move down coming, just have to be patient enough to let it happen and then profit from it. Good luck this week and keep those stops tight.


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