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Energy Equities Outlook and Trading Plan for October 7-11

It was another disappointing week in energy, as the XOP moved all the way across the August range to touch the lows around 20.50. It did manage to hold, but the bounce was very weak and failed right at the middle of the range around 21.55. It spent much of Friday under 21, and probably would have closed much lower had the SPY not had such a big run to close the week. I don’t have much confidence in energy for the rest of the month of October. I still think this group takes out the lows and completes a final washout to put in a bottom for this latest down cycle. That washout probably takes the XOP somewhere down into the 17-19 range in the next month or so, especially if the SPY tops out in this 298-303 range for a third failure at new all time highs.


I don’t think this sector turns until there is some real pain (even more than usual) and some type of capitulation event on extreme volume. The larger money just hasn’t been lured into the sector at theses prices, as I think they just don’t see value… yet. Looking back, it is easy to see now that the spike to 26 on the geopolitical issues was completely wrong. It was totally ignored, and I think that is a sign that a capitulation event is on the way. The real problem here is the relationship between XOP and SPY. There’s a chance that a capitulation in energy coincides with the overall market finally turning down for a big pullback. In that situation, we probably get the dreaded “L” type pattern for XOP and an accumulation range that lasts for quite awhile. If the SPY can hold in and move to new all time highs, we could get lucky with a “V” shaped pattern in energy.


I really don’t want to see an “L” shaped pattern. The XOP is almost impossible to daytrade in the lower 20’s since it really has no intraday range at all. Trying to trade it down in the teens would probably force me to abandon it and trade the XLE. Most individual stocks have fallen so far that they don’t have enough tradable range either. I’m on a per share commission structure with Interactive Brokers and every time XOP drops in price, that requires more shares to take the desired dollar amount position, and it’s dropped to the level where buying the amount of shares I want is getting really expensive. Not to mention that it is now so thick that trying to use limit orders on the bid or ask has been difficult and many orders aren’t getting filled, which then forces me to pay the spread to get a position. Not sure how much longer I can daytrade this down here with these extra costs.


The 50-52 range for WTI will be big this week. I get the feeling that some type of intervention or support from OPEC could occur at any time. If that 50 level cracks, be aware that they could step in, which is a real danger if you are playing short for a break to the downside. There’s a lot of room to fall, as WTI dropped all the way to 42.50 in December. The E&P’s are trading way below their December mark when oil was 42.50 and I’m really not sure what would happen if we again dropped to that 42.50 level. The only real positive I see is that this 50-52 area would be a perfect place to put in a bottom. If 50 did break and it turned into a quick stop hunt and reclaim of 50, then that’s a clear sign of big demand under the market and we could get a sharp move back up. Any drop under 50 this week will provide some great information.


The big name from last week was CVX. That 114-115 level was a big one, and it broke easily with CVX closing at 113.85. This pattern in CVX is much like the pattern of WTI above. The real clue here is if this move under 114-115 turns into a stop hunt and reclaim. If CVX can reclaim the 115 level, it could make a sharp move back toward 124, especially if the SPY moves back to ATH. I’m watching for a very light volume pullback early in the week to maybe the 111-112 area. If it bounces there on light volume and takes out 115, then it can run. If the volume is high and/or it fails again at 115, then it is probably looking at 107.50 for the week. The key here is the volume on the retest of last week’s low area. The other name I was watching last week was COP at 57. It completely failed and finished at 53.50. That could be a clue that CVX has no shot at reclaiming 115.


Looking at other markets for clues, the most important one is probably the small caps, which represent the domestic economy and consumer. IWM held the 145 area and has been in a tight range of 145-160 since the start of the year. The test for IWM is 151. If it takes that out, it could run back to the top of the range, but if 151 fails, then 145 probably fails too. There’s a huge gap under 145. The other clue is XRT. Retail and energy are both consumer dependent sectors. Those two charts have been moving together for months, but have started diverging lately. Retail has become a little stronger (or has XOP become that much weaker?) and may be signalling that the consumer is holding in with continued spending, which is also very good for oil.


This week’s trading plan: There’s a defined range playing out in XOP between 20.50 and 22.68. I’ve posted the chart a few times on Twitter, and the movement has been fairly dependable. I’ll post the updated chart again in the same Twitter thread as this week’s trading plan. The three main points to play off of are 20.50, 21.55 and 22.68. Any trade should be around one of those points. I don’t want to play anywhere else in the middle of that range, it’s either the two extremes or the exact center. I prefer the two extremes.


If the market starts next week off with a test of 20.50, then I’ll probably give it a play long for a bounce back into the range, likely back to the middle at 21.55. The 20.50-22.68 area is fair value and it will probably take a good bit of force to auction it very far away from this fair value. Keep an eye on the volume of any auction testing the 20.50 area. If the volume is light, then a long play back into the range is likely correct. If the volume is heavy, then we could be looking at an initiative move away from fair value and the start of a trend toward some other area of fair value lower.


If the market starts the week with a move back to the middle of the range at 21.55, there are two trade options: either play it short for a move back toward the bottom of the range at 20.50 OR play it long for a break of 21.55 and a move to the top of the range at 22.68. I have no idea what happens at 21.55, but that isn’t really the point. These trades are just math and odds on payout versus risk. I’m just looking for some place I can risk maybe 25 cents and get a $1 move. I’m not predicting which way the market will go (as I really don’t know) I’m just looking for spots where I can get a bet down with 3:1 odds. This type of range is a great place to do that.


The next trade I’m looking for is up at 22.68. It’s basically a mirror of the same trade I’m looking for down at 20.50. I’m just looking for fair value to draw price back into the range on a very light volume auction test outside of 22.68. I’m simply looking for a failed breakout. If the volume is light, then it probably falls back into the range and returns to the 21.55 center point. If the volume is heavy, then it could be an initiative move toward some new area of fair value higher.


In summary, I’m trading with an angle for price to stay within the 20.50-22.68 range. I’m looking for failed breakouts at the extremes and price to return back to the middle. Price stayed within this same range for over a month in August and I think there is a good chance that it could stay within this range for another month extending throughout October.


If we do get a breakout at either extreme, then there is usually a second chance to get in on that when price makes one last attempt to get back into the range and fails, at which point the volume will pick up and it will move sharply away from the existing range. For me, I don’t have much interest in playing a breakdown under 20.50 for a short. My preference on that move is to just let it fall and hope it really collapses down to 17-19 and then step in for some longer term long plays. I don’t see much chance of XOP breaking 22.68 to the upside, but if it happens, there’s probably plenty of time to get in for that ride when it pulls back to test the 22.68 point from above.


The point here is you just have to have a plan and know how to attack the price range. Either play for price to stay within the range, or play for the breakout. Anyone who doesn’t have these two plans separated ahead of time will probably panic in the excitement of the move and choose the wrong option. Know what you are looking for and know what you are going to do BEFORE it happens.


As for individual names, I’m still watching EOG as my favorite play. If the XOP does have a washout, EOG is going to be my primary target. I actually like all the Permian names as well: CXO, FANG, PXD, PE and MTDR. Parsley is probably my favorite choice of the group. I’m also watching SLB near 30 in the services subsector. One other interesting play is VLO at the 86.50 level. It has been probing that level for several months and if WTI does take a dive, the refiners could get a spike on decreased input costs. I think there could be $10 worth of move in VLO.


It’s 65 degrees and cloudy here, looks like it might rain, but that’s not stopping a trip to drink some wine and listen to some live music! Hope the rest of your weekend is great. Good luck this week, and definitely have a plan of attack going in.




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