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Energy Equities Outlook and Trading Plan for October 14-18

Last week’s XOP action went about as expected with price staying within that 20.50-22.68 range. There wasn’t enough force or volume to auction outside that fair value range and this coming week could be more of the same. Price stayed in this range for the entire month of August and we may be looking at the same pattern for the rest of October and possibly some of November.


I think the most disappointing thing for me last week was that the XOP couldn’t even get past the midpoint of the range, even with SPY so close to all time highs. We had FED news (more “not QE”), good China news and even had more geopolitical issues with a tanker being hit by missiles, yet the E&P’s barely moved off of all time lows. The concern is that if we are having this difficult of a time struggling off the bottom with the overall market nearing all time highs, then what happens to energy when the overall market finally rolls over and pulls back?


This week the XOP is going to have to at least try to break above that 21.55 midpoint and make a run at the top of the range. If it fails to get past the midpoint, then we could get that move into the 17-19 range. There could be big supply in the 21.55-22.68 top half of the range and even more supply sitting just above the range in the 22.75 area. The SPY will be key this week. I don’t think the XOP can take out the 22.68 level without the SPY making new all time highs. In addition, the SPY will need to stay above all time highs for the XOP to have any shot at staying above this 20.50-22.68 range.


That Friday daily candle on SPY was a huge warning sign for the bulls, but I think price makes an effort to take out the all time highs this week. Watch that 298.74 spot, there will be a lot of bears playing short off that point. If the market takes it out, there’s not much to stop it ahead of ATH. There is a huge amount of liquidity sitting just over the market and they should eventually go get those stops. Most of that liquidity above the market is buy orders of players who are short.  If the market really is long here and looking for a move up, those orders will ignite a rally. If the market is looking to get short, those orders are the ideal place to enter. Either way, that level is a magnet that probably draws price to it this week. If the market gets there, it will provide a big piece of information for the rest of the month. My opinion is that the market runs and gets those stops and then reverses, putting in a big upthrust before turning down for a pullback into the 280 range. I won’t be shorting it though, as it could just as easily spike to the upside and blow the shorts out. There’s really just no good way to control risk on a short up here.


Looking at related markets, the IWM failed again at that 151 level and got rejected right at the 200 day moving average on Friday. It also gave up the 50 day moving average on Friday, two signals that things might not be so good with the smallcaps. The TLT had a nice pullback to the .618 retracement level and may be getting ready to turn upward again. GLD is also sitting on some support and could be getting ready for another move up. TLT and GLD have been moving inversely to SPY, so watch to see if those two start moving up, which could be a signal that SPY might be getting ready to turn down again.


CVX was an important clue this past week for energy and will continue to be my main watch for clues on the overall sector. It managed to reclaim that 115 level, closing at 116.17. It must stay above 115 for the sector to have any chance at moving up and out of the current range. COP was another clue, as it tested that 57 level, but failed. It will have to take that out and maintain it for the sector to move up. The services stocks SLB and HAL are still sitting right on the bottom and will have to get some kind of bounce to help the sector. Refiners MPC, PSX and VLO are looking good. I didn’t take that VLO 86.50 long trade, as it gapped right past my entry point on Friday. I’d like to have a second chance on that one.


One sector that kind of has my eye right now is the group of natural gas stocks, specifically COG. There hasn’t been a signal for a defined turning point yet, but I’m feeling like these could be ready for a move up. I’m considering an entry on COG this week using 17 as a stop. I’d like to get an entry close to 17.25 on it.  MR is another favorite, but very risky. I’d like to see that one move down under 3 for a scale in.  EQT, AR and RRC are also possibilities, but I like the quality name in COG.


This week’s trading plan – I posted the current XOP chart in the Twitter thread with this week’s trading plan. (That chart is also over on the right side of this page in the Twitter sidebar). I know it looks a little confusing, but it’s basically just a diagram of the points where I will be trading. It’s really just the same 20.50, 21.55 and 22.68 points from last week, but there are so many more options for trades this coming week.


Option 1: XOP opens the week at 21.55 (A) and makes a move down to test the bottom of the range at 20.50 (C). That’s a long for me in that circle C depending on how much volume there is on the move down. I’d like to ride that trade back up to the center circle of the range at 21.55 (D) and then evaluate to see if it might break through or turn back down to take out the lower range.

Option 2: XOP opens the week at 21.55 (A) and makes a run at the top of the range at 22.68 (B), fails and retraces back down to the center of the range at 21.55 (D). At that point it has to make a decision, either 21.55 holds for a bounce and run at the top of the range OR 21.55 fails and it falls back to the bottom of the range at 20.50. If you follow the white lines on the chart, those are the paths I’m watching.

Option 3: After one of the above two trades happens, I’ll then be looking to get involved back at the center point at 21.55 (D). The trade decision there will depend how price was rejected at the top (B) or bottom (C) of the range and the resulting momentum and volume on that reaction.


The circles on the chart represent the only places where I want to enter. I don’t want to trade anywhere outside those decision points because anything outside those points is going to be random chop. I’m once again looking for price to remain inside the range this week, just as it did last week. The trades at the circles on the extremes will be breakout failures for price to fall back into the range. If price does find enough force to clearly break outside the 20.50-22.68 range, there will always be a second chance to get on that ride when price retests the range. Just like last week, I’m not looking to short any break to the downside, I’d much rather let it collapse and then put on some longs in the 17-19 range. If price is clearly strong enough to break out the top of the range at (B), it will usually fade back down and test that 22.68 range top for a long entry. That long trade depends on the volume of the 22.68 retest.


This week should be full of opportunity, just so many ways that this market could go within a very defined structure. That structure makes risk control much easier and the profit targets are much more defined as well. Those things make the risk:reward on each trade easy to work with. It’s a beautiful sunny day here, and it’s time for the Sunday usual. Hope everyone has a great trading week!


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