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Energy Equities Outlook and Trading Plan for October 21-25

It was a fairly boring week for the E&P’s and XOP, but that rangebound boredom could be leading to more exciting things on the horizon. It felt like there was some heavy accumulation going on all week at the bottom of this latest range and that someone wanted to establish a big position. The buying continued until about lunch on Friday, and then the buyer just stopped and price predictably fell sharply when the buying pressure was removed. There never was any heavy selling or pickup in volume at the top of the range, just a pullback of buying, as if whoever was buying wasn’t yet ready to break it out of the consolidation range. Those conditions are usually signs that someone is accumulating for a meaningful move up in the future.


Much of my trading is based on Wyckoff formations and his four cycles of market structure. Positions are accumulated, marked up, distributed and then marked down. It is very possible that we are in the beginning of an accumulation at all time lows in XOP.  The buyers will continue to work the market for their new positions, but at some point you can be sure that they will explore the bottom of the range and put in a spring structure to shake out the weak longs and pick up all those stops under the market. That could be what we see this week. I’ve been writing that we could also get a complete washout of this sector, possibly down in the 17-19 range. It really depends on how many stops are down there, how many weak holders there are, as well as how many regular sellers (tax loss anyone?) are going to show as price takes out lows. The action on the next dip will provide some great clues about what we should expect for the next several weeks.


I think we probably see the XOP take out the lows this week and at least test that 20.30 area, but it’s also possible that this thing could way overshoot if sellers (especially tax loss and new shorts) really hit the market hard.  The action in the SPY will also be important this week. Do we put in a top or are we looking at a big run into Christmas? The key on the next XOP dip is volume. I will be much more eager to buy if the volume is really light with low volatility on the way down. If the XOP breaks the lows on big volume with wide ranging candles, I’m probably going to be very cautious entering my trade. I’m normally a short term trader, but I also have an account for longer term trades, and right now my larger goal is to try and catch a washout in energy for that longer term account. I know it’s coming, the trick is the timing. The better the trade is timed, the larger position I can take. I know it doesn’t seem like much, but there is a huge difference in return by catching this thing at 17 rather than 19.


The key to getting this XOP move right is to have a plan. I see people arguing all the time about which trading systems work and which don’t. I’m a believer that they ALL work, even the really crazy ones like astrology. The trading system doesn’t matter. What does matter is that you have some consistent way of viewing the market that you fully understand. If you have a way of viewing the market and creating a plan for what you think the market will do under your trading system, then you also know when the market isn’t agreeing with your system. And when you know that, you know which way the market is really going. Now, follow that market direction. The key isn’t the trading system, the key is having a consistent way of measuring the market so that you know which way price is going. A trading system isn’t a “predictor”, it’s a way to measure reactions, and that’s what ultimately provides you with market direction.


For me, my plan here is a basic Wyckoff accumulation pattern. Some people probably think my method is useless or wrong, but it doesn’t matter. What matters is that under my plan this market should dip down on low volume to the point where it grabs all the stops under the market, tests the sellers’ strength and then evolves into a markup after the spring is put in. The key here is that I’m NOT using my system to ‘predict’, but instead I’m using my system to ‘measure’ the reaction of the market. If the reaction is consistent with my plan, then I have a good idea where the market is going and trade accordingly. If the action goes opposite my plan, then I also know which way the market is going and I can trade accordingly. So many people get confused into thinking that a trading system is a predictor rather than a measurer. Sorry for getting off on a tangent, back to this week’s plan LOL.


Trading Plan for the Week: This week’s plan is very simple and it doesn’t involve any daytrading like last week’s plan did. Sometimes the environment just isn’t right for daytrading and this week might be one of those environments. I’m looking for a test of that 20.30 area and I want to gauge the market reaction there for a long trade and a larger move up toward 24. When the market moves to the 20.30 area, it has to make a decision. Do the buyers show their hand and make a big effort to support the market or do new high volume sellers come out of the woodwork to cause an overreaction to the downside and a possible washout or capitulation? If the volume is high on the down move, I’ll stay on the sidelines and let it fall as far as possible before scaling in. If the volume is light and it turns into a clear stop hunt, then I’ll start scaling in after the 20.30 test. Like I said, the point isn’t to ‘predict’, it’s to ‘react’. This week’s plan is for a long trade, the only question is where the entry takes place. I have no desire to short the market this week. While the odds of a down move might be high, the risk/reward on a short trade is horrible. Just because a directional move has a high chance of occurring, that doesn’t always mean it’s a good trade. It’s the payout odds, in combination with the directional move odds, that matter.


The open on Monday will set the stage for this week’s action. If the XOP gaps down big and then reclaims last week’s range, that’s a good sign for the bulls. If we open Monday and the first move is up for a test of 21, then I’ll probably back off and be really cautious. I haven’t seen any events this weekend that would cause a gap down, but the market wants that level and what better way to grab stops than to do it with an opening gap to panic the market. Give the Monday open at least 30 minutes to settle out before getting involved.


Individual Stocks: CVX is still having a battle at that 115 level, closing the week at 114.74. It looked like it had a chance to recover, but it hit a wall at the 50% retracement level of that big 7 day down move from 125 to 110. XOM continues to struggle in the 68 range and had a big rejection right on the 50 day moving average last week. If the generals aren’t going to lead, then this sector isn’t going anywhere. COP was my other big watch. The largest E&P went right to that 57 level and failed again. EOG and OXY look horrible as they continue to make new lows. Even the Permian darlings of PXD, CXO and FANG are all moving toward lows.


I wish I had two trades back from last week’s plan. The first was COG. I had a feeling the natural gas stocks might show some bounce, and they did. I had a 17.25 entry picked out for COG, but it dropped to 17.28 and then it got away from me. The second trade was the VLO long at 86.50. That one gapped past my entry and ran as high as 91.66. I was thinking there was about 10 points of profit potential in it and it has already moved half that, with more gains likely. I wouldn’t chase it here though.

The service names held up well, even with the lackluster earnings report from SLB. We get HAL earnings on Monday. I’m looking to pickup some HAL if the earnings report causes any kind of overreaction to the downside.


One name that has my eye this week is MTDR. That whole PE/JAG deal really seemed to set Matador off on a spike lower. I’m not sure what the thinking is here, maybe the buyout premium is being removed after seeing that sad JAG deal. It was near 20 after the SA attacks, it’s 12.50 now, and I think that’s an overreaction. I’m definitely interested in this one and will be looking to start a position if it gets caught up in any sector washout. I’m also still watching PE, but not as high on it as I once was. I think they really added some complexity and uncertainty to the picture with the JAG deal. I was looking for PE to test that 13-14 range, and I’ve still got some buy orders down there.


I’ll probably be a little less active this week while I sit and wait for the test of the lows. I DO NOT want to be early on this trade. The difference between a 17-18 entry and a 20 entry is HUGE, both in possible position size and percentage of profit potential on the trade. Most of my daytrading has been IWM and KRE lately, with XOP kind of being a wait and see for a swing trade setup to form. Be patient with energy stocks this week and don’t get caught in a washout.



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