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Energy Equities Outlook and Trading Plan for October 28 – November 1

Energy stocks finally showed some life this week by starting Monday on the lows and finishing Friday on the highs. It was a nice trending week that could continue toward the top of the range around 22.68. Another decision will have to be made if price reaches that point. The key to the run was the overall market creeping right to new all time highs and dragging everything with it. Some OPEC supply cut headlines and a nice EIA number also helped things. A new ATH for the overall market will be necessary to keep energy moving up. If the market fails, energy probably heads right back down to the lows around 20.37.


I’m still not sold on this latest energy run. For the last few weeks, I’ve been posting that I think we stay in this August range for October and probably part of November, and that has pretty much been the case. The real concern I have with this market is that we just haven’t gotten that final washout that we need to clear the supply and move everything to the hands of longer term holders. I think what we are seeing right now is just shorter term traders looking at an out of favor sector and trying to manipulate some year end gains. The overall market is at an all time high and energy just looks cheap, therefore it’s a target for fast money. The true picture will be revealed when the overall market turns down for the first time after it breaks that 304 level. How does energy react when the fast money heads for the exit? That first market pullback could produce the much needed final washout and capitulation.


The big event this week is the FED meeting and announcement on Wednesday. We sit at all time highs with the FED due to cut again. Seems like we were just here at the last meeting and cut. I’m concerned that Powell does cut, but that he telegraphs that this might be the end of the cutting cycle, or at least close to it. If the market senses any hawkish view, that could top things out for awhile. It’s likely one of those buy the rumor, sell the news events. I won’t be in any trades after lunch on FED meeting day.


One stock that is still bothering me is COP. It failed again at 57 and just seems to be lagging this energy run. Conoco will release earnings on Tuesday morning, so that could be a big piece of information for the E&P’s. Also, the big two, XOM and CVX, report earnings before the bell on Friday. That’s another event where I’ll be playing it safe and moving to the sidelines. If either of them negatively surprise, it could take the entire sector down.


This week’s trading plan: I’m going to post a trading plan for some swing trades, but most of my trading is going to shift back to daytrading for the next few weeks. There just haven’t been enough trades on the swing level, and the ones that have been there I’ve mostly missed. While the big trades are nice, it’s the daytrading grind that produces consistent cash. Last week was a great trending week to daytrade, but I was focused too much on the bigger picture and just didn’t catch the smaller moves like I normally do. I’ve been focused too much on the wrong timeframe, so it’s time to get that straightened out. I’ll still Twitter post on the swing trade timeframe, but most of my actual trading will be on a lower level, which I don’t post.


This week I’m watching three points for swing trades. The first trade is an early week pullback to the 21.55 level. The XOP broke out of that range that it has been in since October 2, but I think it probably pulls back to test that range on Monday or Tuesday. When it does, the key will be the volume on the pullback. If the volume is light, I’ll probably give it a trade on the long side to bounce off of 21.55 and then hopefully have price take a shot at 22.68. The first resistance on the trade is the 50 day moving average at 22.03 (which is likely what stopped Friday’s run). If it can clear the 50ma and Friday’s high, I think demand will pile in and drive it toward the top of the range at 22.68. If it reaches that point, a new trade plan will have to be made. If playing this trade alone, the stop is last week’s VWAP around 21.25.


The second trade is a long trade in the 21.10 area. This can stand as a trade by itself or it can be a combo trade with the trade above. If trade one above fails, there is a second chance to get long at the intersection of the 8 and 20 day moving averages at 21.10-21.15. There is even the option of scaling in at 21.55 long with about half size and then scaling in the second half of the trade if it slides all the way back to 21.10. There were several bounces off that 21.10 level last week, so there should be good demand there. There is also another level below that at 20.95 that I would use as the stop for the entire trade. The profit target on trade is still the 22.68 level. If it takes out 20.95, there’s a good chance it heads for the bottom of the range at 20.37.


The third trade is a short at 22.68. If we come in Monday and this thing gaps up big or we see a big opening drive that reaches the top of the range, I’d definitely be willing to take a shot short. There are a couple problems with this trade, it’s countertrend and it has no real risk control stop level. It’s a very difficult trade and there must be some type of intraday structure to work off of, because there isn’t really any macro structure above 22.68 to play off of. I’d also take a look at this trade on Wednesday afternoon on the release of the FED decision. If we get a spike on that, everything could top out and start down. I’d be really tight on this one though, because this thing could really hurt you if it breaks out and just keeps going. There must be a very risk controlled structure to play off of to take this trade. The profit target on the trade is a pullback to 21.55, with the chance that it falls all the way to the bottom of the range at 20.37. The FED Wednesday and/or the XOM/CVX earnings on Friday are the things that could produce the 20.37 move.


Two other trades that are possibilities: A breakout long trade at 22.68 and a long trade on any washout under 20.37. I still have no desire to short any breakdown under 20.37. I don’t think the chances are very big of either of those moves happening this week. We probably continue to stay in this August range between 20.37 and 22.68 well into November. It would be a surprise to me to see it get outside that range with any type of strong initiative move, but there are some big drivers out there this week with EIA, FED and XOM/CVX earnings, so it is possible. However, responsive trades will likely continue to be the play for the next few weeks.


I’m not sure if anyone is really interested, but I’m going to try and get up a post this week describing how I daytrade and the structure that I watch during the day. That might help clear up some of my Twitter posts. This blog is really just a place to journal my trading thoughts and notes for my own use and organization, but if it helps anyone else out there, then that’s a good thing. It’s fascinating to go back a few weeks on the chart and then go back and read what I was thinking at the time to see how it matches up against the chart.  It makes it really easy to see how and why I was wrong and how to respond to the same setup next time it happens on the chart. It’s definitely a habit that I’d recommend to all traders. Good luck this week and be safe around the EIA number, the FED decision and the XOM/CVX earnings.


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