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Energy Equities Outlook and Trading Plan for November 4-8

The XOP closed the week at 21.85, which was just one penny higher than where it closed the prior week. In the bigger picture, it went nowhere. The high of the prior week (Oct 21-25) was 21.98 and price tried to escape that range this week, but just didn’t have enough demand. It also got squarely rejected at the 50 day moving average which sits at 21.99. I think that’s another sign that what we are seeing is fast money in the sector rather than longer term money. It’s just stuck in this 20.37-22.68 range while the SPY keeps reaching new highs. E&P’s really should have seen more demand this week, but it’s pretty clear that the bigger money still isn’t interested. That can change quickly though.


The week started on a positive note as we gapped out of the prior week’s range on Monday morning and even gave it a second run on Tuesday before failing. Once the rejection was clear, the rout to the downside was on, pushing price all the way down to 20.71 on Thursday’s open. Friday was a relief rally and a fairly strong day as the SPY was just ripping and there were some bargain hunters in energy who were probably waiting for the XOM and CVX earnings reports to clear their risk. The problem for energy was that it couldn’t even regain the highs set on Monday and Tuesday in this bull market. The run on Friday seemed more like faster money just looking for something cheap that they could drive in a full throttle bull SPY run. The key for next week is to see if that Friday momentum continues or if it gets rejected again between last week’s highs and the top of the range at 22.68.


The real key here for the longer term players is what happens in energy when SPY makes that first pullback. It’s easy to make a quick play on energy when the market is running, but when it pulls back, energy might be the first thing that gets thrown overboard in the selling rush. I still think the sector needs an absolute meltdown washout to clear the slate and get shares in the hands of longer term holders, if there are still any of those brave souls out there. As long as fast money controls the sector, we will continue to see this whippy range of short term trades.


In individual stocks, the usual suspects still didn’t show much life last week. CVX was a laggard on Friday, finishing just six cents in the green. Had XLE and energy been out of favor on Friday, there’s no telling how far down Chevron might have been on those earnings. It easily broke that 115 level, but did manage to crawl back above it on a day when the XLE finished up +2.3%. The sector was running, but Chevron wasn’t. My other favorite indicator stock, COP, barely managed to close over that important 57 level, clearing it by a mere 15 cents. That’s not a great momentum sign. See if the biggest E&P can hang onto that 57 mark this week. XOM did look good and it’s going to try that important 70 level this week. The two majors are both going to have to break out if the sector is going to make any run.


One thing that is really starting to become a concern with the XOP is the weighting of the refiners contained in the index. As of Friday’s close, refiners held the top six weightings in the XOP. Throw in CVI and the total weighting of all refiners in the ETF is about 19%. I can’t remember the refiners ever being this heavily weighted in the index in the past. Those refiners are a big reason why the XOP isn’t much, much lower. It’s great when refiners are running up, but keep an eye out if they reverse, as it could take the XOP down quickly since they are so heavily weighted. It’s a difficult situation when 20% of the thing you think you are trading (E&P’s) isn’t really what you are trading. Just be aware.


This week’s trading plan: I’m expecting the E&P’s to make a run toward the the top of the range around 22.68, especially if the SPY keeps on melting up. Bargain hunters and fast money will continue to look for out of favor sectors where they can make quick gains. The only problem with fast money is that they can leave just as quickly as they show up. For this sector to truly start to recover, it needs the shares in the hands of longer term players who will not dump them back on the market at the first sign of trouble. We can only trade the situation we have, not the one we wish we had, so I’m looking for that fast money to hit the sector for some gains next week.


The first two points of interest for the week are the 50 day moving average at 21.99 and last week’s high at 22.32. The area between those two points is where I’ll be judging the momentum and volume to determine whether I want to put on a short trade at 22.68 or let it break and retest from above for a long breakout trade. I really don’t know what’s going to happen, but the only thing you can do is have a plan for each situation at 22.68.


If the sector fails in that 21.99-22.32 area, then the first point of interest on the downside is 21.55. That’s been a longstanding fair value area and now the 8 day moving average also sits close by at 21.59. If the momentum and volume are low, I’d probably try a long trade off of 21.55 for a short term (probably intraday) bounce play. If 21.55 fails, then it’s probably back to last week’s lows of 20.72 or lower, possibly much lower. If that happens, then I’ll just stay on the sidelines until the market shows some defined reversal sign, which might take awhile.


I usually have some feeling before the week starts for which way the XOP will go, but this is one of those weeks where I really just don’t have a feeling one way or the other. I can make a solid case for both directions and that usually isn’t a recipe for a good trading week. Honestly, the last few weeks have been pretty bad in energy for me. I can’t seem to get anything to set up correctly, as the market just whips around in this tight range. There just hasn’t been enough opportunity. With the market running like it is, I’ll probably be trading IWM and KRE most of the week, with XOP getting left on the back burner. Sometimes you just have to go where the clearer opportunity is, and right now that’s in the small caps and financials which appear ready to break out for a big run.


Sorry for such a depressing writeup this week, but energy really isn’t tradable for me in this tight range. I figured this was the way October and most of November would go, but I was really hoping it would turn out differently. I’ll probably be a little more quiet on Twitter until energy can finally break out of this 20.37-22.68 range and start a clear trend, but I’ll still be watching in the background. Good luck this week and keep those stops tight just in case this market makes that much needed pullback.




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