Energy Equities Outlook and Trading Plan for November 25-29
Nov 24, 2019 Trading Blog
As the overall market keeps making new highs, the E&P’s just keep decaying to new lows. The XOP has been my best friend for years, but I think the relationship might be coming to an end. As any short term trader will tell you, there has to be range and volatility to make money. The XOP has lost almost all range and volatility on an intraday basis, making it nearly untradable at these prices, and there doesn’t appear to be any great spike back up in price happening anytime soon.
We got the test of the 20.37 low on Wednesday morning, but the bounce wasn’t very impressive, topping out around 21.25. It should have easily traded back up to fair value at 21.55. The fact that it showed no real demand makes me think this is probably headed even lower. At this point, I just don’t think there is any reason to be in these if you are a longer term investor. Eventually, there should be some type of washout down to the 17-19 range, but even then I’m not sure how much reward is available in this group. Sometimes things just die out as the world moves on. I’m sure at some point oil will finally get that move back up, but there’s also a chance that it never really gets much above where it’s at, and an even greater chance that it falls under $50 when the inevitable recession hits.
It’s one of those situations where if you have a pile of dollars that you have to invest, why in the world would you waste that pile on this sector when there are so many other opportunities out there in the market? I think that if any larger players do choose to take a chance on energy, that they will only play the larger, safer names. The days of speculation in small, risky oil startups is probably over.
While the longer term looks bleak for energy, there will still be opportunities to trade them on a short term basis. This sector can rip on occasion when all the right factors line up. The problem is the long dead periods that you have to sit through between those rips. For me, this sector is going to move to the back burner for awhile. I’ll still be looking for some of the swing type moves, but daytrading this sector just isn’t as attractive as it used to be. Even the individual names have suffered the same fate, most of them falling under $25 and showing no tradable range. There used to be about 40-50 names that I could trade on an intraday basis, now there might be 12-15 names left.
Unfortunately, I’m going to be moving all my daytrading to the IWM for awhile. I’m sure energy will eventually make a comeback, but there are just better opportunities out there for daytrading. Having said that, I’ll still be watching the sector for swing trades which I’ll post here.
Trading Plan for the Week: We’re stuck in this 20.28-21.55 bottom half of the range right now and I’m not sure which way this breaks. My gut says it breaks lower and gets that much needed washout into the 17-19 range. The controlling factor over the next few weeks will be the SPY. It has been ripping to new highs almost every day, yet the XOP sits at lows. I really think this sector is going to get crushed when the SPY finally makes a reversal and pullback, especially if the cause of that pullback is recession or economic slowdown related.
There are really only two trade possibilities this week. Either let this thing fall and see how it acts on the next test of the lows at 20.28 and then buy it for a bounce or let it break above 21.55 and get long hoping for a run back to the top of the range at 22.68. Neither of these trades is very attractive because the reward on both is pretty small, probably a dollar or less.
The only other move I’d consider this week is to just stand aside and let this thing burn out. Let it take out the lows and hope the SPY turns down at the same time causing a complete capitulation and then possibly start a slow scale in for a long play. It’s really hard for a sector to get back into a bullish trend until a majority of the shares get back into strong hands who will hold for the long term and not dump the shares on the first sign of trouble.
As you can see, I’m pretty down on energy right now. For me, it’s not strictly the fundamentals of the sector itself, it’s more that the sector has gotten in such bad shape that other sectors are looking that much better with more opportunity. The way I trade requires range, which energy just doesn’t have right now. Energy used to be a constant source of opportunity, volatility and tradable movement, but times have changed. Have to change with them. I’ll return to the sector when it can manage to get back above 22.68 and show that the lows are in for a longer term trend.
Since I’m moving energy to the back burner until it can recover, the holiday month of December is also a good time for me to move away from Twitter for awhile. I keep saying I’m going to give it up, but I always seem to come back to it out of boredom during the trading day. I’ve noticed lately that it has started to affect my mental calmness during the day, and anything that affects my trading isn’t a good thing. Just seeing all the negativity and the way people treat other people is disturbing. I need a break from all the impeachment, boycotts, shootings, etc, etc that bombard me all day. It just isn’t healthy. I’ll post charts a few times a week, but I’m going to try and limit things for awhile.
Good luck this week. Keep those stops tight and be safe.