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Energy Equities Outlook and Trading Plan for December 2-6

It was another week of decay for the XOP. The overall market was making new highs, with the SPY touching 315, yet the E&P’s closed a few cents from all time lows. The previous week set up a rising wedge pattern, so the breakdown wasn’t totally unexpected. The issue now will be what happens on the open this week as we test that 20.28-20.32 area. Does demand show up or does this thing just totally washout down to the 17-19 area, or lower? I think the key this week will be what happens with the SPY. If we get any significant pullback, energy probably gets crushed, especially the commodity itself.


I didn’t take any intraday energy trades last week, as there just isn’t any significant reward in this tiny range. As I wrote last week, the XOP has become untradable on an intraday basis for me due to the lack of range. I’ve switched all my daytrading over to the IWM, which managed to move straight up about $5 last week. The only thing I can do with the XOP down here is to try and catch some multiday swing moves.


The only other option for me in energy is to switch to the XLE for intraday trading. It still has some decent range up near 60. I also think that if the longer term players do come looking for energy, they will only go for the larger cap, higher quality companies. The only negative about trading the XLE is the large weighting of XOM and CVX in the ETF. For me, it’s actually easier to trade either Exxon or Chevron individually rather than trading the XLE. If the XOP continues this slow decay, I’ll probably start posting more on the XLE and individual names. I don’t really like that, but you have to adapt to what the market gives you.


As for individual names, I’m really not seeing much opportunity. I’ll be watching XOM in the 66-67 range, CVX at 115 and COP at 57. The service companies are an attractive trade possibility. I’m watching SLB at 37.50, HAL at 21.50 and NOV at 24.50. If the sector does somehow make big reversal, the service companies might be the first movers.


Oil itself took a hit toward the end of the week, but those kind of moves in very low holiday liquidity are hard to trust. I want to see if the bounce will take out that 57-58 area. The strength of the initial bounce on Monday will likely set the tone for the entire week. If the bounce is weak and/or gets cleanly rejected at 58, oil will probably breakdown and take XOP with it.


Trading Plan for the Week – So what is available this week in energy? The simple answer is “not much”. There’s really only one or two trade possibilities this week. The first trade is a reversal trade on the Monday open. If the XOP gaps lower or makes a sharp move lower on the open, I’ll be waiting for some type of selling climax. Let it bounce off that high volume climax, evaluate the strength of that bounce and then let it come back down and retest the climax low. If the volume is low on the retest, then give it a shot long with a stop just below the intraday low. If the volume is high, then just step aside and let it fall. The more conservative entry on that trade is to let price get back inside Friday’s range low and then enter, while using the intraday low as your stop. That method requires a little smaller position sizing, but the confirmation entry of getting back within range somewhat offsets the risk on the climax retest entry.


The second trade on the XOP is to just let this thing totally collapse and hope that the last players capitulate. This might take 3-4 days of down action and could reach the 17-19 range. It needs to be on absolutely huge volume. If the volume is light on the washout, then I’d be hesitant to step in.


The goal on a capitulation is to get a majority of the shares into stronger hands who will hold the shares for the longer term and not dump them back on the market every time there is a bump in the road to recovery. As long as there is heavy supply out there, the scale can’t tip in favor of the bulls. All that supply needs to be locked up for at least a year in the hands of holders who won’t dump it. I think there is some price point at which longer term players will return to the sector, but I just don’t know where that price point is. I think that point might be somewhere around 17.


If this sector gets down in that 17-19 range, I’ll be looking to start a long position. My scale in for entry will depend on how much volume there is on the move down. Higher volume will enable a quicker scale in.


I also want to throw a quick mention in here about GDX. I posted on it in the Twitter feed a couple weeks ago for a nice trade off of 26 up to 27.40 and then for a reload trade down in the 26.20-26.50 range. It ended last week at 27.10 and there could be a great long trade if it can break the 27.50 level. If you pull up a weekly chart, the first thing that hits you is the almost perfect cup and handle type setup. That falling wedge starting back in September could break for a huge spike upward past the 31 level. If this thing breaks 31, it’s off to the races for a monster long trade. I’m going to be looking at this first thing Monday for a longer term trade using 26 as my stop for position sizing.


Sorry for such a depressing writeup, but there’s just not much available in energy this week. The key is to let the XOP test the lows and see how it reacts. I’m hoping for a total capitulation, but fear that we simply get more of that low volume, slow bleed downward to new lows, and that’s just not tradable for me.


Also, as I posted last week, I’m limiting my Twitter posting. I just can’t take the constant barrage of negativity anymore, it just isn’t worth it and it’s not healthy. I’m still around though, so if any of you guys have any questions, just send a DM. Good luck this week and be safe if you try to catch this falling energy knife.

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