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Energy Equities Outlook and Trading Plan for Dec 16-20

This week is going to be the last week of trading for the year for me. I’m out of here Friday to the warm Bahamas for Christmas. Hope you all have a very Merry Christmas and Happy New Year.


As for the XOP, it really doesn’t feel like it’s in the Christmas spirit this year. More new SPY highs, China Deals, OPEC cuts, EIA numbers and the E&P’s show no desire to do anything at all. With all those great catalysts, they are just dead money stuck in this same range we have been in since August 5. I think Friday was probably one of most disappointing days I’ve seen in energy over the last five months. SPY had a green day, Oil was almost touching that magical 60 price, yet the XOP tested the top of its range and got absolutely smacked back down. Total rejection. Crash and burn. It barely managed to hold the middle of the fair value range at 21.55.


If we dig a little deeper into the individual energy components, the problems start with the leaders of the sector. XOM and CVX both failed at very important points on Friday. CVX failed at that 119-119.50 area, which it has tested many times since August. XOM failed at that 70 level which has been significant supply since August. Both of those stocks had every opportunity to break out on Friday (especially since they are two large DIA components and SPY components). The fact that they ignored the larger market and failed so badly while the overall SPY and DIA were green is a big relative strength clue that things might not be so good in energy. The real problem for energy is what happens when the overall market tops and has the next pullback. If they can’t even run with a market making new highs, how bad are things going to get when heavy selling starts?


During this past week, the important points for XOP were the middle of the range at 21.55 and the top of the range at 22.68. The XOP spent Monday, Tuesday and Wednesday trying to chew through the 21.55 level, which is acting as point of control for this range which began in August. It managed to break through and looked pretty good on Thursday making a run as high as 22.31, which should have set up a continuation to the top of the range on Friday. We got a nice open on Friday and price ran to within 10 cents of the top of the range, touching 22.58 before totally collapsing. The only positive for the day was that it held an important point at 21.68. That point was the Tuesday and Wednesday highs, which is now acting as a balance point. That point will be the focus for the upcoming week. If it holds, there could be another run at the top of the range. If it fails, the most likely path is all the way back down to the bottom of the range.


I guess the real question is ‘why’ did it fail? I’m just not sure. I thought maybe tax loss sellers were hitting it hard, but I’m not sure that tax loss selling is a valid reason this late in the quarter. The only reason that makes a bit of sense is to look at oil prices. WTI reached the 60 level, which has acted as the top of its range since July. While oil and E&P’s haven’t been moving in exact lock step, they have both been respecting the top of that 5-6 month range. Both seem to have gotten rejected on Friday. Maybe $60 is as good as anyone expects oil to get. Maybe it’s all downhill from here in oil, and therefore the E&P’s topped out. Or maybe things just got too extended this week and needed a breather before taking another shot at the top of the range. Who knows. All we know is that price failed at a very important upper boundary while the rest of the market looked good. Don’t ever ignore relative strength clues.


Trading Plan for the Week: Since I’m leaving on Friday, I’m a bit limited in the types of trades I can take this week. My favorite trade is going to be a long off of the 21.68 point first thing on Monday. I’m hoping for an open near Friday’s close and a light volume pullback to test that 21.55-21.68 range. I want to see it hold and then hit it hard once it climbs back above 21.68 and hopefully head back up for another test of the top of the range around 22.68. I might possibly scale in small starting at 21.68 on the way down and then add as I see it holding any significant intraday low, and then really hit it hard as it reclaims the 21.68 level. It really doesn’t matter how you enter on this one, the 21.55-21.68 range either holds or it doesn’t, just be sure to have stops in place. If I can get a price near 21.68, there’s the possibility of about a dollar of reward up to 22.68. On the downside, I’m cutting it at 21.30 for a total risk of about 38 cents. It’s a decent risk:reward on the trade, especially if I can improve the entry a little closer to 21.55.


Edit: I just posted the chart for this week’s price paths and trade locations and wanted to point out one more trade possibility. If the XOP makes a run at the top of the range early in the week, I might give the breakout trade a try if there’s a decent sideways buildup at the upper boundary. You can see what that might look like on the chart I posted on Twitter, it’s labeled as point “C”. Everything will need to be perfect with this situation to try it, but just thought I’d point it out.


I won’t be doing any swing trades or longer term trades through the rest of the year since I’m not here to monitor them. The only thing I will be doing is putting some buy orders in the 17-19 range while I’m gone. Maybe we get a replay of last year’s Christmas massacre in energy. Would be nice to return from vacation to an XOP 17 position.


Anyway, that’s really all I’m looking at this week. It’s mostly just a week to wind it down and work on some record keeping and review the trading journal from the last few months. Hope everyone has a very Merry Christmas and I’ll see you all in the new year.




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