Energy Equities Outlook and Trading Plan for February 3-7
Feb 2, 2020 Trading Blog
Sometimes certain areas of the market reach a point where nothing matters except pure emotion. Energy stocks have reached that point. I see all these guys preaching and posting about the “oil fundamentals”, supply numbers, demand numbers, OPEC, blah, blah, blah. Those guys are analysts, they are NOT traders. One thing I’ve always noticed about the fundamentalist types is that they always have to have a reason for WHY things happen, and that need always makes them late to the party. Sometimes there just isn’t a reason, there’s no cause except pure emotion. It’s pure fear. It’s pure hopelessness. It’s Jim Cramer screaming into your television telling you that oil is dead. That’s where we are now. And that’s where opportunity lives.
Opportunity is rarely a neat and tidy concept, nor is it easy. Opportunity is scary, messy, confusing, uncertain and risky. Opportunity is hard to see because your mind directs you away from such negative concepts for your own protection. The masses rarely take advantage of true opportunities. They can’t see for themselves. They wait for others to get on board first. They wait for confirmation. They wait for the safe play. They wait for Jim Cramer to tell them the coast is clear. They wait and wait and wait. And then that opportunity is gone. Energy is about to give one of those opportunities. You can follow the herd and turn away and protect yourself, or you can take a chance for a big return. I’m stalking a big trade in energy soon, as I believe this is the best opportunity I’ve seen here in a very long time. But let’s also be realistic, not every opportunity turns out to be a winner. Always be smart and protect yourself, size positions appropriately and use protective stops.
The Future for Energy Stocks
I think this entire sector is setting up for a run in the next couple years. There was never the M&A wave, it wasn’t necessary. The weak simply died off or are in the process of dying, leaving the strong still standing. Oil will never go away, there simply isn’t a realistic replacement. Green concepts are all the rage right now, but they aren’t practical, they are hype set forth by the climate changers, the liberals, the tree huggers and save the world types. Yes, some companies throw a few cents on the dollar at these concepts to keep those groups away from the boardroom, but that’s really about the extent of how far it goes in the long run. In the end, it all comes back to oil. If it didn’t, we wouldn’t have troops in every ME country. There’s no other reason to be there, other than oil, is there? Trillions are being spent in support of oil and I doubt a few $60,000 Teslas are going to change that. I often drive through Pennsylvania and I see these $5 million dollar windmills just sitting there doing nothing. It’s a show. Political correctness is loud and noisy and often drowns out the underlying majority. Oil is the majority, and will be for a long time.
I think one of the things that many trader types don’t understand about energy is the length of the cycle. This isn’t an industry that changes on a dime like technology. You can’t just write some software and be up and running. It takes years. The actions of the last few years are the seeds of oil price in the coming years. All the spending cuts, the shelved projects, the wasted gas burned off for free. The Tier 1 acreage drained and used up. You don’t just get that stuff back or start it up at the snap of a finger. There’s a really good chance that oil price could drop soon to a level where even more projects and drilling gets shut off, and that is just more powder for the coming explosion in prices. I hate to say it, but OPEC may have played their hand perfectly. America had the opportunity to develop their energy for the long term, yet they decided to pump it out as fast as possible and sell it for short term pennies. It’s not an endless resource, and when it declines and runs out here, OPEC will gladly jack the price and be back in business again, at our expense. The real trick here is timing it right. Anyway, if you are wondering why I’m bullish long term and why I bother to stick with trading this sector, that’s why. There’s going to be some excellent trading here in the future.
Overall Market View
Over the last few weeks, I’ve been warning of the transformation of this market into a distribution phase. I’ve called these final few months a parabolic type of stealth climax. However, now I’m starting to see concrete examples of buying climaxes, and the most obvious ones are in the most important stocks. These buying climaxes become more obvious if you switch your chart from share volume traded to dollar volume traded. Take a look at INTC, AAPL, MSFT, FB and AMZN. All of them have climax days in the last few weeks. Those climax days can sometimes be your only warning that a distribution is about to begin. The financials have also started to show a few buying climaxes in AXP, JPM, C, MS and V. Keep an eye out for more of these buying climaxes as larger companies keep reporting earnings. These climax days aren’t positive events, they are big holders capitalizing on the hype and dumping on the retail traders that fall for the hype. It’s the first sign of larger holders heading for the door. As distributions develop, they trade sideways until everything has been sold out and then the bottom falls out. Be aware.
As for the whole coronavirus event, I still think this is going to be a great buy the dip opportunity. It’s going to end up being a psychological event, not a physical one. You just have to ride it out and be patient for the dip to reach an emotional climax and buying point. Currently, there is no resolution. All I see is “Twitter experts” saying “I told you this was going to be huge” or “This is nothing, it’s the flu”. There’s allegedly 16,000 cases and 300 deaths. The flu has already killed 5000 in the US in January. Corona seems pretty much like the flu to me, but I don’t know, you don’t know, nobody knows how this is going to turn out. One thing that does scare me a little from a psychological effect on the public is that I’ve seen a couple reports that the virus is being treated successfully with HIV type drugs. If this gets twisted in the media, people could make a connection that isn’t there. This is NOT HIV, but that word simply strikes fear in everyone. This has actually been out there for awhile, as I remember seeing one of the Chinese doctors treating himself with an HIV type cocktail, not sure why it took the media so long to latch on to this. No matter what sector or instrument you are trading, just make a plan, be patient and let the market tell you what to do. Don’t try to guess.
Energy Week in Review
So what did we see this week? We saw a good bit of panic, both in energy and in the overall market. We seem to be getting somewhat of a perfect storm in energy. The question for me is whether what we are seeing is a short term reaction in oil due to virus scares and temporary consumer disruptions OR if the decline is that first signal of a larger economic slowdown or crisis like we saw in 2008. Commodities are usually the first indicator of slowing growth. Things like X, AA, FCX, NUE, CLF, DD, DOW. Copper has been absolutely crushed for the past 12 days. It’s the raw material building blocks that slow when the supply chain clogs and finished products aren’t selling. Right now, all those commodity types are getting hit pretty hard, along with oil. That signifies a larger growth problem, but it’s still too early to make that call. Just keep an eye on other commodities to see if they move with oil.
The biggest event (other than coronavirus) this past week was the release of earnings by Exxon and Chevron. The reports weren’t horrible, but the stocks got punished. Phillips 66 (earnings) and Valero also got hit hard on Friday. It seems that the refining, chemical and midstream parts of the sector were hurting. The actual upstream oil production parts of the business didn’t really do as bad as the stock price drop would suggest. I think that is also why the XOP held up a little better than the majors on Friday. There is possibly more downside to come in the two majors. There’s a good chance that the big demand in XOM is sitting down in that 56-58 area, which marked those lows back in the 2008 meltdown and retest in 2010. As for CVX, I think there should be some initial demand in the 100-102 area. The scary thing with these is what happens if those areas don’t hold, because there’s nothing below that to prevent a total collapse. Also, take a look at RDSA and BP, they are already breaking down past major support areas. I guess we will evaluate the bounce in these two demand areas for XOM and CVX and go from there.
Technically, the XOP should have been hit harder on Friday. SPY was down almost 2% at one point, several airlines were pulling flights and the corona hype was in overdrive. Combine that with bad earnings and this thing could have easily been at 18. It was certainly setup to panic in an area with no market structure. Thursday’s low was 19.15 and we managed to hold that low on the close Friday at 19.16. The market made a few attempts at 19, but each time held strongly there. There were buyers in that 19 range. We’ll see if they show up Monday. One thing to watch this week is some market manipulation attempts by OPEC. They have already discussed cuts and moving the meeting up to early February, so maybe this was an underlying theme that was holding XOP up a little on Friday. I think they are making a huge mistake wasting their ammo this early in the coronavirus game, but that’s just my opinion. If things get really bad after they make a cut, then what can they do? Let’s see what they do this week.
Trading Plan for the Week
I’m not daytrading energy this week. My plan is to find the point of panic and continue with the longer term XOP plan from the last few weeks. My original plan was divide my money for this trade into four pieces and start in at 20 and buy a quarter position every dollar down. I pulled the plan at 20 after the coronovirus scare and now we are at 19. I did pick up a small starter position at 19 on Friday, but not the full quarter I wanted. Having even a little skin in the game focuses me on price action. It isn’t always the best way to go financially, but that’s just the way my brain works, I simply focus better if there is something on the line. The plan for this week is to complete that first quarter position on Monday or Tuesday if we get a nice spike down on more virus scare. My goal on this entire position when I first created this longer term plan was 18.50, but I might get close to that price before I even fill the first quarter of my order. If I can get the first quarter fill at 18.50, then I’ll probably go for the second quarter on any break under 18, depending on how much momentum there is.
The problem down here is that there isn’t any structure to work off of, which makes it very difficult to create a longer term plan. This is one of those weeks were each day will have its own unique plan. I’ll post my daily plan on the Twitter feed each day before the market opens. The key, as always, when trying to catch a turning point is to NOT BE EARLY. I’d rather be late than early on this kind of trade. At least after the panic happens, you have a point to trade against and you can pick up the position with a little more risk control. But you don’t get the best price that way. Sometimes you just have to play it by ear and that looks like the way it’s going to go this week.
The one thing that does concern me, and I was fearful of this on Friday, was that once this turns to the upside, it could rip a quick 10%. I’m sure there are a lot of retail shorts that piled in Friday. I really thought those guys might get trapped, but they didn’t. If XOP does start moving up, watch 19.57 (last week’s VWAP), 19.90 and 20.07. If price can get above 20.07, the bounce could be on back toward the middle of the range at 21.55. The 50% retracement of this down move that started from 24.50 is 21.70. The bounce will likely be shorts covering urgently, but it will also be traders like me who don’t want to miss the longer term long trade. If the sellers haven’t sold yet, any run back toward 21.55 isn’t going to entice them, so there may not be much supply available on the bounce.
The XOP plan is fairly simple and wish I had more to write about that trade, but there just isn’t much to it, just have to be patient and get the good entry. When this coronavirus started, I posted that this was going to be a great buy the dip opportunity, and I still feel that way. As most of you know, I’ve moved my daytrading over to the IWM. That ETF has been a great trading vehicle lately and has moved in nice smooth trends. IWM is coming up on a very big level in that 158 area where it broke out back in December. The small caps never got the breakout that the SPY and QQQ did and they are right on the verge of failing completely. IWM and energy are two areas that are very consumer sensitive and often they move together, so keep an eye on whether IWM breaks down this week and fails under 158. That could be a sign that oil has more downside to go.
One positive thing, the Chinese did build that hospital in 10 days! I’d really like to have all that time back that I spent watching the “hospital building live cam”. Pretty amazing accomplishment. Good luck this week, be patient and be safe.