Weekly Energy Equities Outlook and Trading Plan for February 10-14
Feb 9, 2020 Trading Blog
Sometimes things seem exciting, but when you look back nothing really happened in the bigger picture. The XOP opened the week at 19.17 and closed the week at 19.21. The only real accomplishment this week was that the long downtrend from 24.50 seems to be slowing and possibly trying to make a turn. I don’t think we have made that final low, but we could be getting really close.
I base much of my trading on Wyckoff principles and this past week the XOP made a really interesting formation. The E&P’s have been in a range since August which can be described as a Phase B according to Wyckoff. This is really just a fancy way of saying that it’s consolidating, either an accumulation or a distribution. Price tested the bottom of that range several times over the last six months, specifically around that 20.37 area. On January 27, price broke through the lows of that range and began to form what Wyckoff calls a ‘spring’. A spring is simply a test of the lower range boundary to see how much selling pressure is still in the market or how much demand might be sitting below the range. If this spring does not draw any sellers out (traders putting on new shorts or stopping out of longs) then the formation usually leads to a reversal, and sometimes it can be really large depending on how big the preceding accumulation range was.
Getting back to the XOP, the break on January 27 continued until Monday, February 3 where it found some decent support at 18.77. Tuesday and Wednesday created a nice bounce up to 20.07 where sellers once again showed up. Thursday and Friday saw price drift back down and touch 19.07. So what we have is the spring move down to 18.77, a bounce and then a retest of that low at 19.07. So far, the spring is holding which suggests price should reverse back into the consolidation which began in August 2019. I do have some concerns about this pattern though. The volume on the retest should have been lower, which would have indicated that the sellers are getting weak and running out of supply. The volume on Thursday and Friday wasn’t extremely heavy, but it wasn’t light either.
So at this point, we have the spring and retest and waiting to see what develops. Monday will be an important day for this pattern to complete. The important points will be 18.77 and 20.07, as well as the volume on any move toward either of those two points. No other price level matters this week and you don’t want to get involved anywhere in between those two points. Let the pattern play out and let the market tell you which way it is going. Don’t try to outguess the pattern.
Overall Market View
The strength of the SPY is absolutely amazing, especially when you consider the context of what is happening in China. It’s almost as if US equities have turned into the world’s safe haven. As China pumps stimulus into their economy, much of that money seems to be finding its way to the US. The “TINA” (there is no alternative) concept seems to be getting stronger and stronger and pulling money to the only place that it can get a decent return, which is US equities, technology to be specific. The only problem with this is the counterintuitive move that could happen as China solves the conronavirus problem. Once problems in the rest of the world ease, the TINA concept suggests that more alternatives will open and money will drain from US equities back into beaten down opportunities in China and elsewhere. Don’t be surprised to see the market possibly pull back as conronavirus issues ease.
While SPY and QQQ continue to make new all time highs, the IWM still lags and this is a huge concern. It’s also a tell that energy may not be ready to bounce yet. The IWM measures domestic small cap stocks which are heavily influenced by the economy and interest rates. The ETF is a very good gauge of economic strength of the US consumer. Energy is very similarly driven with consumers filling their gas tanks to get to their job or the mall. While the SPY was strong this week, the IWM failed to reach the January highs and also sold off significantly on Thursday and Friday, much like XOP did. Keep an eye on the 168.15 level on the upside and the 160 level on the downside this week for IWM, as a break in either direction could be a big clue about the future direction of oil.
WTI is sitting right on that 50 level and closed this past week below those May, August and October downward price spikes. That close suggests that there may be more downside coming. Price has moved from ~65 to 50 and there was almost no bounce at all this week at that 50 level, there really just wasn’t any demand. If there is anymore bad news, this probably takes out 50 this week and makes a run at 45. Buyers are going to have to show up early Monday or this thing is in real trouble. There is some support at 50 and it SHOULD bounce, but with the given context of world events there is a good chance that it doesn’t. If it does break down, see if the XOP diverges at all with oil price.
Individual Energy Stocks
It’s finally time to add XOM back to my daytrading list. I haven’t done much daytrading in energy since Christmas because the range in the XOP is just so small that it isn’t worth the spread and commissions. I’ve wasted a good bit of time waiting on this longer term XOP swing trade and I need to get back to energy on a shorter timeframe. Exxon is the best way to do that. XLE is too difficult to daytrade and most of the other energy stocks are in the same boat as XOP with low price and no range. If you notice that I’m adding XOM to my Twitter posts, it’s because I’m daytrading it.
As for Exxon and Chevron, they may be getting close to a bottom. I think the 56-58 area for XOM will find demand and the 100-102 area for CVX should also find demand. Once these finally bottom out, they could be good traders on the long side for the next few months. It’s so much easier to daytrade a stock in a longer term uptrend.
The biggest price direction clue in energy this week could come from the refiners. They have just been crushed over the last several months. As oil prices drop, the refiners normally increase in price as their input costs (crude oil) fall. WTI has dropped from 65 to 50, yet the refiners have seen big losses. That’s a good indication that the problem is on the finished product demand side, not the raw material input supply side. It’s difficult to tell exactly why that product demand is falling right now. It could be coronavirus related, but it could also be economic weakness related and it could have begun well before the virus appeared. If you take a look at VLO, MPC and PSX, those charts topped out in November and didn’t participate in the Iran WW3 spike like XOP did. Their steep fall is likely a combination of the oil spike to 65 AND falling demand from a weaker economy. Keep an eye on the 86 level for VLO and the 57 level for MPC.
COP had earnings this past week and took a pretty big price hit all the way down to 56.43. That’s not what you want to see from the largest E&P. Most of the other E&P’s are hovering at support along the bottom boundary of the range from August. The two most tradable right now are DVN (earnings Feb 18) at the 21 level and EOG (earnings Feb 28) at the 71.25 level. Those two spots offer very defined stops and good upside with limited (and defined) risk. MTDR is a Permian stock that is also looking attractive at the 13.50 level.
Trading Plan for the Week
I’m still waiting to establish the longer term swing trade in XOP. I still think we get a coronavirus scare here in the US and that’s probably going to be the entry opportunity on that longer term trade. There might also be a shorter term opportunity this week.
I’m watching the open Monday for a test of the 18.77 range for a possible long swing trade. If the Thursday-Friday pullback is indeed a retest of the spring, then we should get a nice bounce if 18.77 holds. I’d like to see very light volume on the pullback Monday. If it looks like it’s going to hold, I’ll be getting long with a stop under 18.77. That’s a tricky stop though because everyone is going to be putting a stop there, so some extra leniency might be necessary to stay out of the noise. If 18.77 holds, I think this can make a run at 20.07 and possibly the middle of the range at 21.55. If it does reach 21.55, I’ll likely cut the trade because I think it probably pulls back to test the bottom of the range again around 20 one more time, at which point the long trade can be put back on if possible.
If we get an up move on the open Monday, I’m not chasing it. I don’t really see any trade entry ahead of 20.37, as the reward to risk just isn’t sufficient. Also, I have no desire to short this market in any way at all. That goes for energy and the overall market. I think the shorts are just fighting the trend in a big way. It’s just not time to get short yet, wait for the market to give you the signal.
I’m also back to trading XOM this week. It’s been a long time since I’ve traded it, but it can be a really steady and low volatility intraday trader at this price level. Choosing XOM isn’t a knock on CVX either. I think both are good, it’s just that CVX is very hard to daytrade with the wide spread and jerky movement. If there is opportunity in CVX, I’d have no problem putting on a position there in the longer term. As for XOM, I’m watching 61.65 on the upside and 61.06 on the downside. I’d like to see a test of 61 for an intraday long trade. The 61.30 (last week’s VWAP) should be an area of interest early this week. Eventually, the sellers from the earnings report will thin and this should start moving up. On the longer term, there should be major support in the 56-58 area if things get bad in energy. If it dropped down that far, I’d probably be willing to put on a longer term swing trade, but for now my intention is just to daytrade this stock as a proxy for overall energy. I think that once the tide turns on the sentiment in energy, XOM and CVX will be the first stocks that funds pile back into. And yes, I keep seeing the green crowd against fossil fuels, but I’ve seen this many times in the past and it never lasts. Just wait until recession hits and energy prices drop and gas gets way back under 2 bucks, nobody will be on the EV train anymore. No matter what the fanboys say, TSLA isn’t going to save the world.
Pretty simple plans for the week, a little more energy focused than usual for me. I’ve been doing most of my daytrading with IWM, but I feel like a storm is brewing in that one and it has exceeded my level of comfort on volatility and overnight gaps. I’ll come back to it, but energy looks a little more tradable lately. Also, don’t get complacent this week. I know SPY looks good at ATH, but that coronavirus wildcard is still out there. Don’t get in too deep on your positions. The buy the dip opportunity was there when this virus started and if you didn’t jump on that it’s now gone, don’t chase it. Just be careful out there and use those stops. Good luck this week.