Thoughts on this Week’s Decline and Trading Plan for Friday
Feb 27, 2020 Trading Blog
What a crazy couple days for energy and the market overall. Lots of different currents. Tried to list some below. It’s not trading advice, just my way of getting all my journal thoughts together, maybe it helps someone else, not sure. Karma, you know?
First of all, this is where I’m at: XOP at 15.92 (3/4 of the way into the full position, large position), XLE (small 1/4 position at 49.60), XOM (small 1/4 position at 53) and SLB (small 1/4 position at 29.56).
I started watching for this XOP trade way back in the 20-22 area and stayed fairly patient waiting to get involved. Entries at 17, 16 and 14.75. I preplanned for a final price of 15.50 on the entire XOP position (17, 16, 15 and 14 planned entries). That entry approach seemed good considering we were sitting 23 just a month ago. I figured energy was due for the washout, but 40% from the January high? I didn’t see this big of a SPY drop coming either. Nobody saw this. If you say you saw a 12% market correction in 6 days coming, just stop, you are lying LOL.
Anyway, I’m probably going to be early on this trade and take some serious heat. I knew it could happen and sized for it, but it still isn’t a good thing or much fun. I’m going to monitor the 14 area for the last quarter entry on the trade, but if the momentum really gets bigger, I may pull that order and try 13.50. Once I’m all the way in there, it’s just time to let the trade work. Could it drop below 13.50? Definitely. But I really don’t think this is going into that 10-12 range. I could always be wrong, but I’ve also scoped out some other trades I’d very much like to take in that range. Nothing to do Friday except see how 14 acts.
I’ve got some other trade ideas, but first some SPY thoughts to give these ideas some context. I think the low for SPY is 271. I posted that number on Twitter Wednesday when we were at 316 and I’m going to stick with that number. Although I’m going to add that I never expected the market to move this fast to 295 where we stand afterhours. I was thinking like days, not hours. We have given up the entire run since October in SIX days. People were up 20% in their 401k’s. Gone. Think about having a $500,000 account and now a month later you got $400,000. Some people’s dreams got crushed. And it could get worse if we go 271. If 271 breaks, then it could be a straight shot to the lows from Christmas 14 months ago. That $500,000 account would be $300,000 at that point. Think that kind of move won’t crush stock market sentiment?
So after that XOP trade executes, and given the SPY 271 outlook above, I’ve got some other trade ideas if we do dip to that 10-13 area. I started closely following XOM again a few weeks ago and that was good timing. I’ve got a 1/4 position at 53, but seeing it at 49.82 with the SPY looking to gap down, I’m definitely interested in sizing that trade up. It’s Exxon under 50. I can’t pass up Exxon under 50. I mean we are talking 56 during the 2008 financial crisis. Could it drop down to the 2000 Dotcom era 45? Possibly, but I’ll take that 20 year low risk all day. I’m looking to double up and get in another 1/4 position at 48. I’d hit another 1/4 if we test 45. Is the world going to quit using oil? Probably not. Buy the highest quality and put it in the long term account. That dividend has to be huge right about now.
Adding that trade would leave me with XOP and XOM large positions. If we go SPY 271, I’m also willing to spread some bets around on large cap quality energy through the XLE. I’ve got a 1/4 position at 49.60 (not a great entry, I know). It’s sitting 45.13 afterhours today. 2016 low was 49.93 and the 2008 financial crisis low was ~40. We are sitting right between those two events at 45. I’m going to add 1/4 at 44 and another 1/4 at 40. Maybe the world never uses another drop of oil again and I lose this trade OR there could be some serious upside long term. Sometimes the longer term offers some great opportunity if you can sit tight. If for some reason we break to the absolute lows at at 37.40, then I guess I’ll throw in that last 1/4. If that breaks, the world is probably pretty much ending. The end of the world could always happen, but you only lose that bet once.
Ok, after that XLE trade I’ll be holding XOP (E&P’s covered), XOM (Big cap quality integrated covered), and XLE (general energy sector covered). That’s probably the best way to cover a full sector move. I’ve also got 1/4 position in SLB at 29.56 (yeah, I know, not a great entry either). Would be nice to add the services subsector to the above three holdings. The highest quality oil services company in the world is SLB, there’s really no argument there. If they fail, then the sector is toast and the world ends. Financial crisis low: 35.05. Dotcom era price: $38. Today’s after hours price: $26.84. Do I really want to play the current price situation long term? Absolutely. I’m willing to go 1/4 at 24 and another quarter at 21. Worst case is we hit that early 90’s range high at 19 and I toss the last quarter in.
For me, at this point, the above four positions are as deep as I’m willing to go this week. I’m sticking with highest quality on a total sector move. If things show some bottoming, I’d consider adding a few very speculative ideas at the right price. Probably my favorite target right now is PE. I had planned on establishing a position at 13, but didn’t take it. It’s sitting 12.72 afterhours. I’m willing to go with a 1/4 position in it at 12. The most I would go after that is 1/4 down at 10. At that point, I’m done with it. Not willing to go big on something this speculative, but definitely willing to at least give it a medium sized position.
That’s pretty much all I’m interested in right now. I really like some of these individual names, but at some point with the trades above, the funds in the account run short. Would be nice to have the deep pockets of a big fund, but I don’t. With the current market action, I’d rather concentrate my money on sector moves, not individual names. I’d definitely hate to miss the sector move if I somehow picked the WRONG names. It can happen, I’ve done it many times and kicked myself for being so stupid and greedy. Some other names that might get attractive at some point: MGY ~6, COP 42, MTDR ~8, DVN ~14 and EOG 56.
On a non-energy thought, how angry must the GDX players be right now? I mean you get the world coming to an end through a plague and everyone dumps the miners. 28.14 and the weekly chart pattern disintegrates into a total failure. Not the safe haven they thought it was. I’m sure this will get another run in the future though as the stimulus package and rate decreases to fix the virus scare is going to be HUGE, and hugely inflationary.
Last thing I’m watching and trading is IWM. That 144 level is going to be important in the next few days. If that holds, there could be a nice bounce to the 158 area, but if it fails, the party is over in small caps and it’s likely looking at 134. I don’t have a position in IWM, it’s more of a daytrading vehicle for me.
Plan For Friday: There SHOULD be a bounce coming. There SHOULD have been a bounce today. I think we get a gap down Friday to the 145 area in IWM and that 290 area in SPY, that could set up a nice bounce. I’m going to be on the sideline for the first 30-60 minutes. Need to see the gap down, then buyers rush in with another day of huge volume. If SPY and IWM can get back inside the Thursday range, it could be game on for the bulls for a short term trade.
With XOP, there was some demand there today. It dropped to 14.43 and demand hit it pretty hard. Moving the ETF >8% from 14.43 to 15.64 was big players, not retail. They are under there. Being able to close at 14.83 while the SPY collapsed was significant. There was demand there taking advantage of the overall market decline to accumulate some XOP. See if that relative strength continues tomorrow. When you see big players deciding to get involved and willing to produce that kind of volatility, it could be near a major turning point. Are there other buyers there? Are there larger buyers just lower? How much supply is still over the market and how anxious are those sellers to get out? Still questions to be answered Friday.
One encouraging thing to see was volume. 86 million in XOP today. That’s capitulation size. That’s the second largest day in at least 5 years, probably longer. Largest was the Saudi Arabia attack at 93 million. The volume in the XLE may have been the largest ever. My daily chart goes back 6 years and I don’t see a larger volume day for XOM either. Would like to see an even larger volume day Friday to put in a final bottom, which could lead to a nice bounce. I think we probably retest any low, but hopefully on a retest with lower volume that holds for a turn in the overall trend.
Anyway, so many thoughts on the sector and they are probably an incoherent jumble of paragraphs. Just trying to get some of them organized in my head (and stored for later so I can review how I was seeing the market). However you decide to trade this market, please be careful, this volatility is a killer. Be safe out there.