Weekly Energy Equities Outlook and Trading Plan for March 2-7
Feb 29, 2020 Trading Blog
What a crazy week in energy. There seem to be a hundred different crosscurrents all going on at the same time. I tried to break down all of my trading thoughts for the week in a little different format this time, hope this helps organize things a little better. Some thoughts you might agree with, and maybe some you don’t, these are just my trading thoughts and definitely not advice. Also, I wrote all my trade ideas here on Thursday.
Coronavirus
So far, this is more hype than substance, although I have no doubt that the substance could easily evolve. We have a situation where the entire country is freaking out, the government is in full frenzy mode and the market is panicking. Having said that, we have a few random cases and another handful of cases (in quarantine) that we repatriated directly from China. That’s it, that’s all there is in this country at this point. Is the current mass panic justified? I’d say no, not yet. I think we have reached mass hysteria over something that may or may not happen, or even be a big deal if it does. I’m no expert and I hate to be “that guy” that compares this to the flu, but 70,000 people died in the US of the flu last year. I have no idea how many died in China of the flu, but I’d guess way more than 70,000. How do we know that these 2900 people who died from coronavirus wouldn’t have been part of that 70,000 that died from the flu? Unfortunately, any serious illness will hit an older, compromised immune system and the flu and coronavirus eventually have the same effect on that subset of people. There may be nothing special at all about coronavirus other than it has some harder hitting flu effects that take down people who would have died anyway with the regular flu. I hate to sound callous, but there’s just so much we don’t know that we are all wasting our time speculating about something of which we have ZERO real knowledge.
Edit: There was a single death in Washington. You can bet the media hype machine will be out in full force terrorizing the public for the rest of the weekend with this. Who is to say that this person wouldn’t have been one of the 70,000 who died from regular flu anyway. Perhaps coronavirus and/or the flu would have had the same effect on this person. I wouldn’t jump to any conclusions after just a single death. Market probably not going to like it though and that late Friday spike gets erased quickly.
It’s only scary because of our own personal fears about mortality and the unknown. I lived through the 1980’s AIDS epidemic and it was the same thing, huge fear, but once everyone got the facts things weren’t so scary. We have a huge fear of the unknown, and right now that fear of the unknown is what’s driving this coronavirus effect. Things will settle down once we know what we are dealing with, even if what we are dealing with causes a handful of deaths in the general population.
Traders could be a little shortsighted here and might not be looking out far enough in the future with regard to the coronavirus long term effects. Yes, the economic effects could be bad and yes people could get sick. But, the FED and President are going to throw the most massive stimulus package at this that the world has ever seen, especially as election time approaches. As the saying goes, “Never waste a good crisis” and this gives them the excuse they need to do things that otherwise probably wouldn’t have been acceptable in election tactics. Think you can’t buy some votes with personal stimulus checks? For traders, it is probably going to be lower rates and huge liquidity injections, and that keeps the bubble going after this speedbump. I’m sure there will be another crisis down the road somewhere, but once the unknown clears in the next month or two, this market is going to rip back to the upside. SPY 400 seems like a reasonable target for 2021. THIS is the reason I’m in these longer term energy trades, I’m trying to look out a little further on the horizon than the herd. I’m also sitting on some family 401k cash (I missed the Oct-Feb run with that cash) that will be going back into the market if we break back under the SPY 250 level. Feels like a second chance to correct a big mistake to me.
Overall Market – SPY IWM QQQ
This week was one of the quickest falls that I’ve seen. It ranks right up there with peak action in 2001 and 2008 and the handful of minor crises in between. If you stayed breakeven or made money this week, you did well. I’m down about 6% on my trades, and I’m happy to only be down that much, it could have been worse. I don’t think we have seen the final lows yet. I’m writing on Saturday morning and I have a feeling the FED may offer up a surprise on Sunday to jolt this market. Even if they don’t, I think a quiet weekend will soothe traders enough so that we get a nice bounce on Monday which might continue into Tuesday. The strength of the bounce will be key. One important thing to remember next week is how SPY closed Friday. There was a run from 288 to 297 in the final minutes. How would our thoughts and analysis change if that spike (manipulation?) had not happened and we had closed at 288? Does Friday’s closing price truly represent the other 6 hours and 15 minutes of action during the day? Personally, I think the market was pushed to save a huge amount of margin calls and forced T+ selling, but that’s just my opinion, we’ll see if they give back that fake move on Monday’s open.
Technically, SPY stopped right where it should have on the down move, which was exactly where demand stepped in to start that October run. There was a crowd there willing to buy and it is likely a crowd of traders who regret missing the Oct-Feb 20% run hoping that this gives them a second chance. If this next bounce fails, this group will dump their holdings as SPY crosses 282. I think Friday was purely a dead cat bounce, there just wasn’t any way the market could keep declining at that pace. Also, while the bounce was nice, price got rejected when it attempted to reclaim Thursday’s range and SPY still closed well below Thursday’s low. And remember, this SPY closing price is really just a five minute run from 288 to 297. Is it real? I posted this a few times this week, but I think the first significant bottom comes in at 271. I think we test that level later this coming week. Watch Friday’s low of 285.54, Friday’s high of 297.89 and also the 200 day ma at ~304 (I think this gets tested at least once early this week). Also, watch the volume. SPY did 385 million shares Friday. If price drifts back to the lows, it needs to be a very low volume test for things to turn upward. If we hit the lows again on the same high volume as Friday, it’s probably headed for more downside.
The real problem for me is IWM. It is lagging the other major indices and didn’t get much of a bounce off the lows Friday. The 144 level is significant. If SPY starts another leg down and 144 breaks, the next real liquidity likely doesn’t appear until ~130, or about 10% down. These small caps are almost all domestic companies that are closely tied to the US economy. If the economy slows, these guys are the first to feel it. They are very similar to energy. If people aren’t spending, shopping, traveling for work or on vacation, then they aren’t using oil and gasoline. IWM and oil basically measure the same thing: US consumer activity. You could also throw TLT in this group, as rates are very sensitive to the same factors.
One factor that really concerns me about this latest pullback is how the public sentiment towards stocks will be altered. Opening that 401k statement in March isn’t going to be fun and you have to wonder if a shock to the system like this might slow down the bubble type thinking of most people. There’s a big group of people my age that saw a huge spike in their net worth just over the last 18 months, especially the last six months and losing that big cushion will really hurt some people. It was a risk free game for a long time, but sometimes all it takes is one warning shot to put that seed of doubt in there. Does the public start to doubt the “Buy the Dip” game? And does a change in sentiment start to affect the coming election? Trump hung his hat on the stock market as a measure of his success. If you live by that sword, you can die by it. While something like coronavirus and its health characteristics can be the root of all this, it is really the indirect consequences that can matter.
Energy Sector – XOP XLE
The energy names got a much needed relief bounce Friday, but be aware that as good as that bounce seemed, XLE still closed below Thursday’s low (even with that last 5 minute spike). XOP fared a little better, managing to get well back into Thursday’s trading range. XOM was encouraging with a very high volume reversal bar, but CVX lagged significantly and closed well below Thursday’s lows. The sector isn’t going to make a sustained move unless these two majors are both moving up together.
The biggest factor for me this week was the volume. It was massive and possibly indicative of capitulation. I’m not ready to say this was a final capitulation, but it was definitely a step in the right direction. Hopefully, all that volume was some larger players willing to soak up supply and lock it up for awhile. There should be a bounce off these lows, but the next thing I’m looking for is to see if these recent buyers are willing to hold on to their stock or if they simply throw it right back on the market if price retests the lows. There is a good chance that what we saw Friday was a Wyckoff type selling climax. If it was, that should lead to an automatic rally and then a retest of the selling climax low. If that selling climax low holds on light volume, then there is a good chance that the sector starts to move sideways in an accumulation Phase B. I don’t think we are going to see a V shaped bottom in energy, but rather the dreaded L shape.
Last week’s final VWAP was 15.88 (my XOP average price is 15.92). This VWAP price is going to be an important indicator next week. Will the sellers reappear there or do the buyers have enough strength to get price above what the average trader spent on it last week? VWAP for XLE is at 47.60 and the same concept applies. VWAP for XOM is 52.65.
As for WTI itself, I think we have further to fall. I think the market wants to take a look at that 40-42 area at least once. I’m not sure if that move will take E&P names down further. At some point, the stocks and the commodity might start to diverge, and that’s an important clue to be looking for. If oil drops and tests 40 and the XOP is able to hold the 14 level, then that could be a sign that things might be getting ready to turn upward. The real problem for oil is that I think it is probably going to be capped in the 50-51 area. I just don’t see much upward price mobility above that, just too much supply sitting overhead. If so, then the E&P’s can’t be too optimistic about the next couple quarters. It would be nice to have a clear picture of each companies hedge position. With oil recently sitting in the 60’s, the hedgers could be big winners while the non-hedged names get crushed.
Individual Energy Names
There was some great opportunity in individual names this week. I tried to keep all my action concentrated on the overall sector, but if we get a nice low volume retest of Friday’s lows, I might get interested in some of these names. My favorite name is PE. I was itching to buy when it got down below 12.50, but somehow resisted. If it gets back down under that level and the XOP looks good, I’ll be pulling the trigger.
COP has become attractive falling from about 60 all the way down to 45. If you want to own the most quality E&P, that is your target. I’ll be watching the 44-45 area on the next pullback. EOG had earnings this week which were decent but ignored. The stock bottomed out around 56 and I’ll be watching that point again. The one that I don’t like is OXY. There are just so many things going on around that stock that I think there are safer bets out there where you don’t have to deal with internal power struggle issues. No matter how attractive that price gets, I’d avoid it. In the Permian names, I’d stick with the quality name, which is PXD. There is some solid support around 117 and I wouldn’t mind giving that one a try at that level on the retest.
CLR is another stock I would avoid. I don’t really want to own anything in the Bakken. Same thought on MRO, and definitely trash like WLL and OAS. In the Permian, I’d stay away from APA, CXO and FANG. If you are looking for a lottery ticket type play in the Permian, give MTDR a look in the 8-9 area. A lottery ticket type play for the Eagle Ford is MGY ~7. I’m not looking at any stock smaller than these (mostly staying above the 2 billion cap level), there’s just too much debt risk with almost all of them. There are going to be a lot of bankruptcies coming and I have no desire to play in that minefield.
Trading Plan for the Week
In the big picture, I think we get a bounce Monday which carries over into Tuesday. The strength of that bounce will be important to evaluate. If it is weak, then we could easily take another look at the 14 area. An average bounce would take price to about the 16.50-17 area. I’d be concerned if we couldn’t manage a bounce to that level. 17.50-18 would be encouraging and could lead to a successful retest of the selling climax low. Anything less than a bounce to that 16.50-17 area probably indicates that price is headed below the 14 area for another leg down. The strength of the early week bounce will have a lot to do with whether I keep this current XOP position or whether I try and trim it down on the bounce. I’d be more willing to hold the position the farther up we bounce. If price stalls below 16.50, then I’ll likely give some serious thought to trimming the position if it crosses back below my average price of 15.92.
After the bounce and evaluation, the next concern will be how price moves back down to test Friday’s lows. I think we will take another look at the 14 area, but the real key is what kind of volume occurs on that move. I definitely want to add to (or reload) my position around 14 and I’ll be much more willing to do so if the volume on that move is very light. I’d say volume needs to be less than half of what it was this past week, likely even less. If the volume is heavy, then I’m hitting the sidelines and waiting for the next selling climax. Sometimes capitulation is a process, not a one day event.
Technically, on XOP I’m watching 14.09 at the extreme. The road signs on Monday will be at 15.02, 14.86 and 14.43 on the downside. On the upside, I’ll be watching 15.87 and 16.50, and if things get really crazy, then 18. For XLE, 44.65 and 43.51 downside, 47.60 and 49.00 upside.
I’m looking to add some XOM if it tests 48 and XLE if it gets near 43.50. I thought about adding these Friday and I mentioned them all in Thursday’s writeup, however I regret not taking these planned trades, but things just weren’t looking good and holding that extra size over the weekend wasn’t appealing at this point in the news cycle. I put all my trade ideas here on Thursday night.
General Trading Thoughts
I’ve been watching many traders on Twitter and the thing that fascinates me is that most of them seem to have no plan at all. For me, the thing that has helped me develop the most as a trader is writing all my trading thoughts down. If you are going to put real money in the market, at least take the time to actually write down your plan. It is amazing how much just committing your trade to paper will help. It gives you some point of reference to lean on and to guide when the market conditions change.
Also, I get people suggesting that what I’m doing with my trading is catching a falling knife. Well, kind of yes and kind of no. Am I buying on the way down? Yes. Am I just plunging in on emotion praying I catch the bottom? Not really. This goes back to my point of having a plan. I’m not just trying to catch a knife based on emotion. I started with an overall market context and structure, defined my desired timeframe for the trade, defined how I was going to enter the trade and what final trade price I wanted, and sized the trade properly to fit my desired risk tolerance. All of this was done BEFORE I entered the trade. It’s really a trade just like any other, it just happens to be a trade that gets put on while the market is going down. Taking risky trades isn’t necessarily a bad thing, the key is to know all your parameters for the trade ahead of time and not letting any single trade hurt you.
One of the most important things in trading is that you must know the timeframe of your trade before you enter. Changing timeframes is one of the worst things you can do in trading. If the trade was created and put on with a longer timeframe in mind, then don’t micromanage the trade based on short term price movements, let it work. I have this problem a lot because most of my trading is intraday. I almost made that error Friday afternoon. There was an XOP buyer at 15.61 and I seriously thought about cutting a portion of this trade with a small loss just to play it safe. It is difficult to see a down move coming and be willing to sit and let your longer term trades ride that move out when the tempting thing is to cut them thinking you can put them back on later. Almost 100% of the time, you don’t get the opportunity to put them back on and you miss the move. Again, writing things down helps avoid this error.
Also, learn something from every experience. You don’t get weeks like this past one very often, so don’t waste or ignore the lessons that this kind of market action provides. If you made mistakes, learn from them and figure out how to fix them. Weeks like this can expose hidden flaws that don’t appear very often. The goal is to make your game airtight, even under the most volatile circumstances.
Anyway, that got kind of long again this week. I might try to post a couple mornings this week since things are moving so fast. Good luck this week and always protect yourself. You definitely want to be one of those traders who ten years from now says, “I traded the Coronavirus crash and survived to fight another day”.