Energy Equities Outlook and Trading Plan for March 9-13
Mar 7, 2020 Trading Blog
It was a week of complete destruction in oil and gas, but on the bright side, that’s the environment where you find the longer term deals. I did a lot of buying this week and no doubt some of it is going to be early, but sometimes that’s the only way to catch the big move. It’s not always the ideal way, and you will take some pain, but if you create a plan with a proper drawdown figure and time horizon outlook, you can make big money. That’s the plan in the longer term account. I’ll still be daytrading the sector, but putting some money away with a longer term view is always a good idea.
Coronavirus Thoughts
If you don’t read any other part of this week’s post, please just read this one. The lunacy is off the charts. At this point, I’m probably going to take another Twitter break. I do this every so often when things get crazy. I’ve actually had random nutjobs responding to my posts outraged at my views. It’s insane, I had no idea how pissed off people could get when you don’t freak out at the same things they freak out about. I’m a pretty chill guy and at 52 I guess I’ve seen a lot and therefore I just don’t get upset at much or worry about much. Life is too short to live in fear. I’ve seen friends and family taken without warning, seen bad things happen to people and had things happen to myself. At some point, you just have to decide to live every second of your life and enjoy what you got. I’m not saying be stupid, but be smart and do what you can, but continue living your life and enjoying the things you do have and not waste one second on things that might happen. You have no control in this life and I think if more people realized that they would stop feeling like they had to control everything. Just live and let what will be just be. Life’s just too short for this crazy shit. Respect the virus, but don’t let it rule your life. Get off Twitter and Facebook if you have to, but get back to life before you miss it.
Overall Market SPY IWM
Ok, back to the stuff that you are really here for. I’m probably the only person out there who thought the SPY actually had a pretty good week. If you pull back to a weekly chart, SPY put in a nice inside bar (almost an exact doji) closing right where it opened. That’s usually a signal that momentum has stopped and everyone is on pause trying to figure out what to do next. After the previous week’s huge red bar, that’s a win. Does it resume the downtrend next week? Who knows. I’ve been watching 271 as a short term low, but it’s looking more like that point might be around 285 and that’s the level that will be important this coming week. The interesting thing is the weekly volume. Average weekly volume for SPY is about 280 million shares. The past two weeks have done 1.2 and 1.1 BILLION, or about 4-5x average. Volume will be a clue this week.
I’ve written about this in past weeks, but here’s what I think is really happening. That run from October to February was a Wyckoff buying climax. After a buying climax, you get a pullback into a selling climax, a bounce to an automatic rally and then a retest of the selling climax. Once that pattern completes, the market moves into a sideways consolidation pattern. This is where the market will show its hand. The sideways pattern will either be a re-accumulation and the market will move higher OR it will be a distribution pattern and the market will start a markdown into a bear market when the sideways distribution is complete. It’s too early to know which this is. Accumulations have decreasing volatility as time moves on, while distributions become more volatile. The volume in an accumulation shows up at the bottom of the consolidation, while the volume shows up at the top of the consolidation in a distribution. Watch the volume at the upper and lower boundaries for clues.
If you want an example of how the chart might develop in SPY, just Google Wyckoff distribution pattern. We are currently in the beginning of Phase A. The pattern takes a long time to play out and it’s just getting started. That will give you a rough guideline on how things might move over the coming months.
The thing that truly amazes me though about all the SPY predictions is how everyone is saying, “But earnings are going to be bad, revenue is going to be down.” Seriously? Do these people actually think earnings and revenue were the drivers of SPY ripping to 340? And if that wasn’t the driver on the way up, it sure isn’t going to be the driver on the way down. People have to get over the fact that fundamentals aren’t the main driver of markets. It’s liquidity that drives these markets and I’m sure the FED (as well as the President/Congress) is ready to pull the trigger on massive sums of liquidity to repair any virus damage. Traders are too shortsighted. Once the initial virus hype frenzy passes, SPY is easily headed to 400+. The virus frenzy crowd is just voluntarily handing the smart money their shares because the smart money has a much broader outlook. Be the smart money.
While the SPY has held up well, IWM hasn’t. These are the small US domestic companies and they will likely be hit the hardest by virus fears. They represent the US consumer (as does oil), so when consumers are weak, the IWM and energy both lag the SPY. The TLT is also part of this group as rates fall when the economy slows. Take a look at TLT lately. The IWM did not hold the January 28 selling climax lows, while the SPY did. The 144 area is huge for IWM, so watch that level this week. Price made a nice bounce Friday to close 144.40. It had the chance to really collapse there, but it didn’t. See if it grinds back into that 144-159 range and stays there for a few months.
Oil and Energy Stocks USO XLE XOP
Complete bloodbath in energy stocks this week, but most of the damage was a result of the OPEC meeting which didn’t go as planned. The market priced in a cut, then it didn’t happen, at which point everyone panicked. Let’s see if everyone takes the weekend and comes to their senses. Unfortunately, Russia is taking a hard stance and forcing US Shale to make production cuts. Honestly, I’m surprised it took them this long to finally get fed up with paying America’s bills and keeping shale alive. It hurts, but US stocks needed this for a long term recovery. We have been coasting along inefficiently for a few years and that has to stop. It’s time to get rid of the dead weight companies and get the healthy ones cash flow positive again. That’s the only way larger investors are going to return to the sector. If the survivors can get healthy, these things are going to have a run over the next few years that we haven’t seen since 2009-2014. The key for us as traders is to stay with the survivors and not gamble on the weak.
Given that we want to focus on quality survivors, let’s start with XLE. I think we are probably going to take a look at those 2009 lows around 38-39 before we get a good bounce. XLE closed at 42.50 on Friday, so we could see about another 10-15% on the downside, possibly a little more if SPY takes a larger tumble than expected. After seeing Friday’s OPEC/Russia approach, the prudent thing to do is switch from the XOP to the XLE for trading. The XOP just contains too many weak companies which will be directly hit by Russia’s approach. There are going to be bankruptcies and I just don’t want to play that game. I think the XLE is going to be a clearer picture of what’s really going on in energy and will be a more complete list of quality survivors. I’m not saying dump your XOP, I just wouldn’t build the position too large, as it might lag the XLE.
Once we go down and test those 2009 lows, there’s a good chance that the topside becomes something in the 52 area. A move from 38 to 52 would be a pretty nice trade and the odds of that happening in the next six months is fairly high. Just remember that the XLE is heavily weighted toward XOM and CVX, which make up about 42% of the ETF. Always keep an eye on those two leaders.
The XOP is in trouble. I really liked the bounce probability in that ETF, but now that Russia has taken their approach, I’m worried about the smaller shale companies. Unfortunately, the XOP is an equal weighted index and things like LPI and OAS are weighted the same as XOM and CVX. The problem is that many of these companies are going to go bankrupt and this will trap the ETF at low prices. So while XOM and CVX could jump 5-10%, if you have LPI and OAS tanking into bankruptcy, the index still won’t move up. That’s the danger of an equal weighted index. It was nice when these little companies were flying and outperforming XOM/CVX, but now the opposite is true. I’m moving my positions from XOP to XLE if we can get any type of unexpected event or bounce.
As for oil itself, I posted last Saturday that I was looking for $40-42. We closed 41.57 Friday. The big question is, where is the bottom? For me, I was looking for 40-42 even without the OPEC disaster. The fact that oil held that level even with the disaster is a bit of a positive for me. It could have been much worse. I think there is likely more downside, but I don’t think we are looking at 2016 low type prices, and if we do, it won’t last long. So basically, I think we could drop another 10-12% from here, which would put us in that 35-37 range in the coming weeks. The real key will be the amount of demand destruction caused by the virus panic. That’s an unknown that I can’t forecast. If that is worse than expected, then the downside could actually be near those 2016 lows for a brief period. The key though, and I’ve said this many times, is that when the tide turns on oil it is incredibly fast. The coronavirus has diverted our attention from world geopolitical events. We were on the verge of WW3 just a couple months ago, and another huge price spike on the Saudi Attacks just FIVE months ago. Don’t get complacent if you are short, those events are still out there even if we aren’t thinking about them right now.
I’m sure I don’t have to remind anyone what has happened in the past when domestic things aren’t going so well. Attention diversion, which usually means some type of military action, is a long practiced tactic. Don’t be surprised if the old attention diversion tactic pops up again as election time approaches. And with Russia’s recent conduct, it appears that the oil world may be moving more toward an “every man for himself” environment, which is a lot more conducive to conflict arising than if the oil world were working as a cohesive and cooperating organization. Just don’t ignore the geopolitical, the US is going to have to figure out some way to save shale and you have to think a geopolitical event to drive oil prices up is somewhere up the sleeve of US politicians.
Trading Plan for the Week – I think we get more of the same for the first part of the week, especially if the SPY wants to test that lower boundary, whether it be 285 or my 271. There is going to be some panic on Monday as traders digest the OPEC debacle over the weekend. Speculation on what will happen to oil price will be most rampant as the week starts, but should taper off as we move forward. I’m going to be doing more buying in the long term account on the panic.
Aside from all the longer term positions that I discuss here, it was an incredible week for daytrading. I post almost exclusively about my longer term trades, but remember, I’m mostly a daytrader so don’t forget that’s pretty much the angle that I view the market from. I had 21 trades before lunch Friday and about 17 of those were scalps, with most of those being in MPC. I don’t post any of those daytrades because it would just clog your timeline LOL. It’s been a long time since I’ve been that active and that’s mostly a factor of energy stocks having no range worth trading. I miss the days where almost every energy stock had enough range to be tradable intraday.
As for the XOP, we are again operating in unknown territory with zero road signs to play off of. The only concrete signs are Friday’s 12.71 low, Friday’s 13.82 high and the weekly VWAP at 14.41. If we break Friday’s low, all you can do is play it by ear and try to manage the order flow, which is really difficult in this environment. One possibility that I don’t think anyone expects is a very quick spike back up to 15. If we get that spike, I will be dumping all of my XOP position and then transferring that money over to XLE on the next dip. If larger buyers are interested, or if there are things playing out behind the OPEC scenes that us nobody retail traders don’t know about, then buyers with longer term outlooks could come for this very quickly at these prices. The XOP volume had started to taper off before the OPEC meeting on the retest of the Feb lows and that OPEC disaster could have shaken out the last remaining sellers. We will see if this plays out I guess.
Also, don’t dismiss the chances of an OPEC surprise. We have no idea what these guys are really bargaining over. Like I posted on Twitter, something about this whole OPEC situation just doesn’t make sense. Maybe Russia is holding out for something specific and maybe that something specific isn’t from OPEC, it’s from the USA. Russia’s conduct is a direct shot at US Shale, maybe there’s some negotiation going on there as well between Putin and Trump. Don’t be so sure that this whole OPEC thing is over just yet.
In XLE, I’m watching 41.86 on the downside, 43.50, 44.90 and 48 on the upside. For XOM, 47 downside, watching 48 and 50.50 on the upside.
As of close Friday here’s where I’m at:
XOP 1/2 at 13.74
XLE 1/2 at 42.97
SLB 1/2 at 27.66
HAL 1/2 at 14.91
EOG 1/4 at 55.64
MTDR 1/4 at 7.58
PE 1/4 at 11.75
TBT 1/4 at 17.76
I’ll be looking to add 1/4 to XLE in the 41 area early this week. I’m still debating on whether I want to add to the XOP position. I’m leaning toward not adding, but if that price gets down near 11.50 I really have no choice but to give that a play. I’m also wanting to add a position in XOM (~46), COP (~43) and MPC (~36).
Like I said, I’ll be a bit scarce on Twitter this week. It’s interfering with my thinking and I expect some intense daytrading activity this week that I don’t want to be impacted by any distractions. I’ll likely check it every couple hours, so shoot me a DM if you have any questions. Hope you have a great week, and remember : Get out there and live your life. I’m off to enjoy a couple bottles and some live music in the warm sunshine with the love of my life. Don’t waste a day, you don’t get them back.