Thursday April 2 Trading Plan, Beware the Trap
Apr 2, 2020 Trading Blog
I don’t usually put up plans before the market opens, but I thought today would be a useful one. XLE is trading 29.50 premarket, with XOM at 40 and CVX at 73. The biggest piece of advice I’ve got for today is to be really careful on the long side if you chase this gap up. This is the perfect spot for a bullish trap. I wrote Saturday about the danger of putting on long trades based on hype, rumors and especially “government meetings” like Trump promised for Friday. Sometimes it works, and it might work today, but is the risk worth the reward? Not for me.
There have been rumors flying everywhere this week on a possible resolution of the Saudi/Russia price war, but it’s my opinion that it’s just an attempt to try and talk up prices. As I said Saturday, Saudi and Russia had a plan to crush shale and their plan is working perfectly, we even got our first bankruptcy yesterday (WLL). Do you really think they are just going to change their mind when the plan is working so well? Just because we ask them nicely? Probably not. The storage continues to fill every day that the US is locked down, and that lockdown is just getting started. Putin knows his power increases as that storage fills and he’s in no hurry to change his path. All these negotiations and talks are just extending the game and giving the tanks more time to fill. He’s stringing everyone along. While we have meetings, he’s sitting back waiting for those tanks to fill. And once those tanks fill, we are looking at $10-15 oil.
XLE has been fairly strong this week and has been diverging from oil and SPY, which is a signal that a bottom is on the horizon. I’m not sure where that bottom is, but I don’t think it’s here yet. There’s just too much fundamentally bad information out there. And yes, the market can be a forward looking pricing mechanism, but the problem is always the same, you never really know for sure how far out the market is looking.
Technically, the spot to watch for XLE is 31. That’s the top of the range that we have been working with since March 12. There are a mountain of stops up there above 31 and the smart moneys knows exactly where those stops are. Don’t be surprised if they take a shot at those stops today or tomorrow. Once they take it up and attack that level, there’s no reason to think they will push it up any further. They most likely take a short position up there and then let it fall back to the lows for a pretty good profit on those shorts.
Could XLE breakout at 31? It could. But I’d say the odds are less than 25%. If it does break out, then where’s the next supply? I’d say 34-35. If you buy the breakout around 31, you are easily risking 5-6 dollars to make 3-4, and that’s not a great way to play. In addition to those payout odds, the winning percentage is really low, like I said probably around 25%. When you combine the low winning percentage with the horrible payout, it just isn’t a good trade. Once you add in the fact that it’s also a trade based on rumors and a Trump “meeting”, then things just look even worse. I could be completely wrong and energy stocks could rip, but I’ll sit this one out and wait. The trade is just too expensive.
The next problem with getting long here is the SPY. It looks like the bounce off the bottom is running out of steam. 263 seems to be the upper bound of this new range. We likely take another look at that 263 level again soon, but if it fails a second time, things could turn ugly and head down. Trying to play XLE long while SPY is declining is a losing proposition. I’d be much more willing to play the XLE long if SPY can break out of that 263 level, but I’m staying on the sideline until that happens. Also, as I’ve pointed out before, XLE actually follows the IWM more closely than the SPY. The focus on the consumer in smaller cap US domestic stocks correlates with consumer spending on energy. The IWM is lagging SPY. On Wednesday that relative weakness was large IWM -6.8% while SPY -4.5%. While this XLE gap up looks nice and the promise of government intervention is attractive, the IWM and SPY are warning of danger in the overall market.
Trading Plan for Thursday – I’m watching a couple of spots on XLE today: 28.80 and 28.44 should act as support for any XLE rally. If those two fail, then the gap up in XLE will likely turn into a red day. If you believe in the hype and rumors and you want to take a shot long, either of those two spots is probably a good entry. If those fail, I’d stop out fairly quickly. I have no desire to enter XLE above 29.50, I’ll just let it go and try another trade later in the week. If we gap up, the first spot to watch as price rises is 30.00. There should be some supply there. The next supply up from there is 31.00
I’m going to watch for a short trade on that stop hunt around 31. I do think the short approach is probably better than the long approach up at that level. You could probably put this trade on around 31 and stop it out around 32 for a tight $1 risk. The reward on the trade could be $4-5. Getting 5:1 on that trade is attractive
Anyway, just some quick trading thoughts for what might be a very tricky trading day. I’m probably sticking on the sideline in energy today until I see what we do at that 31 level, or if we even get close to it at all. If you decide to chase this, be really careful and keep those stops tight.