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Weekly Energy Equities Review, Market Outlook and Trading Plan for May 26-29

It was supposed to be a volatile week, but it turned into a real snoozefest with very little trading opportunity. I felt good about the SPY move from 279 to the 296-300 area, but the flatline there was really bizarre. At this point, it’s difficult to determine who is in control of this market, but I’ve got a pretty good line on the remaining price paths and they should all offer good trades. The important thing now is to avoid getting locked into a prediction about which way this market should go. Let it tell you which way it’s going and then follow it.


I guess the easiest way to write things up this week is to start with the captain obvious statement that the SPY is going to either break up or down out of this 278-298 trading range. The only thing I feel certain about is that the final move out of this range is going to be a really big one. But first, let’s back up to last week’s analysis and try to figure out why it didn’t play out to the end. The plan last week was for the market to take out 287 and move to the top of the range in the 296-300 area where the range was supposed to end with an upthrust pattern at 296-300 consisting of all buyers getting filled and larger players using that liquidity to get short for the next leg down, except we never got the leg down. The buyers and sellers are still fighting it out as price remains trapped in the 296-300 upthrust area. SPY made no serious effort to break to the upside and also no effort to move back to the middle of the range at 287. So the real question is this:  Why is price still sitting trapped at the top of the range?


If we know why price is still sitting there, then we can make a good odds probability estimate about the next move. There are a few options why it might still be there. The first (and easiest) explanation is that the upthrust pattern is simply taking a very long time to complete. The market could be very balanced with a large number of people who are buying thinking price is going up and an equally large number of short orders looking to establish for the next leg down. Maybe the bears are looking for more shares to short than the bulls are willing to take, and so they wait and keep on filling the bucket? The longer the range, the larger the breakout. So one possibility is that last week’s plan was correct and the next leg down is coming, however it’s just taking forever to fill the large bearish orders and therefore taking longer to play out than expected.


The second option is that this entire range since April is a re-accumulation rather than a distribution. It’s my opinion that it is a distribution, but the patterns often look very similar. I could be wrong about this being a distribution. If I am wrong and this is instead a re-accumulation, then last week’s action makes some sense. In an accumulation, the buyers use the range to absorb every share they can get their hands on to establish a position for the next leg up. The buyers may have soaked up every share lower in the range and are now sitting at the top of the range trying to get every last share they can before the breakout and next leg up. If this is the case, then this range likely breaks to the upside soon for a large move up to new all time highs.


The thing that makes me think this is not an accumulation is the move from 279 straight to 298. If someone wanted to build a very large long position, then why move price that fast? Why not sit and accumulate more in that 20 point range, especially toward the lower side? Also, why accumulate all this stock just under 300 for a move that might go just another 30-40 points, which is only about 10%? The easy accumulation was off the bottom where longs made about a 30% return already. Trying another accumulation up here is just a lot of downside risk being assumed at 300 for such a small future reward on a large accumulated position. Someone wanted the price at the top of the range quickly and it’s not because they wanted to buy a big amount of stock there for a small run up. I think they pushed it there because they wanted to unload, which would be distribution, not accumulation. But maybe there just weren’t any shares available lower and things just got unbalanced quickly, resulting in the flash move from the bottom of the range directly to the top of the range at high speed. It’s possible, but not likely, only time will tell.


The last option is that maybe this 278-298 area is simply fair value and we are destined to sit in this range for a few months. That could explain why the volume was light and the movement was minimal last week. There really isn’t that much supply overhead, but there isn’t that much demand underneath either. Basically, everyone sold in May and walked away and we have reached normal slow summer action. In that case, the market likely continues to move sideways for several weeks with little tradable action. The range just continues to build for an even bigger breakout toward the end of the summer or early fall. Maybe the threat of the second wave of virus cases has put a top in this market here around 300.


In summary, we are looking at one of three choices: 1) a developing distribution range and upthrust pattern which is in the process of completing for the next leg down, 2) an accumulation range that is in the process of completing for a leg up, or 3) a dead market stuck in a range for the summer. Most of the above is larger timeframe theoretical opinion, but each choice does have technical tradable opportunities which I’ll cover later in the trading plan section of the writeup.



Just as the SPY continues its range, energy stocks are also grinding sideways creating their own range. The XLE remains in this 35.50-39.50 area which started back around April 28. The ETF added about 6.8% this week, but 5.7% of that gain was the opening price gap up on Monday morning. Price stayed in a $2 range the rest of the week with very limited trading opportunities. I know I haven’t Tweeted much about energy this week, but there just hasn’t been much to say. There have been a few moves in the first hour, but almost every day flatlined after the first hour offering nothing. The positive news is that price is accumulating right at the top of the range, which suggests it might be getting ready for a breakout into the gap to 42. It’s probably going to follow SPY this coming week, so let the overall market lead before playing a breakout.


Technically, 38 seems to be good demand in XLE. Price tested that area early in the week on Monday/Tuesday and then again at the end of the week on Friday morning. It held solidly on every test. I’ll be watching 37.69-38.00 this week for another test. If that area fails, then price probably goes right back into the 36-37 range that has been in play during this larger range. On the upside, the 39.00-39.50 area was tested several times throughout the week and remains the spot to watch for the breakout.


XOM finally had a better week than CVX. It managed to increase about 6.2%, while CVX only added about 1%. About 5.6% of the weekly gain in XOM was from the Monday morning opening gap, as it mostly traded sideways after the Monday open. Both majors are still stuck solidly within about a 10% trading range. XOM has been rotating 42 to 46, while CVX is rotating 87 to 95. At this point, it’s impossible to determine which way these are going to break. I’ll be watching the lower boundaries of both ranges this week.


Energy stocks can’t blame their lack of upward movement on oil prices. The stocks diverged from the commodity this week with WTI opening the week around 30 and grinding upward almost 10%, while XLE was only up about 1% from the Monday morning open. The gains for the week in the XLE consisted almost entirely of the Monday morning opening gap up of ~5%. If you assume that oil prices and the overall market should be moving in the same direction, then maybe WTI is predicting a breakout for SPY?


The refiners are once again on the brink of breaking out. My favorite of this group is VLO. It managed to push just above the top of the range at 67 and then closed the week with a strong day on Friday ending at 65.68. I’ll be watching this one for another break above 67. MPC and PSX are showing almost the same exact pattern and also present trade possibilities.


The services names could present some opportunity this week. HAL and BKR have already broken out, but SLB has an excellent pattern for a trade this week.  I’m watching the 18.50-18.70 area for a possible entry long to get back into that March 9 gap up to 24. The rig count just keeps dropping, but the services names are managing to trade sideways through it. It’s possible that all the service names have bottomed well before the rig count. Speaking of rig count, one name that I’ve been watching for a trade is HP. It has been in a very well defined range since the March 9 collapse. There’s an area at 15.75 that can be used as a concrete stop, so I’m looking for an entry as close to that as possible in hope that the rig count bottoms out and things start moving in the opposite direction. An entry around 16.75 could provide a good spot to try and capture a breakout from 20 with minimal risk.


Trading Plan for the Week – The market is closed on Monday, so it’s only a four day trading week. I figure Tuesday is going to be a very difficult day to trade as not everyone will return to the market this first week of summer. If we are looking at low volume this week, then I’ll probably start the week on the sideline and again start watching that 296-300 area to see if there is any sign of a range break. I just don’t see much point in getting involved while we are in this range. Same for the XLE 38-39.50 range, it just isn’t worth getting chopped up all week in a directionless market. Some weeks just don’t offer any trading opportunity, it happens.


The one SPY move I do not want to see is a huge gap up open on Tuesday. If I see it, I’m moving to the sideline. I was looking for a big gap up and failure last week and this week presents the same setup. If the gap up happens, there’s no reason to chase it. Just let the market go and wait for the pullback to retest the 296-300 breakout area from above. These huge gap ups at the top of a range are where most breakout traders get trapped, and as I discussed above this could very much still be an upthrust pattern leading to a leg down. If it gaps up, don’t chase it.


So let’s assume we start the week with a little move down in SPY to the lows of last week. If that move causes XLE to open below the 38 area, my first trade is going to be a long when price reclaims Friday’s lows at 37.69 for a ride back to the 38.50 area. If price fails to get back into Friday’s range, then we could be looking at a move to close last week’s opening Monday gap from 36. I’m not interested in trying to short that move. If SPY opens the week with a gap up, then I’ll be on the sideline until XLE manages to break 39.50. There’s just no reason to play within last week’s consolidation, it’s just going to chop you up.


As for SPY itself, it’s really the same trade outlook. If it tests last week’s lows I’ll be looking to get long with a fairly tight stop. If it looks like it’s going to fail to reclaim last week’s range, then I’ll stand aside. I don’t want to be short this week in a low volume market, because you can get trapped quickly in that kind of environment.


I discussed the SLB and VLO trades above. I’ll be looking for breakouts from both of those. The key on these two trades is the need for some volume on the breakout, otherwise the breakouts probably fail.


I really think this week is going to be a wasted one with very little opportunity in energy. In the meantime, I’m working on a daytrading system for the XLV this week. The XLV could also setup for a nice longer term play. On a longer term basis, I’m looking to establish a long position with a stop around 98.75 for a run back to 102 and a possible breakout. I like this sector for the next six months. I think this virus situation has made people realize how important healthcare is and how much work we have to do to bring our system up to better standards. There will be a  lot of money thrown at the healthcare sector over the next couple of years and there should be some great trading opportunities in the sector.


I also still like the financial sector and I think there are some good setups there this week. If the SPY is going to breakout, then the XLF must lead the way. There are a handful of financials that are sitting right at the top of their ranges and seem ready for a breakout, especially if the SPY cooperates.  My favorite trade in financials this week is WFC. That bank is tied a bit to the mortgage industry and has been hit a little harder than the other major banks. It seems like the housing industry could be looking up, as the ITB has been green lately and looks to be heading back to the February highs. The XLRE could also be ready for a move higher. I’m planning to get long with a stop just below 23.92. That move last week really looks like it could be a retest of the spring formed in the prior week. If it is, and it holds, then WFC could get back in the accumulation range and make a move back to 30. It’s a huge opportunity as you could probably risk 25-50 cents for a 5-6 dollar return.


If the financials do break to the upside this week, then you want to shift focus to the GDX for a short play. The miners were weak with 4 out of the last 5 days being solidly red. The financials and miners continue to move inversely, so watch them both for clues.


The casino stocks have been a great trade so far. I’m still long MGM from 13.13 and have been in and out of PENN a few times. PENN is the strongest of the group and I don’t see any reason why it can’t hit 40. I want to find an entry into LVS and WYNN this week. LVS probably has the better pattern with an ascending move from 35 to 50. If they start the week with any type of move down, then I’ll be looking to get long LVS around 45 and WYNN around 75.


The last trade I’m watching this week is IWM. I’m playing for a breakout of the 135 level for a run to the 141-142 area.


It’s important not to get impatient this week. This is considered the first week of summer trading by many and after all the volatility lately this could be one of the slowest summers ever as everyone just takes some time off to see how the real world settles out. Don’t force the action this week. I’m working on the XLV daytrading system in the background this week and will be glad to just stand aside during a choppy, low volume first week of summer. Good luck this week and be patient.


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