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Weekly Energy Equities Review, Market Outlook and Trading Plan for June 29-July 3

Hope everyone had a great trading week. I didn’t do much trading in the energy sector this week because my attention was focused on scalp trading the IWM. The range and opportunity in the IWM has been ideal lately, whereas the range in energy names, especially XLE, just keeps getting smaller. I’ve mostly abandoned trying to do any multi-day swing trades because there’s just no pattern to where this market is going to open each day. While many people have recommended moving to a longer timeframe to get away from the HFT algos, I’ve actually found the better option is moving to a shorter timeframe and trying to take advantage of them. However, I do see some longer term opportunity developing in energy and there may be some good swing trades developing in the next week or two.


Let’s start at the top and work down to energy. The SPY remains in a downtrend which started back on June 9 and it didn’t show any intention this week of trying to break out of that downtrend. It really had a good opportunity to turn things around with a breakout on Friday, but there was just no demand in the market and price finished right at the lows for the day and week. The action on Friday suggests that the upcoming four day week is probably going to be negative. One thing that I would watch for though is a big up day on Thursday to make things look good for the three day July 4th weekend. Trump will be out in full force during the weekend and you know he will be touting how well the stock market is doing. If you play it short this week, it might be a good idea to square up and cover on Wednesday afternoon.


While is seemed like a negative week for the SPY because of the direction, the range stayed within the prior week’s range and produced an inside week. The last four weeks have actually been a consolidation with each week alternating red and green with large ranges. It feels like the market actually doesn’t know which way it wants to go, which is at least better than a clear downtrend. The VWAP for the week finished about 306 and that will be a major point of resistance for next week. The next supply above that is the 310 area. On the downside, the point to watch is 297. We touched that level back on May 27 and June 15. It has acted as solid demand for the last 8 weeks. If you remember, that 296-300 area was the level I was watching when we were in that 279-296 range and looking for the breakout. It seems like the market wants to drift back and test that breakout point next week. If it fails, then price probably heads to the bottom of that prior range around 279. If the 296-300 area holds, then I think we probably finish the week around 305-307. I really don’t see next week getting above 310, but you never know.


On the IWM, the level to watch on the downside is 134. The IWM also formed an inside week and finished with a VWAP of 139.50. It actually felt like the IWM was a little stronger than the SPY to end the week, which could be a good signal for energy. I don’t follow the QQQ closely, but the chart suggests that this is where the danger is for the overall market. The QQQ had been in a tight range between 242 and 246 which began back on June 16, but it clearly broke down on Friday finishing at 240. If the overall market is going to rally, then the QQQ needs to quickly reclaim 242 and get back in that prior range. If it fails to do so, price could be headed back to the 232 area. Tech has been carrying this market and things could get ugly if the big money starts bailing out on that sector.


The other area that is starting to become a concern is the financials and XLF. There was an important area around 23-23.50 which failed and the big banks just don’t look very good. I do see a possible trade developing in WFC, but it needs more time to setup. I’d watch the KRE also, as the smaller regional bank names reflect more local lending and credit issues. If the two main market drivers of technology and banking stocks start to head down, this entire market could fall hard.


Energy XLE WTI

The energy names really had a good run off the March lows, but that XLE move from 38 to 47 now looks like a buying climax and blowoff top. XLE has rolled over into the first pullback from that run and is looking to establish an AR point for a possible re-accumulation formation. In last week’s post, I thought the AR point would be established around 35-36 and it looks like the XLE is really trying to find demand there with a close for the week at 36.49. There’s a small level at 35.55 that needs to hold this week. That point is about a 50% retracement of the run off the March lows. If that area fails, the next demand doesn’t show until 32-33, and that’s way below where an AR point should form and means that the possibility of this being a re-accumulation falls and the possibility of this being a new leg down toward the March lows rises. The 35-36 area is going to be big this week.


As for the actual commodity, I fear that WTI is evolving into somewhat of a head and shoulders type top in the 38-42 area which could lead to a move back to 30 soon. The move on Tuesday was a clear failure and the point to watch now is 34.50. Price should see a bounce there, but if it doesn’t then price is likely headed 30-32. I don’t really see WTI taking out the 26-29 level again, but strange things have been happening in oil over the last few months.


The majors are also exhibiting a rough head and shoulders type pattern which mimics the pattern being formed in WTI. XOM, CVX, BP and RDSA are all sitting near necklines following big spikes in early June. CVX is the one to watch. There’s a left shoulder around 96, a head up at 103 and a neckline around 86. There’s also an important VWAP off the March lows sitting at 84.75. Friday’s action took a shot at that 86 neckline and closed at the lows of the day and week. Monday’s open is going to be important. It will be interesting to see if these names make a move to form the right shoulder. If 85-86 fails and this thing starts down, there’s probably going to be an extended move down toward 75. As for XOM, the same pattern is there and price is sitting right on the March 23 VWAP at 43.50. If price takes that level out, then control of the stock clearly shifts from buyers to sellers.


Having said the above, there are some great trades setting up in CVX and XOM. I like CVX better and if it gaps down below 86 on Monday’s open, I’ll be looking to take advantage of a reclaim trade and get long for a bounce back toward 94, which could form the right shoulder. It’s an easy trade with a risk of $1-2 for a reward of $7-9. The same trade sets up in XOM at 43.50, but that one is a little more tricky because there is also level close by at 39-40 which might be a truer neckline and a better trade area. The same trade also sets up in some of the larger E&P’s like EOG, PXD and FANG. The support area on all these stocks is very obvious and should give very clear signals for the next longer term trend move.


The service names are also setting up some nice trades. I’m starting to get interested in SLB down around 15 and HP around 16. HAL and BKR aren’t really setting up very well. NOV is another watch around 10-10.50. Some patience is definitely needed with these trade setups. If the SPY really does rollback toward 279, then these energy names could easily overshoot to the downside, especially if WTI collapses back to 30. A stock like HP could easily break the 16 area and be at the March lows within days of breaking down. The key on these longer term swing trades is to scale in slowly on the entry. Separate the trading money into 3-4 pieces and enter at certain levels as the stock falls and try to end up with a decent overall average price. It’s a more risk controlled way to trade, but it does take some advance planning so you know well ahead of time where your levels are and how much you want to invest at each level. I’ll post more of my longer term trades as things get closer to prices that I like.


The refiners were a disaster this past week. MPC, VLO, PSX and HFC all had big down moves which finished at the low of the week. The only refiner that presents any possible trade is MPC. I’m watching the 34-34.50 level for a reclaim trade on the long side.


The natural gas names have been confusing for the last couple of months, but they all showed their hand with big failures. COG and EQT are now in strong downtrends as the price of natural gas just continues to crumble. I’m avoiding all these names. The only reason I continue to watch them is for the outsized effect they are having on XOP. The natural gas names have pulled the XOP from 72 to 49 in just a few weeks. Other E&P’s didn’t help, but the natural gas names and refiners have had bigger down moves than other energy names, so the XOP has been hit worse than XLE. I’m also avoiding XOP for now. That ETF used to be a favorite, but the weightings just don’t represent the overall sector anymore.


Trading Plan for the Week – The entire plan for the week depends on tonight’s open. The primary plan is to look for a gap down near 36 in XLE and then play a reclaim trade long as price crosses 36.33 and regains Friday’s range. Target on the trade is 37.50-37.80. The stop on the trade goes just under the morning low. The only problem with these reclaim trades is if price opens too far from the entry to make a playable stop. For example, if XLE opens in the 35-35.50 range, then that stop would be too far from 36.33 and make the risk:reward unprofitable. It’s always a judgment call and you have to know your profit target ahead of time to determine if the risk/stop is worth the reward. If price gaps down and never reclaims 36.33, then I’ll just watch the action and see where the bottom is. Price could easily slide down and test the 35-35.55 area. I’m not interested in shorting any energy names.


The second trade is a long reclaim trade on CVX. I’d like to see it gap down around 85.50-86 and then reclaim last week’s low of 86.18 for an entry. Target is 90.50. The stop goes just below the morning low before the range reclaim entry.


MPC is also setting up a nice reclaim long trade at 34.66. The 34-35 area has been solid demand and a long trade there can be protected with a tight stop with the possibility of a move back near 39.


The best trade of the week for me is probably going to be a reclaim long setup in IWM. I’m looking for a gap down near 136 and then a reclaim of last week’s low of 136.29 or Friday’s low of 136.49. This should be an excellent trade since the reclaim area covers Wednesday, Thursday and Friday. There should be a lot of demand, as well as many shorts who might cover when the range gets reclaimed. There’s also a major IWM support area at 134 which should control the downside. If price never reclaims 136.29, then I’ll be looking to put on a straight long trade at 134 with about a dollar stop to see if we get an early week reversal. If it touches 134, I’ll give it an hour or two to bounce. If it doesn’t bounce quickly,I’ll just dump it.


Next on the list is a longer term trade in MGM. Price has faded all the way back to 15.70 and I’m looking to start a scale in soon. The best entry will be the point where new casino closures are announced. If there is an overreaction, I’ll be get getting in. I don’t know what price that might be at, but I think the entry could be in the 12-13 area, but that’s just a guess right now.


INTC is moving toward a nice long setup at 56. I’ll be watching this one on Tuesday to see if it sets up a long reclaim opportunity on the open. I’m not really interested in a straight long on a decline, as I don’t want to catch a falling knife on this one. This is a play that will probably require a very controlled entry and stop.


It should be an interesting week. I’m still mostly avoiding Twitter, but I do check it before market open and after the close if you have any questions. I’m off to do the usual Sunday winery trip with the love of my life. A new wine on the menu this week and live music. Don’t waste a minute of happiness with all this social media crap, life is short, so enjoy it all.

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