Weekly Energy Equities Review, Market Outlook and Trading Plan for July 6-10
Jul 5, 2020 Trading Blog
Many times my daily trading plans end up in the trash by 9:35 am. This past week was one of those times. I knew in the first 5 minutes last Monday that I had made a mistake in my market view. But those mistaken trade plans usually turn into some of my best trading days. This game isn’t about prediction, it’s about knowing which way the market is going and then following. The great thing about a bad prediction is that it shows you where you are wrong. And when you know which direction is wrong, then you also know which direction is right. Follow that direction.
The market sent a clear signal this week. I don’t necessarily fully agree with it, but that doesn’t matter. The market is signalling which way it’s going and the only thing you can do is follow. In last weekend’s writeup, I was looking for the market to continue its three week downtrend into that 296-300 area, test that breakout area and then either bounce or more likely fall back down into that 279-296 range. Instead, the SPY opened Monday morning and visited that 296-300 area, touched 298.93, and then went on a complete straight line rip to the upside before stopping around 316. That move suggests that there was huge demand in that 296-300 breakout area and that this market had no desire to get back in that 279-296 range. I don’t really know WHY there is demand there, because fundamentals mostly suggest that there shouldn’t be. But it’s there and you have to acknowledge it and ride that trend. The market signal is UP.
If you have been reading me for awhile, you know that most of my trading is based on Wyckoff principles. We are in an interesting formation right now. SPY had the run off the March 23 bottom, and then the buying climax run in late May through early June, but now we sit in a specific formation of consolidation. The ultimate question right now is whether this current formation is a distribution or a re-accumulation. Let’s take a look at the current formation which began on June 11.
The SPY peaked out around 322 on June 10 and then had that first real pullback to 298 on June 11-12. That initial pullback set the lower bound of this current consolidation formation at 298. Once the SPY found demand around 298, it then bounced on June 15-16 to form the automatic rally point around 314 which marks the upper bound of the current consolidation formation. Once those two bounds were created, price has remained inside the formation for the last 12 trading days. The question we now want answered is which way do we break out of this range? Is this consolidation a distribution or re-accumulation? Is the big money dumping on retail buyers in this range or are they buying more for the next leg up?
At this point, there is no real way to know the direction of the breakout from this consolidation area. We can only gather clues as they are offered each day. The important clue from Friday was the opening action which tested the upper bound of the range and failed quickly. There was fairly large supply there on Friday morning which also showed up in the last hour and closed the SPY near the lows for the day. Friday’s early rejection and late collapse showed that price isn’t ready to leave the range and there is more consolidation work to do. I expect that the next move for SPY is a pullback to the middle of the range around 307.50 where a decision will be made. Does it bounce there and take another shot at the top or does it fail and move down for another test of the bottom of the range around 298?
I’ll be looking for a shorter term trade long off of 307.50 this week and hoping price will make another run at the top of the range for a possible breakout at 315. For my longer term swing trades, the setup I’m looking for in the next couple weeks is a spring at the bottom of the formation around 298. I’d like to see price move down and test that lower bound one more time for a final shakeout and stop hunt before setting off on the next leg up. I will be loading up heavily long on the next visit near 300. The important points to monitor SPY price action this week are 315.75 (last week’s high), 308.25 (last week’s VWAP), 307.33 (8 day ma), 307.50 (range point of control) and 298.93 (last week’s low).
One other important thing to watch this week is the QQQ. In last week’s writeup, I pointed out that for this market to move higher the QQQ was going to have to reclaim that 242-246 range. Not only did it reclaim that range, it blew it out of the water and made it as high as 254. But I’m still nervous about tech and the QQQ. The FAANG stocks are all looking toppy (of course they have been looking that way for years). The recent chart has put in a “three pushes” type pattern and could be due for a big pullback. This market will go as tech goes. See if some of this money comes out of tech and moves into financials this week.
Energy XLE CVX XOM WTI
The energy names are clearly underperforming the market again and it’s difficult to get excited about them right now. The SPY and IWM are forming consolidation ranges near the highs for possible breakouts, yet the XLE remains trapped near the lows of a nearly four week downtrend. The relative weakness is just too much to ignore. The $2 range in XLE was simply unplayable last week, which was the main reason I avoided energy and stuck with daytrading the IWM. Is there any hope for energy names?
The only trade I see right now is a longer term XLE swing trade setup at the bottom of the range around 36-36.50. I’ll be looking to put on a long reclaim trade one morning this week if there is any gap down open below 36 with a 36.31 reclaim entry.
The majors did nothing this week. XOM has been sitting in a $2 range for the last 7 trading days while CVX has been stuck in a $4 range. There’s just nothing available to daytrade when these names get stuck in such tight ranges. The only trades I see on either of these names are long swing attempts at the lower bound of the range, that being 86 for CVX and 43 for XOM. I wouldn’t try to catch the falling knife on them either, I’d definitely have to see some type of risk controlled setup with a tight stop because if the SPY does fail at 307.50 and retest 298, many of these energy names could collapse quickly. Energy names made no effort to move up as SPY ripped last week from 298 to 316, so I can only imagine that if SPY turns down then energy will move down even more quickly.
I hate to be a real downer, but I don’t like energy right now. I’m bullish on the larger market overall, but the energy sector just isn’t showing anything positive. At this point, I need to see something positive before I get back in these names. However, things can change quickly in energy. The one thing that would get me interested again would be a quick move down for a stop hunt and shakeout on these names and then have demand step in quickly. It feels like most of these stocks need to test the lows one good time to restore confidence. I think there’s just a total mistrust for these names right now, especially since you can buy pretty much anything else and likely get a better return. There’s just no reason to choose energy over something like tech or financials.
As for the commodity itself, WTI didn’t show much last week. I’m still looking at that head and shoulders top formation in the 38-42 area. That 40-42 area is going to be big this week. If price can breakout to new highs, my view of the sector would definitely change. However, if price puts in a clear reversal then that just confirms what I’m seeing in the individual stock names. One thing I would keep an eye on though is the Dollar Index (DXY). I’ve seen multiple people pointing to a future decline in the dollar which could be a help to oil prices. It hasn’t developed yet, but keep it in mind.
Trading Plan for the Week – As usual, everything depends on the Sunday night open. Creating a trading plan before seeing that open has been difficult over the last few weeks. The ideal situation for Monday would be a gap down in XLE to around 36 and then a reclaim of last week’s 36.31 for a long entry. My guess is that we get some type of open right in the middle of the slop range from last week and I’ll have to sit out the morning and wait for something to develop in energy. And then nothing will develop and I’ll lose interest completely in energy and move to the IWM, LOL. I’m not interested in shorting energy (or anything else) this week.
My second trade target is MPC. It was on the trade plan last week but it never setup correctly. I’m hoping for a gap down open around 34.25 for a reclaim entry long at 34.69. VLO has a very similar reclaim trade that sets up long around 55 and 55.66.
Unfortunately, those are the only energy trades I’ve got for Monday. Outside of energy, I think financials might be the sector to trade this week. I have a long reclaim setup scoped out for JPM. I’m looking for a gap down open below 91.50 and then a reclaim of 91.93 for a long entry. A similar trade sets up in AXP with a gap down open around 92.50 and a reclaim long entry of 93.34. I’ve been waiting on WFC to setup for a few weeks and it looks like a prime target this week on the long side. It could be setting up a long spring entry in the 24.50-25 area. Financials will probably be my main focus this week.
I had INTC on a couple recent trading plans and I’m still watching that one around 56 for a reclaim long trade to setup. It may not happen this week, but is worth watching for. Also, keep an eye on SMH. It’s sitting at highs in a nice tight base and could be ready to break higher. Watch that 155 level, as it could offer the first clue of any reversal in the larger QQQ. I’m not trading SMH, just watching for clues about the larger tech sector.
MGM is still on the radar. I still expect that the casinos are going to get shut down again for either 60 or 90 days. If there’s even a single cluster somewhere in the country that originates from a visit to Vegas, that shutdown likely happens quickly. I’ll be a buyer of MGM if the shutdown happens. I’d like to enter in the 12-14 range, but will probably scale in slowly in pieces. I’m also watching WYNN and LVS.
That’s really all I have for Monday. It’s a short and limited writeup on trade plans. I think this could be great trading week though, it’s just one that will be played more by ear than usual. The signal from the market is that we are moving higher. I don’t really agree with that signal, but the market is always right and I’ll be trading the long side on Monday until the market tells me otherwise.
It’s Sunday and you know what that means! It’s going to be a two bottle day out in this heat. But the music should be good and the company even better, so I hope everyone enjoys the rest of the weekend. Life is short, don’t waste a minute.