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Weekly Energy Equities Review, Market Outlook and Trading Plan for July 27-31

This should be a big week for energy stocks. The XLE has evolved into a pattern that must resolve itself soon. I’ve posted the rough head and shoulders pattern a couple times on Twitter over the last few weeks and price continues to develop along that pattern. From late June through this last week of July, the XLE has been forming a rough right shoulder in the larger picture and testing that upper boundary of 38.50. So far it has failed every test, but the pullbacks have been very shallow and if you just look at the last five weeks of time in isolation it actually looks like an inverse head and shoulders. Confusing. However, I expect that the larger pattern continues this week and we get another test of 38.50. Is this the week price finally breaks through and makes a run at the June 8 highs or does it fail for the final time and head for the neckline around 34? After a month in this 36-38 range, it’s time to make a big decision.


What clues can we find to predict the breakout direction? The first market I look to for a leading signal on energy are the small caps which are represented by the IWM. The IWM is the American consumer and domestic small businesses. It is the economy. When the consumer doesn’t spend, these businesses don’t do well. When the consumer isn’t shopping, working, going to school or travelling they also aren’t using energy. The IWM made a nice base throughout mid-June and into late July, but the attempt at breaking out of this base last week was a failure. The 145 level is a big decision point for the IWM this week. The action there will have a bearing on what happens with XLE. If IWM opens the week with an early test of 145 and then makes another run at 150, then I would expect the XLE to make another run at 38.50. Both should break out at the same time. If IWM fails at 145 and heads toward the 136 area, then XLE probably also fails at the 36 level and heads to 34.50. Keep an eye on this correlation.


I prefer the IWM over the SPY when trying to analyze the energy market. For the last few months IWM (and XLE) have lagged the overall market. SPY has broken that 323 level and the June 8 highs, however neither the IWM nor the XLE have approached those June 8 highs. The SPY has lost much of its predictive ability because it is being controlled by the FANGMAN stocks. The SPY doesn’t really represent the domestic economy or the consumer anymore. It represents fast money and a handful of manipulated stocks. When analyzing a commodity, everything comes down to supply and demand. The key is to focus on the market that better measures the people using the commodity you are trying to predict. The IWM does that much better than SPY.


The second thing to watch this week is the dollar. It continues to weaken but might be getting a little stretched. That weakness has been helping gold, silver and the basic materials stocks and should also help oil. I’m watching the 1.3350 level in the USD/CAD pair specifically for any clues on oil. Overall, the UUP broke a significant demand level last week around 25.90 and could be heading for 24.75. If the dollar continues to weaken, oil and energy stocks should at least explore the upside this week. Also, keep an eye on GLD as it might show the first signal of an upward dollar reversal.


As for WTI itself, it was a little shaky. It attempted to break the recent highs and was looking good early in the week, but faded on Thursday and Friday. The action wasn’t too bad though as most will look at this pullback as just a normal gap fill off the larger base breakout from Tuesday morning.  I think it takes another look at the 42.50 level this week to try and put in more highs. Many traders still use the USO for oil and it really has a nice setup for a long play on the open Monday. I’d like to see an open under 29.00 and then get long as price reclaims Friday’s 29.05 low. On the downside, watch any WTI break under 40 as a danger signal.



It wasn’t a good trading week for me in energy. I sat out the down day on Monday and then couldn’t catch up with price as it ripped on Tuesday and was then stuck on the sideline Wednesday, Thursday and Friday as price chopped around within Tuesday’s price range. Sometimes there just isn’t much available and you have to trade other things. Whatever happens with the XLE this week, I’d just prefer some type of breakout one way or the other. This range is just untradable.


On the positive side, the last five weeks have setup a nice inverted head and shoulders type pattern that may offer a long trade. It’s a good setup with shoulders around 36.50 and the head around 34.50, but how that recent five week pattern is developing in the larger picture could be a problem. Sometimes price action looks good in isolation, but when you take a step back and look at its place in the larger picture, things don’t look quite as good. I’d like to see the XLE start off the week with a test of the 36.50 area and then a bounce toward the highs around 38.50. I’m going to be very cautious if we come out Monday and take out the highs or gap up huge out of this range. Any attack on the highs right out of the gate is likely to be a false breakout and a trap. There’s no reason to get involved on the first breakout at 38.50. There’s a good deal of supply sitting 38.50-40 which should slow the breakout and there’s a high possibility that any breakout will come back down and test the 38.50 breakout point from above for a good long entry if everything is working together.


The majors are not looking too good, especially XOM. It’s having a very difficult time getting back above 43.75 and is in danger of breaking down and leading the sector toward recent lows. CVX at least broke the July highs, however XOM never even got close. Both stocks have earnings on Friday, so I won’t be doing much with these two ahead of those releases. It wouldn’t surprise me if they just chopped around until Friday and then made a big move on earnings. I’ll post a plan for these two on Thursday. BP and RDSA strength fall somewhere between XOM and CVX, probably closer to XOM. 


I like the E&P’s much better than the majors right now. There are several setups that I’m watching this week for long plays. Almost all the E&P’s have the same setup, a sharp breakout on last Tuesday and then a three day pullback the rest of the week. These could be ready to really breakout. My favorites this week are the Permian names including PXD, CXO, FANG and PE. All four charts look the same and play the same setup. I’d like to see these open Monday down below Friday’s lows and then reclaim those lows for entries on the long side. The other name that looks attractive is EOG. It has been very weak lately, but seems to be snapping out of it and looks to be setup just like the Permians with a long reclaim trade setup around 49. I don’t like the charts of COP and OXY as well as the others, but they could still be playable if they are slow to develop and the other names have already run too far away to enter long.


I’m not really interested in the services names this week. They are doing well and showing strength, but the charts really don’t offer anything tradable. It was good to see that SLB’s earnings were accepted and the stock didn’t get hurt on the release. The only name that I might play this week is HP. It has put in a very nice base over the last five weeks and could be a good breakout play in the 21 level to possibly make a run at 28.


The natural gas names had a good week but I have no interest in chasing these after the latest run. In fact, if there was any subsector in energy that I would consider shorting, these names are probably it. I’ll be avoiding them this week.


The refiners can’t seem to get things going to the upside. VLO was the only one that attempted a breakout last week and it failed. I really don’t see anything to play this week with the refiners. The only one that might offer some opportunity is MPC. If it can clear the 39.50-40 level, it might have some room to run a couple dollars. The problem though is that there’s just no place to stop the trade if it’s wrong. It’s been a continuous grind from 33 and the fall back down could be fast. The risk/reward just isn’t there on a long trade in MPC unless it develops a small level to play off of.


One other interesting thing that I saw this week was MXC. The low float stock got pushed all the way to 14.50. The daytraders in this bull market are reaching the euphoric stage. There was absolutely nothing from the company to prompt this move, it was purely daytrading rooms taking advantage of the low float and driving it with a few pumps in sub rooms. These plays look great in hindsight, but if you get caught in them you can really get hurt, especially on the short side.


Trading Plan for the Week: I’m hoping this is going to be a productive week, especially in energy. The ideal trade to start the week would be a gap down in XLE below 37.25 and a reclaim of Friday’s lows for a long entry and a run toward 38.50 for a possible breakout. More likely though, I think we probably gap up Monday in which case I’ll be cautious and wait to see if it’s a false breakout. If it does gap up, there could also be a long play off of 37.55 when it drifts back down. I’m not interested in trying to short anything energy early in the week.


Second trade is a long setup on one of the Permian names. I would take this trade with PXD, CXO, FANG or PE. For example on PXD, I’d take a reclaim long trade on any gap down below 99 and a reclaim of Friday’s lows. Basically, I’m looking for a test of the breakout point from Tuesday or at least a test of the low point where this group pulled back to after Tuesday’s move.


The only other energy trade this week will be long play in CVX around 89. This doesn’t have to be a reclaim setup, I’ll settle for a simple test of 89 to get long with about a dollar stop for an attempt at a breakout around 93.


Next trade is a long setup in IWM around 145. It would be nice to get a gap down toward 144.75 Monday morning for a reclaim long setup around 145-145.50. There’s a tight stop around 144.25 and there’s opportunity to 150 for a nice risk/reward on the trade.


One attractive non-energy trade is SBUX. I’m looking for a long setup to enter around 75 for a move to 77 with a possible breakout toward 80.


I’m also watching JPM for a long setup around 97-97.50. The long trade can use a dollar stop for an attempt at 101 and a possible breakout. If the overall market is going to go higher, this is one stock that I think really has to start moving.


I’ve been monitoring the casino stocks for awhile and LVS is starting to get close to a buy point for a longer term swing trade. I’ll be buying in the 42-43 area for the longer term account. I also like MGM in the 15-15.25 range. MGM probably has a better setup than LVS because there’s a really tight stop available. This one shouldn’t get below 15, so if you can pick it up around 15.25 you can really size this one up for a big winner. WYNN long around 70 is also on my list, but I like LVS and MGM better.


I picked up some INTC in the longer term account this week on the big pullback after earnings. I was a little early on the entry at 51.95, but I did leave space to add if it drops into the 48 area. I really think this was an overreaction and money will come back into this name. It may take awhile, but as the SPY moves toward 400 and the blind buying of anything tech continues, INTC will recover and probably set new highs. Just a name that’s going to require some patience.


That group of trades should keep me busy for Monday and Tuesday. Much will depend on the Sunday night open, but I don’t see a big gap up or down happening, so most of these plans should be available Monday. Good luck this week and hopefully we get some big moves.



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