Weekly Energy Equities Review, Market Outlook and Trading Plan for August 3-7
Aug 2, 2020 Trading Blog
Sometimes signals from charts are very direct and observable because we are looking for something specific to form on that chart. However, sometimes the best signals result from things that DON’T happen on the chart, especially when we expected something specific to happen. In last week’s writeup, I thought this would be a big week for energy and we would get a resolution of the forming head and shoulders type formation and a decision on which way this sector wants to go over the next few weeks. I think we got that signal, it just wasn’t in the form I was expecting. So which way are we going?
I know last week’s action was pretty depressing and most individual names closed the week way below where they started on Monday, but there were some sparks of hope in the sector on Friday and I think the market was offering a signal in its own strange way. The XLE has been setting up a rough head and shoulders with two important points at 36 and 34.50. On Thursday afternoon, the XLE struggled to hold the 36 level and got as low as 35.88, mostly on the depressing earnings from COP, which caused the stock to be down almost 10% during the day. Honestly, when the market closed on Thursday I was expecting the XLE to gap down Friday and get close to that 34.50 level, especially with XOM and CVX reporting earnings Friday morning. If those earnings reports were poor like the one from COP, the sector would likely gap and take out 34.50.
Those earnings reports from XOM and CVX were poor just like the COP report, but the market reaction was completely different from what I expected. Instead of tanking toward 34.50 on bad reports, the XLE merely drifted down around the 35.50 level and then found demand which pushed the price back above 36 at the close. Not only did we NOT tank to 34.50, but there was enough strength to get back above that important 36 level. That should NOT have happened on bad earnings reports and definitely not after the weak action we had on Thursday. Basically, the market was setup to fail, had the fundamental information (earnings) to justify that failure, yet it did NOT fail. That’s a positive signal which suggests we may be heading up from here to give that 38.50 level another look for a breakout toward 40+.
I’m not saying the bullish signal is perfect. There’s still a good chance that Friday was temporary demand with some players looking to cover shorts and/or find liquidity opportunity in the bad news. There’s always the possibility that 36 acts as a roadblock to the upward price movement. No signal is perfect, but usually when I expect a market to tank, and it has fundamental news to justify that tank and then it doesn’t, that’s normally been bullish. We’ll see if it works this time. My plan this week is to let price drift back down to the 35.50 area and then start building a long position. If Friday’s lows get taken out and price tests 35, then I’ll dump it.
Overall Market
The SPY showed some incredible resiliency this week, especially on Friday when it closed at the highs. It seems like it wants to test that 327 high area again and then make a run at all time highs in the 337-340 area. I’ve been saying this for awhile, but I think this market is on its way to SPY 400 later this year, especially once the election is over, the protests calm and the virus disappears. There’s just so much money in the system that I don’t see any way it doesn’t keep making new all time highs just like the QQQ has already done. I just can’t foresee any event that could stop this freight train. If the virus, business closings, unemployment, riots, etc didn’t stop it, then what could? If you look at the longer term chart, this whole event was a 21 day down move in a 12 YEAR bull market. It was a blip. At some point you just have to accept that the stock market is completely disconnected from the real world. It’s a public utility, a bank for storing 401k’s and that bank is going to be protected until the end of time. At this point, I’d be shocked if we see SPY under 300 again anytime soon.
My favorite market indicator is the IWM and it looks like it’s about to breakout and join the QQQ and SPY in attacking the highs. I’m watching the 150 level this week for a breakout and a move to the 160 area in the coming weeks. I’d love to see one more pullback to the 145-146 area to get long, but I don’t think I’m going to get that chance. The IWM has been one of the best leading indicators that I have found for energy. They both roughly measure the same thing – the US consumer. If the IWM breaks the 150 level and gets into that late February gap, then the XLE should head back up to the 38.50 level and breakout for an attempt at 40+. If 145 breaks to the downside though, the IWM could be headed toward 138, which would correspond to XLE breaking back below 36 and heading toward 34.50.
The dollar is another important watch. The move up in UUP on Friday was a bit strange with the SPY also moving up. They have been moving inversely, so one of them changed on Friday. I think UUP was probably just ready for an oversold bounce. Watch the 25 area to see if it tests and reverses upward. The EURO had a big reversal pattern on Friday and the YEN put in an even larger reversal. Watch these two closely to see if price returns to Thursday’s extremes for a retest. For oil, watch the USD/CAD pair. It spiked up Thursday as oil spiked down, so the relationship there was consistent. If the USD/CAD pair starts rising this week, that could be a red flag for WTI. Stocks have preferred the weaker dollar, as have commodities including oil, so I’d like to see the dollar continue to weaken as support for equities.
As for oil itself, it really could have rolled over on Thursday, but just like XOM and CVX on Friday, it found demand and made a sharp recovery to reclaim the 40 level. Maybe the reversal in WTI on Thrusday was a precursor to the same XOM/CVX reversal action on Friday. The opportunity for a collapse was there, but didn’t follow through and that’s a signal. The 39 area could be nice support this week for a possible attempt at making a run back toward the highs.
Gold was also interesting this week, especially the action on Friday. The UUP and GLD move inversely most of the time, but on Friday they both went up. The UUP/SPY relationship did the same. Since they move inversely, one of them was changing Friday. Given that the SPY and GLD (and TLT) all went up on a rising UUP, that makes an even stronger case that UUP was probably the one changing. The real question here is if the UUP change was a leading red flag or just an anomaly. I’m thinking the UUP bounce was just temporary and that it should head back down this week. Keep an eye on the SPY, GLD and UUP relationship.
Energy
I covered the XLE above, but the most interesting thing this week was the action in the majors on Friday. I’m not sure which was more impressive, XOM’s gap down and then green close or CVX getting down to 81.51 and then making a huge run to close at the high of the day. Either way, there was some huge demand in these two stocks on Friday. They make up almost half the XLE, so if there’s this much demand in the majors, then the rest of the sector should follow. I get the feeling that many traders might have been playing energy like I was this week, just pulling the bids all week until earnings on Friday and then making your play. Let’s see if these two generals follow through on Monday. Watch the Friday lows.
The other group that showed good strength was the Permian names. PXD, CXO and FANG were all nicely green on Friday, with CXO even managing to close above Thursday’s earnings report high. I wanted to play these on Monday, but never got the right setup. I’ll be watching them again this week for a Monday pullback to try and get long.
COP, EOG and OXY were’t quite as strong as the Permian names, but they are setup well going into this week. OXY long at the 15.75 level is my favorite play out of the group. I don’t really like the company, but that setup is perfect for a long play. It’s a play where I can get some great size in with a very tight stop. If price takes out 15.50, the trade is probably wrong. If I’m right, the price target is likely in the 17.50-18 range, possibly more if the sector breaks to the upside. That’s a pretty good 7:1 return.
I’m not crazy about the setups in the service names, but I still think HP might be worth a play long in this 16-17 area. Same case could be made for a long NOV play in the 10.75-11 area. I’m not really interested in HAL or SLB this week since there really isn’t any area to play a stop off of in those names.
The refiners aren’t really offering much right now. The only play in that area is a long HFC trade around 26. MPC, VLO and PSX just have too much downside risk for a short term play.
Remember, I’m a very short term trader, mostly daytrades and my trades are all based on technicals not fundamentals. These trades aren’t recommendations on the quality of these companies, but rather order flow and liquidity in the very short term. Just because I don’t like something like HAL or SLB this week, it has nothing to do with the fundamentals of the company, it’s more that they just don’t offer a solid technical setup with defined risk and ample reward.
Trading Plan for the Week – Simple energy plan for Monday, I’m looking for any pullback to get long XLE, the majors CVX and XOM, as well as a few of the Permian names. The only problem I have is if we don’t get the pullback but instead get a gap up. The question then becomes whether I want to chase these names or not. I probably will, but it will require some defined setups on Tuesday. But for now, I’m looking for any pullback Monday to start some long positions. Let’s hope the Sunday night open doesn’t destroy all the following trade plans.
The XLE trade is my favorite, but strangely OXY is probably the second best opportunity. I hate this company, but the setup in OXY is quality. I’m looking to get long in the 15.50-15.75 area with a stop below 15.50. Reward on the trade could be 18.00 for a huge R multiple play of around 7-9.
In the Permian names, FANG has the best setup in the 38.75-39 area. I’ll be looking to get long there with a stop below 38.50. Reward on the trade could be 42 for another huge R multiple play.
The last energy trade for Monday is a long play in HFC off the 26 level with a 25.50 stop. Target on the trade is 28.75.
There are a few trades outside of energy that are enticing. I’m still watching JPM and might give that a shot long against Friday’s low. If the SPY is going to break toward all time highs, the financials are going to have to join the party. I also like a long play in AXP off the 93 level. Both of those trades offer very defined stops and risk management. I’m also watching a V long play in the 188-189 area. It isn’t really a pure financial, but the setup is quality and can be stopped fairly, especially with the 200 day ma sitting just under this two month range around 185.
The CVS/WBA pair may offer some opportunity this week. I’m watching 62 in CVS for a long play and 40 in WBA. As summer winds down and the fall/winter flu season kicks in, these will probably be ready for a move up soon. I’m planning for short term trades on these, but they could very well morph into longer term plays if the momentum picks up.
I was able to enter positions in MGM (14.75) and LVS (43) from last week’s trade list. These are in the long term account and I might add to them this week. The casinos never got the shutdown that I was looking for and at this point I don’t think it’s going to happen, so an entry here with room to add on an unexpected shutdown is a decent play.
The INTC play at 51.95 has been a disaster, but I added to the position at 47.25 for an average price now of 49.60. As I stated in last week’s writeup, this was a pre-planned add. There are very few stocks that I would make this play with, but INTC is definitely one of them. Like I said last week, it’s going to take awhile to heal, but when tech continues to run and INTC is sitting in this range, they will come looking for it again, especially if the company gets some of their fundamental problems resolved. INTC has been around a long time and I’ve watched them overcome problems before, let’s see if they make the recovery this time as well.
The last play for this week is a long in NKE in the 96-97 area. It can be stopped under 95 for a possible breakout toward the 104 level.
That’s all I’ve got for Monday and really all I can handle in one day. I haven’t been posting much on Twitter. Sometimes all the mask Karen’s, BLM protesters, political nutjobs, etc all gets to be too much and it intrudes on my mental peace. I just need a break from it on some weeks. Also, I’ve been moving my energy trading system over the healthcare sector. I can see the writing on the wall for energy and sometimes you have to prepare for the future when your chosen favorite area becomes untradable. I’m down to just a handful of energy stocks that are tradable in the very short term and I fear that one more tumble down in energy and there really won’t be anything left to trade except for long term plays. I need to have something to replace the daytrading opportunities and the healthcare sector is perfect. I’ll still be doing energy, but look for more healthcare trades in the future.
Enjoy the rest of the weekend and let’s hope energy can make a turnaround and move back toward the top of the range for a breakout this week.