Weekly Energy Equities Review, Market Outlook and Trading Plan for September 14-18
Sep 13, 2020 Trading Blog
It feels like the market got really close to a final washout on Friday as this latest pullback continued. I think the SPY moves down to test 325 this week and then consolidates for a week or so and then begins that final meltup into the November election. I’m still looking for the SPY to top out in the 380-400 range. It’s curious that everyone watched this market rip straight up from the March lows while always complaining that we needed a pullback. Well, we are getting a pullback in a very logical place for one, yet everyone has now moved to calling a for a crash. I could be wrong, but I think there are going to be a lot of people in November who will regret not buying this pullback.
SPY – I think the February 24 gap down price of 325.85 is going to be an important spot to watch over the next week or so. This current pullback should stop at that level. There’s also a smaller possibility that we could have bottomed on Friday at 331. That 331 area was was just below that February 21 closing price of 333.48, which was the close the Friday before the Monday, February 24 coronavirus panic started. Either way, that February 21-24 area is an important one. Either price stays above and we move on from the pandemic, or we sink back down into the pandemic prices. It’s a pretty simple market choice. If the market decides that there’s more pandemic pain ahead, then we likely take out 325 and head to 300. If the market decides the pandemic is basically over (except for the ridiculous political angle and political agendas) then price should turn upward away from the 325 area and we move higher to new levels of expectations. It’s not so much a technical decision, but rather a simple question: Are we done with the pandemic or not?
IWM – In last week’s writeup, I was watching the 160 point for IWM, but it never even got close. There was a clear failure in the small caps. The uptrend was clearly broken. Notice that the IWM never broke out with the SPY and QQQ. It actually never even got to the February 24 gap down area around 162 from the coronavirus panic. The small caps usually send an accurate signal for energy and the fact that both never managed new highs is significant. Watch the 145-147 area this week to see if it bounces or if it gives up the 200 day ma at 145.50.
Larger Picture Energy – XLE, USD/CAD, UUP, GLD
XLE – The energy sector failed this week at the important 34.50 level and never showed any intention of trying to bounce to test that level from below. There are two likely paths this week. First option, the SPY drops and tests the 325 area and the XLE drops with it and tests 30 and both have big bounces off those levels. Second option, the SPY holds the Friday lows and bounces while XLE holds Friday’s 32.35 low and also bounces back up and tests 34.50. Both options should be great trades. As for WTI itself, I think 34.10 (~USO 25) should hold as support this week.
I put on some smaller 10% longs in 13 names (list posted on 9/10 Twitter) and if XLE does drop to the 30 area, I’ll be scaling more into those names from 10% up to about 40-50%. On the other hand, if the SPY and XLE both hold Friday’s lows and start upward, I’ll probably just hold what I have and ride them to XLE 34.50 where I can make a decision to either cut them and take profits or double them for a break above 34.50 and a run toward 36. It really depends on how strong the attempted move back toward the 34.50 breakdown point is. Just as the SPY came back and tested the 339 point after the break to the upside, the XLE should go back and test the 34.50 point after the break to the downside.
Continue to watch the USD/CAD pair, UUP and GLD for oil clues. The CAD is still trying to move away from the 1.30 level and has an important decision at 1.3250. The primary watch point for the UUP is the 25.35 area. The UUP continues to build a base and if it breaks above the 25.35 level, the dollar could really make a move to the upside, which probably isn’t a good signal for oil. Also, keep an eye on gold. If UUP does form that base and start upward, then GLD should breakdown below the 180 level for a possible short.
Energy – Individual Names
Majors – I was really impressed with XOM in last week’s writeup, but it really failed me and closed at 36.90. I took a position at 37.54 and really thought I had a good deal, but it continued to slide, although it did manage to bounce on Friday for only a 10 cent loss on the day. Speculators have begun to throw the dividend cut rumor around and that may be influencing price. It currently yields about 9.4% and that just won’t last. Either these majors are ready for a big bounce in price or the dividend may in fact be in danger. If the dividend does get cut, I would have no problem loading up on a price collapse, especially if price approached the March lows around 30. My entry on CVX was much better with a position taken at 77.50. The dividend yield on CVX is 6.6%. I’m also watching BP for an entry if the market moves down this week.
E&P – I took positions in the bigger E&P’s this week with COP (33.81), EOG (39.44), CXO (47.04), PXD (92.63) and OXY (10.47). I’m definitely sticking with quality here (subjective LOL) and not dipping down into the smaller second tier names. I’ll probably pick up a position in HES as well. The only smaller names that I’m willing to take a chance on are PE and MTDR. I was really tempted to enter last week, but if the market does fall more, these smaller names will probably come way down. I’d love to see PE in the 8 area and MTDR around 6.50, but that’s probably wishful thinking.
Services – I avoided the service names. The only one that I was tempted to buy was HP at the 14.50 level, but I passed on it. If it breaks under 14, I’ll probably pick some up. I’m watching NOV 10.75, SLB 17 and HAL 13.25 for signals on the service names.
Refiners – This is the group that I’m most interested in. I picked up positions in all four names MPC (31.06), VLO (47.19), PSX (56.73) and HFC (20.97). Currently, I’m green on all except VLO and looking for a big run this week. All four names put in big reversal bars on Thursday/Friday. It will be key for this group to hold Friday’s lows. There’s probably at least 10% upside in all four names from here if XLE gets that bounce back to 34.50. These are also the most likely names to double up the position if XLE takes out 34.50. Once these turn and start moving, they usually trend very strongly.
Natural Gas – I’m still not interested in anything in the natural gas space. They aren’t horrible trades, but there’s just no trend here after they ran up quickly on the NG price spike. COG around this current 18 level could be a possible trade, but there’s just not much reward there.
Trading Plan for the Week – As usual, Monday’s plan depends on the Sunday night open. Ideally, I’d like to see a big gap down for an XLE reclaim long trade setup around 10-10:30 Monday morning. I’m still overall bullish longer term on energy names, but there may be more short term pain if the SPY continues its pullback toward 325. SPY controls the action on Monday. Like I said above, I’ll be looking to add if XLE moves toward 30-32 and I’ll be willing to sit tight and ride what I have if it bounces to 34.50.
For non-energy trades, these names are on the radar:
AAPL– I’m willing to take a shot long in the 110-111 area on any gap down on Monday. If the market gaps up, then just let it go and avoid, don’t chase.
INTC – Looking for bounce around the 48.75-49 area for a run back toward 51. Use a fairly tight 35 cent stop to 48.50.
MCD – This one was on last week’s writeup and it had a pretty good week considering the overall market action. It was green all four days last week and could be getting ready to move to new all time highs with a break of the 220 level.
V – Same play as last week, enter in the 199-200 area and play for a bounce to 207. Stop it out if it breaks the 50 day ma around 199.
WBA – I keep waiting for a bottom in this one and it may be getting close around 32-34. It’s a longer term play, but if I can find a decent place to risk $1, then there’s easily room for a $5-$6 dollar reward to 39.
AEP – Looking for a long entry in the 78-79 area with a $1 stop. Reward is a move back to the top of the range around 88.
AIG – Long entry 28.25 with 27.50 stop, reward to 32.
Financials – Many financial names are sitting right on major support and could be getting ready for a run. These could be the new market leaders taking over for tech. There are opportunities in JPM, C, WFC and BAC. I also like a long here on KRE around 37.25.
Kind of a short writeup this week, just not much to do until the SPY completes this pullback. I’ll be watching for the bulls to make a stand Monday morning and hopefully this market turns upward. Good luck this week.