Weekly Energy Equities Review, Market Outlook and Trading Plan for September 28 – October 2
Sep 27, 2020 Trading Blog
It was a difficult week for my market thesis and it appears that the accumulation range I was watching in the 331-342.50 area really wasn’t an accumulation range at all. Last week’s plan was wrong, but it did provide some useful clues for upcoming market direction. I thought this market would bottom in the 325 area, but it got as low as 320 before a nice bounce on Friday. I still think this is a normal area for a pullback and the market will turn soon and resume its journey to the 380-400 area. The question now is if that wasn’t a pullback into an accumulation range, then what was it?
There are several different types of pullbacks. The most common is a simple pullback which trends, then hits a bottom and then moves sideways for just a bit accumulating the last supply before slowly reversing and trending up. That’s what I was looking for. Instead, I think the market created a complex pullback. A complex pullback is a formation that kind of looks like a lightning bolt. I’ll post a chart of the SPY pullback in the Twitter thread with this article. A complex pullback is an A-B-C type movement with an initial trend down, a bounce and then a second trend leg down almost identical to the initial leg. The first leg in the SPY started on September 2 at 358.75 and moved down to 331 on September 11, for a loss of 7.7%. It then bounced for three days and hit a high of 343.06 on September 16. The second leg then started and ran down to a low of 319.80 on Thursday, September 24, for a loss of 6.8%. There’s a good chance that may be the low for this complex pullback. On Friday, the SPY had it’s best day since the correction started back on September 2, gaining 1.6%. The most important thing about Friday’s move was that price managed to reclaim the prior week’s low of 327.97, which is a rejection of the probe lower beneath the range. It also managed to close very near to the high of the current week’s range. Those are positive signs and early signals of a reversal. Also, keep in mind that this week is end of month and end of quarter, so there could be a little extra effort on the buy side.
The key this coming week will be for the SPY to retest and hold the 319.80 low and then break the downtrending A-B-C complex correction trendline to the upside. A perfect complex correction would have taken the SPY to ~316, so the bears may have run out of steam on Thursday. One thing about complex corrections, they don’t usually spend too long at the lows accumulating sideways. Instead, they reverse sharply to resume the larger trend. Catching them is difficult, but the low of the complex correction offers a very defined stop to trade against. There’s no guarantee that what we have seen is a complex correction, but that’s the thesis I’m going with to create my trading plan for the week. If the SPY takes out 319.80 on big volume, that’s going to invalidate my thesis and I’ll head back to the sideline, evaluate the action and adjust my plans. Remember, no matter how good you think your plan or prediction is, the market is always right.
If 319.80 fails, the complex correction idea is likely wrong and what we are then dealing with is a standard downtrend with lower highs and lower lows. There’s always the chance that what we are seeing isn’t a correction at all, but rather the start of a longer term downtrend or bear market. The next level down for the SPY is around 300. Many people toss around the 20% decline level for a technical “bear market”, which would take the SPY to about 286. The current SPY move reached about a 10% loss at it’s lows on Thursday, so it’s half way there. I really don’t see a 20% move happening, but you never know.
QQQ – One thing that encourages me that the market pullback may be ending soon is the action in tech. While the SPY spent most of the week with price discovery below the prior week’s range, the QQQ quickly rejected any auction below the prior week’s range and finished the week almost exactly at the prior week’s VWAP, and also near the highs of the current week’s range. That’s significant relative strength. The point to watch now is 273.08. If price can establish above that level, then there’s easily room to get back to 281 for another test.
IWM – While tech was strong, the small caps showed significant relative weakness with the IWM opening below the prior week’s range and never even getting close to recovering that range. The fact that lower prices were accepted is concerning. The small caps have been more correlated with the energy sector, and this week’s poor action in both is discouraging. Watch the 142 level for IWM this week. If that can hold and if the IWM can reclaim 150, that would be a great sign for energy. If 142 fails, then 136 becomes the spot to watch. A failure at 142 suggests that XLE will probably move close to the 28 level.
XLF – I’ve been using the financials to gauge the rotation from overperformers (tech) to underperformers (banks, energy) and last week the banks followed energy straight down. They gapped down big on Monday morning and never recovered the prior week’s range while closing the week in the bottom half of the current week’s range. If the banks keep moving down, that probably signals that energy will do likewise. The two sectors are moving together, so keep an eye on the rotation from/to tech from/to financials and energy. Also, keep an eye on European banks for worsening problems.
UUP, USD/CAD, GLD, TLT – While the overall equity markets had some effect on energy stocks, the more important correlation (and context) was with the Dollar. The UUP gapped up and out of the 8 week consolidation which started back in late July, and never looked back. That move was correlated with a big gap down and drop in GLD from the 183 level to 174. The GDX also got hit hard. The USD/CAD is my favorite oil related pair and the early Monday gap up and out of the 1.3250 level really limited any upside in energy stocks. One thing that was encouraging though was that even with the big run in the dollar and CAD action, the USO managed to hold value and even grind softly upward all week, so there is some hope in that commodity/equity divergence. The UUP will likely control things again this week and still has room to the 25.90 area. Also, have to hope that UUP doesn’t turn into a short squeeze as there’s still a lot of dollar shorts out there. The USD/CAD has room to 1.3525. I think we are going to need a big pullback in both to get energy stocks moving upward, however I do think the commodity price could run up sharply if the dollar weakens. Watch the 29.50 area in USO.
In summary, I pointed out last week that many of the above were in consolidation ranges and any simultaneous breakout by the whole group would probably be a big one and go for months rather than weeks. We got the breakout, so let’s see if it does indeed turn into a longer term trend or if it reverses quickly. Remember, these correlations are your background and context for the bigger trading plan and market direction, so it’s usually best to trade with them, not against them. Even if you aren’t trading oil or the energy sector, it’s still a good idea to use the correlations found here.
Energy – Big Picture, Larger Trend
There’s not really any way to spin things, it was an absolutely terrible week in the energy sector. I got really lucky with the long trades I took on Monday because those trades were 100% wrong. Exiting those trades on Tuesday morning’s big bounce was one of the better moves I’ve made over the last few weeks and really saved me some money and also kept the powder dry. After that early Tuesday exit, the only thing I could do the rest of the week was stand aside and watch the sector burn. The demand that I wrote about last week just wasn’t there. I really don’t know where the bottom is at this point. I still don’t think we get to the March lows, but I don’t think it’s impossible either.
The negative sentiment in the sector seems to be really overdone. I get all the supply/demand issues, virus implications and the electric vehicle hype, but oil and gas isn’t going away. The decisions these companies are currently making to diversify, cut exploration, cut capex and decrease production could really be the spark for an oil price shock to the upside. I think people are getting consumed by this virus talk and they are giving up hope that things can ever get back to normal. However, things WILL get back to normal, even if the current sentiment thinks otherwise. When this country does start working again and production of all those shale wells has declined 50-70% during this virus circus, oil prices will react. Those wells aren’t being replaced. I really think many traders forget how fast this sector can move when that supply/demand curve hits a tipping point. The sector has become such a small portion of the S&P that is doesn’t take much to move it. I’d speculate that the sector has become so small in market cap that it wouldn’t be out of the question to corner the sector given how much capital has been printed and distributed on Wall Street. If anyone decides to seriously accumulate these stocks down here, it would only take one spark to set off a price explosion. There is a huge opportunity coming for patient energy traders.
Majors – I get the negative sentiment and the dividend cut rumors, but this is where I want to put the majority of my longer term energy money. It was difficult to keep the finger off the buy button this week with BP under 18, RDSA under 26, XOM under 34 and CVX under 71. I think you have to stick with quality if you want to play any longer term future oil price spike. This isn’t a stock picking idea, it’s a larger sector theme. I think many traders are going to move back into the shale plays, but I think that’s a mistake (although I wouldn’t be against smaller, shorter term bets there). I’d really like to see one more high volume washout to start in on these names with a scale in approach.
XOM is my primary target and I think it could test the March lows in the 31 area if we get a further market pullback. That’s only a 10% drop from current prices. I’m going to be watching XOM Monday for any signs of bottoming and will be taking a 10% starter if it takes out the 33.76 lows. BP is my second choice. I’m not sure where this bottoms, but the March lows are only about 10% away. I’d look at CVX third only because it’s a difficult setup to control risk. CVX is still about 25% away from the March lows and there’s no real concrete stop level to control the trade. I’ll probably enter this one, but I’m not sure where.
E&P – Much like the idea of sticking with the majors for quality and an overall theme idea, I’m planning on sticking with only the largest E&P names to play any long term move. That group includes COP, EOG, PXD, CXO, HES and OXY. I really don’t have any desire to drop down any smaller in market cap for large size plays. I’ll still speculate in a few second tier E&P names like DVN, APA, PE and MTDR, but they will be smaller bets.
COP had the best week of the E&P plays and looked good bouncing off the September 11 lows. I’ll be watching the 33 level this week for a long trade. I did take a shot at CXO at 44.08 on Wednesday but exited on Thursday’s bounce. I’d like to see this one test 42.50 for another try. EOG showed solid strength Thursday and Friday and I’d like another chance at this one around 35. I think it’s the name traders will flock to if they want to play US shale again. PXD around 84.50 and HES under 38 would also be attractive. As for OXY, I’ll give this one a try, but it’s going to have to be at a bargain basement price and I need to have already established positions in all the above names first.
Just saw there is a possible merger between DVN and WPX. DVN used to be one of my absolute favorite names, but they have really fallen. I don’t follow WPX, but I don’t think the market will like this deal. I’m guessing DVN gets punished for it Monday. If DVN got below 7.50 on an overreaction I might give it a look. The deal just seems like DVN is diluting what little quality it had left. Maybe WPX is higher quality than I know, but if they were, they wouldn’t have sold out. Seems like a desperation deal. Avoid.
Refiners – This is still my favorite energy sector play. I’m waiting patiently on these, but the time is getting close. I’ll be starting in at MPC 27, VLO 41, PSX 50 and HFC 19. I think this subsector is where the negative sentiment is at its highest. The electric car hype is way overblown and I really don’t see new virus lockdowns being implemented ahead of the election, and if they are it will only be for short time. I think many people have moved too far into the doomsday scenario. People will travel again. In America, when the scales tip, they do it quickly. Sentiment can change on a dime, all it takes is one spark. Unfortunately, you can’t drill an oil well at the same speed.
Services – I’ve been avoiding this subsector, but I’m starting to get interested at these prices. I wrote about NOV last week and almost picked some up on Friday, but resisted. Like the rest of the energy sector, I think you have to stick with quality and that’s SLB, HAL, BKR, NOV and HP. I think HP and NOV have a chance of testing the March lows. My primary target is SLB and I’d like to start in on that one under 15. Reaching for the smaller names is really dangerous when things get near the bankruptcy level. If you do it, stick with names that have low debt and plenty of cash. The only services position I have right now is WTTR and I probably entered that one a little early. I will be adding to it around 3.25. Other names that I might consider for small speculative bets: LBRT, SOI, MRC and CLB.
Natural Gas – Still not interested. COG and EQT just continue to wander aimlessly with no trend. I have no desire to reach down any further in quality so RRC, AR, and SWN are off the radar for now. UNG does seem to be carving out a nice base and I might get interested if it takes out 15.
Coal – I put these on the radar, but I’m waiting for big pullbacks to give them a more serious look. BTU has a nice accumulation range going on and the 2.75 area could be attractive. I’d need to see bigger pullbacks in ARCH, HCC and CTRA. The problem I have with this subsector is that I don’t know if the recent runs were truly fundamentally based or if it was just fast money speculators playing the last underpriced commodity names they could find. Let it settle out and then take another look.
Trading Plan for the Week – I switched my trading timeframe last week to try and get some positions in the longer term account, so I’m probably not going to be doing much short term trading. I’m trying to keep all the powder dry and my attention focused on getting some names near the bottom. Sometimes when I try to short term trade and make long term plays at the same time, I really make things difficult for myself. I’m watching the XLE 29.54 low to start the week. The only short term trade that I would be interested in is a gap down and reclaim long in XLE. If Sunday night opens down near 29.25, I’ll enter long when price reclaims Thursday’s week low of 29.54 and then add to the position when price reclaims Friday’s low of 29.70. The stop goes just under the morning low prior to the reclaim. Target on the trade is a run at 31.50. I’m not really interested in short term trading any individual names on Monday. If the market starts running back up, then I’ll probably set the long term bottom catching play aside and resume short term trading.
Reviewing last week’s non-energy plays, not much worked. The banks all gapped so far down on Monday that they were unplayable. MSFT worked and the casinos got the drop down to levels I liked, but I just didn’t pull the trigger on them. TWTR was a good idea, but it just moved so fast that I couldn’t catch it. This week’s non-energy ideas:
Casinos – I like WYNN on another break below the 70 level and would like to pick up some LVS down near 43.
AMD – Long play off of 74 with a 1-2 dollar stop, target 85.
AMGN – Long play off 240, stop 237, target 253.
INTC – Quick bounces off of 49 have continued to work, 25 cent stop, target 50+.
JPM – Long play off 92, stop 90.50, target 100.
WFC – Long off 23.25, stop 22.75, target 26.
LLY – Long play off 148, stop 146, target 154.
Electric Utilities – AEP, SO etc. These have been consolidating for awhile and could be getting ready to make a move upward. The electric vehicle hype grows, someone’s going to have to supply all that power. There’s a defined support under most of them for risk control. Pick your favorite, set the stop under recent support and ride it.
TAP – Had this one on last week’s list but didn’t play it. Still looking for a bottom in this one, 32.50 entry, 31.50 stop, target 37.
WMT – Long play off 136, stop 134, target 146.
I finally feel like my world is getting back to normal. Alabama football on Saturday, fall weather and a trip to the winery on Sunday. It’s definitely going to be a two bottle day. I think I could live with fall weather year round if it was possible. Enjoy the rest of the weekend and good luck this week.