Weekly Energy Equities Review, Market Outlook and Trading Plan for November 2-6
Nov 1, 2020 Trading Blog
The election is finally upon us and I’ll be glad to see it pass. I hate politics and if there was any way to remove it from my Twitter timeline, and the world for that matter, I would. That’s not to say I don’t have opinions on things that happen in the world, but rather politics just isn’t the solution to most of those things. Politics usually makes them worse. Good luck and I hope your candidate wins, but to both sides, after the election just let it go and move on with life. There’s too much good stuff going in life to waste time worrying about politics.
As for the market, Monday and Tuesday are probably wasted days this week. The liquidity will likely be very thin and the news headlines are going to be crazy with both sides getting in their final attacks and bribe attempts. There’s also the doomsday possibility that this election ends up being contested for weeks and we won’t know who the winner is for some time. For this week’s writeup, I’m mostly going to skip the Monday and Tuesday action and try to find some opportunity on the election outcome. I think we could have a great opportunity in energy if Biden wins. I’ve also got some already established positions which should pay nicely with a Trump win. The market has somewhat priced in a Democrat win, but I think their party position on the energy industry could take the sector down on Wednesday for a great entry. The first kneejerk reaction on a Biden win will be down, but once traders have a few days to really think about it, the sector probably bounces with the rest of the market. No matter what the final election outcome is, the SPY will likely continue its journey to 380-400 in the month after the election, but at some point in December I think we are headed for a market reset. Not a crash, just a much needed pullback to wash some excess out of the market and give money a chance to get back into the market at much lower prices.
SPY – Price closed the week with a perfect bounce right at that important 320-325 area high from June which was retested from above in late September. There has been a lot of action in the 320-325 level and I think that’s probably the line in the sand for this week. Use that point as a reference after the election to determine the short term direction. If 320 breaks down, then the next level comes in at 300-305. If 320 holds, then it’s on to test 355-360 and then 380. I still see many people talking about a double top, but I still just don’t see that at all. If anything, this is just a consolidation in the two months ahead of the election as traders positioned for a very uncertain event. Personally, I’d like to see the market reset early 2021 somewhere in the 275 area for another run over the next four years. I think the very worst case in an absolute economic disaster would be 200-210, at which point I’d push all my chips in at that price.
Ideally, what I’d like to see after the election is maybe a little dip to 310 and then a retest of 320-325 from below, a break back into the 320-360 range with a little more consolidation and then a big run at the top of the range for a break to 380. One other point on the SPY, I keep seeing a Twitter timeline full of people complaining about how it’s all a house of cards and can’t last forever and that it’s all going to come crashing down. All I can say to those people is that you are killing your trading success with these thoughts. Yes, the game is rigged, but the people rigging the game are in total control. This game could easily go on for another 20 years. You have to play the game you are given, no matter whether you think it’s rigged or not. If you will just accept that the game IS rigged, you can then take an approach to beat the game, which only requires beating the complainers who can’t beat the game because they assume it’s rigged and unbeatable. You don’t have to beat Goldman Sachs, you just have to find spots in the market where retail is simply making mistakes and beat them. It’s kind of like the joke about not needing to actually outrun a bear in an attack, you just need to outrun your slowest friend.
QQQ – The action in tech was stronger than SPY, which could have been due to megacap tech being seen as somewhat of a safe haven during the pre-election uncertainty. Price never made it down to the bottom of the range around 260, even with all the disappointment of earnings misses. If Trump wins on Tuesday, there’s no telling how high this thing goes. Just as 320-325 is the line in SPY to watch, 260 is the QQQ line to watch for direction. The downside of tech making a big run up after the election is that the rotation to tech from energy/banks will probably continue which means a headwind for energy.
IWM – Small caps also came right down to that June high like the SPY did and found solid demand, but almost all of that move was the big gap on Wednesday morning. After that gap down, price didn’t change much. I think small caps are going to be the most important signal to watch after the election. The IWM needs to reclaim 159 fairly quickly and then take another shot at 164. If it can take out 164, then energy will likely turn upward and move back toward 31.25. On the downside, 144 is the worst case for IWM and I’d probably be a buyer there. A fall to 144 probably takes XLE down close to the March lows, where I would also be buying heavily.
UUP, GLD, USO, TLT, XLF – The dollar made a huge run this week, but I’m not sure if it’s a real move or a short cover ahead of the election. If it’s a real move and continues, that’s going to stop USO in its tracks and probably knock it down to the 22 area. The one clue that makes me think the dollar move was a short cover was the action in GLD. A dollar move like that should have knocked GLD down pretty far, but it hung in there this week and held that late September low point. GDX also probed below the 37 level, but found solid demand for a good bounce on Thursday/Friday, even with UUP rising. If the dollar move was a short cover and it starts weakening again, that could send USO back up to the 27-28 area later this week. Specifically, watch the USD/CAD pair and the 1.3425 area. The CAD was weak all five days and should test the range highs soon. If it breaks the 1.3425 level, the next significant level doesn’t come into play until about 1.3600
The TLT was looking good Monday through Wednesday, but fell off a cliff on Thursday and Friday, closing at the low for the week at 157.57. That probably should have helped the XLF a little more than it did. The XLF managed green days on Thursday and Friday, but I’d really like to see the XLF recover and move up since it has been decently correlated with energy. A down move in TLT should be a good signal for energy if filtered through the financials.
In summary, I think the XLE held up fairly well considering all the headwinds. The dollar was ripping up, the IWM moved down large and money rotated back to tech and away from XLF/XLE. If energy is going to recover after the election, it really needs the macro to return to positive correlations including UUP down, GLD up, IWM up, XLF up, TLT down, QQQ flat.
Energy Big Picture
The XLE had been consolidating in the 29.75-31.25 range since late September, but it broke that range this week and closed below it. In last week’s writeup, I was struggling with the decision of whether this latest range was an accumulation or a distribution and whether or not there was going to be a final spring/washout at the end of the range. Well, the odds suggest that the range was indeed a distribution and that we haven’t seen the final lows yet. I could try to make the case that this week’s move was the spring, but that consolidation just wasn’t long enough to reverse the fall from XLE 39. I still think we need that extreme volume washout to establish a final low. I’m hoping that the election result might create that final washout. A Biden win could easily cause a final spike down, which I will be buying.
I took some positions this week ahead of the election and all of them are green except COP. I’m still not sure if I’m going to hold these through the election. If the market has a big up day on Monday or Tuesday, which many people would really like to see, I may cut them for a nice profit and take the reload opportunity on a Biden win. That would really be risky, because I think the positions are going to pay off nicely with a Trump win. Also, I did see that Trump threw energy a bone this weekend with an order relating to fracking. A Hail Mary to pickup votes in the oil states, but still helpful if he wins and maybe something that could produce gains on Monday. There’s also the option of cutting positions in half, locking in a partial profit to reload. If the market somehow tanks on Monday, I’ll just ride them all since I’m going to be buying on any big move down anyway. I’ll make the decision Monday and post the exit prices if I take them.
Majors – Earnings were mostly a non-event on Friday. XOM caught the worst of it with the possible writedowns on dry gas properties. I think CVX did some partial writedowns in the past, but they were also smart enough to sell much of their mixed gas properties to EQT rather than letting them rot like XOM has. People criticized the CVX move and said EQT was stealing the properties, but at least getting some cash (almost a billion) is better than writing them off for a loss. You really have to ask yourself, who’s smarter, CVX or EQT? I’d put my money on CVX and really question the wiseness of EQT paying a billion for similar assets to what XOM just wrote down for a loss. From a purely technical trading standpoint, I still think XOM is the better trade, even though it’s probably not the better company. I was really hoping that XOM would make a move on the March lows after earnings, but buyers showed up and minimized the downside. I still like CVX, but I just can’t find a safe play since it needs an entry down around 65 to produce a stop that controls risk enough to make the trade worthwhile. If the sector moves down after the election, XOM is my play on majors.
My best trades of the week were in BP at 14.88 and RDSA at 23.35. These were trades around 4:30 am Wednesday and the biggest reason that I continue stay with Interactive Brokers because of their 4 am open. These will also probably be the first trades that I cut on any big move up on Monday. I’m watching the March low of 15.51 low in BP. It closed 15.48 on Friday, so there’s a really playable point in that March low.
E&P – My worst trade of the week was COP. I’m really not sure what’s wrong there, but I can only assume that the CXO purchase still isn’t being received well by larger holders. COP is my third largest trade and I have about a third of what I want, so I’m willing to buy this down pretty far. This is going to be the largest independent survivor and probably the biggest pure play on oil. When the sector turns, this should be the first trading target on the long side. PXD has been moving similarly to COP after their purchase of PE. Maybe that combination is also having some problems. I’m watching the 76 level for PXD and would like to pick some up on any significant break below that. I took a partial position in EOG at 34 and I think that’s going to be the other large survivor after this whole downcycle is complete. If it makes a move close to the March lows, I’ll be loading it long as my second favorite behind COP. I’ve still got HES on the radar, but just haven’t started a position yet. I’m still not buying any second tier names yet, but DVN is getting interesting
Natural Gas E&P – I really can’t make up my mind on these. They occasionally look really good and then they just tank. I do worry that XOM and CVX are basically writing off or cheaply giving their gas properties away, and that just doesn’t say anything positive about the future of natural gas. Why would they dump these if there was good profit in them? Did EQT just buy a worthless property that CVX dumped rather than writing down? COG and EQT are still the only two that I would consider. Ignore RRC, AR and SWN.
Services – I had NOV lined up to buy in the 8-8.25 range and just didn’t pull the trigger. I’m probably going to regret that one. I haven’t been too interested in this group, but they are starting to get attractive and I’ll be buying on the next dip. SLB is still the favorite target with HAL in second place. I have no problem with positions in NOV and HP either. I still don’t trust the smaller names, but one I would add to the watchlist is LBRT. If it makes another run below 6, I might pick some up. The only other small name that I like in services is WTTR. Water processing is going to be important, especially if the Democrats decide to start regulating with all kinds of safety rules. Clean drinking water and fracking are both political target and WTTR could benefit. I started a position at 3.07 and I’ll be looking to add on the next dip. I’m planning on going fairly large on this one for the final position size.
Refiners – This group continues to frustrate, but it’s still my favorite energy trade opportunity. MPC remains the strongest and found solid demand again around 26.75. Unfortunately, I missed that entry and still don’t have a position in it yet. PSX is my favorite pick in the space and I’ve got a position at 46.50. It closed Friday at 46.66. This one got close to testing the March lows and I think it probably takes another shot later this week, and if it does I’ll be adding. I also built a small position in VLO at 38.10. It closed 38.61 Friday. I’m hoping this one also takes another shot at the March low to build the position. HFC is interesting and it managed to take out the March low of 18.48. It struggled to climb back above that low, closing at 18.51 Friday. I’ve got a position in that one at 17.25. This group is the primary watch this week and the opportunity that will probably get the largest chunk of my longer term (1-3 months) money.
Trading Plan for the Week – I’ll be on the sidelines Monday and Tuesday, so I probably won’t post much on Twitter. I’m really trying to avoid all the political stuff. The only play that I might consider is selling current positions on any big move up before the election. I’d be willing to pocket the profits and then take the chance to reload. One thing that really pushes me toward this option is the possibility that this election is so close that it becomes contested and we don’t get a clear winner. I think that might just knock this market down to the 300 level. There are so many loose ends and landmines that have already been planted that I really feel both sides have pre-planned a contest of the results. I got trapped in the Bush/Gore election tie and I don’t plan on going for round two on that kind of event, it wasn’t fun. However, if I was in cash, I’d love to see the tie and move down for a purchase.
This is in no way an endorsement, but I think Biden probably somehow wins this thing and if he does, energy is going to have a kneejerk reaction down and that’s when I want to get the big entry. If there’s no big move up on Monday or Tuesday, I’ll just hold all positions and take the profits on any big bounce on a Trump win. If it does turn out to be a Biden win and I’m still holding, then I was going to add to the positions anyway, so no big deal. The only thing I would recommend against is chasing a Trump win. If we get the big bounce on a Trump win, that’s a chance to exit existing longs, not chase FOMO prices up the ladder for new positions. There’s a reset coming, simply wait for it and don’t put yourself in a bad spot by chasing and taking a bad entry price. That makes a very expensive trade.
Technically, there’s a few spots to watch in XLE. Most important is probably 28.44, which was last week’s VWAP. Price should rotate around that point on Monday and Tuesday. On the downside, 27-27.50 should provide demand and on the upside 29-29.25 should show big supply. The XLE is a little tricky though because on Friday XOM was down -1% while CVX was up +1%. See if those two start to move in the same direction, and if so there could be a directional move in XLE toward one of the extremes. If they continue to move in opposite directions, XLE likely just rotates close to VWAP.
All my trading attention this week is on energy and the IWM, so I don’t really have any short term intraday type plays for the week. In energy, I’m watching these points on the downside for longer term (1-3 months) plays:
XLE 26-27
XOM 30-31
CVX 63-65
COP 26-27
EOG 30
PXD 73-74
HES 33
SLB 13-14
NOV 7.50
HP 12-13
MPC 25
VLO 34-35
PSX 42-43
This should be a fascinating week. My only advice is to take it slow, let the election play out and have a plan for how you want to attack based on the possibility of each individual outcome. If things evolve according to your plan, then stick to it and pull the trigger. Action will be wild this week and volatility will be high. Having a plan going in will keep you from losing your nerve when things get crazy. Good luck this week and let’s put this whole election shitshow behind us and move on with life.