Weekly Energy Equities Review, Market Outlook and Trading Plan for April 12-16
Apr 11, 2021 Trading Blog
Sorry for the lack of articles the past few weeks, but there’s really been nothing to write about. Energy is stuck in this dead zone in the 47-50 range and just hasn’t been tradable at all. I’m hoping for a nice move up this week though and I’ve got a long play on tap for the open on Monday. The key to this week is the 50 ma in almost every energy name, as well as the XLE and XOP. If the energy sector is going to bounce, it should be right here on a test of the 50 ma’s.
The real culprit in this dead zone is USO. It has wound into a fairly tight coil this past week and has almost come to a complete standstill. Thursday and Friday were two of the smallest range days in a long time. In fact, there’s a triple inside day formation going on with Thursday being inside Wednesday’s range and Friday being crammed within Thursday’s range. It’s definitely due for a breakout and I think it likely breaks to the upside. Watch 41.69 this week to see if it an break out. On the downside, watch 39.52.
A few other things to watch for energy signals are TLT, KRE and USD/CAD. Much like USO, the TLT has been stuck in a fairly tight range, which has also limited KRE to a tight range. KRE and XLE have been moving together for many months, mostly in sync with rising rates. With TLT (and rates) moving into a flat range, so too has XLE and KRE. Watch the breakout direction on TLT this week. If TLT resumes its downtrend, then KRE and XLE should move up. If TLT decides to start moving up, then watch for the banks to possibly roll over, along with XLE/XOP. The TLT is also the key to this IWM/QQQ rotation that has been going on. As rates go up, tech moves down and small caps have moved up, taking banks and energy with them.
I posted a USD/CAD chart last week and was looking for the pair to possibly break out of a long downtrend, however it got rejected on the breakout attempt and rolled over and moved right back into that downtrend, which is a good thing for USO. If UUP continues to weaken, that’s a benefit for USO. Watch the 1.2630 area on USD/CAD on the upside and the 1.2475 area on the downside. One other signal that seems to suggest the dollar may weaken is GLD and GDX. The miners are trying to breakout of a downtrend that started back in August. If GLD and GDX both start moving up sharply, that would suggest that the dollar might resume its downtrend, which would be a big help to oil and other commodities.
In summary, if the dollar and bonds weaken, banks, smallcaps and energy should resume their uptrends.
SPY – This is the worrisome area of the market right now. It’s pretty much going parabolic with a 7% move in 11 days. This just can’t continue, it’s not healthy at all. Over the last few months, I’ve been writing about a coming blowoff top and it could be coming in the SPY. I read an article this past week which said that more money has piled in stock funds in the past five months than the entire past 12 years combined. Big money exiting the game and leaving retail holding the bag? I just get the feeling that the smart money is (or has already) liquidated holdings and could now be driving the market to a level that would produce a nice juicy profit on the short side. And after the crash, the whole game starts over again. I’m out of everything at this 411 SPY level. I may miss some upside, but this house of cards could be getting ready to fall. My best guess is that it happens sometime in that September/October timeframe.
QQQ – The obvious pattern in tech is a double top, but that’s probably just too obvious and too easy to actually be what’s happening. This week will tell a lot about tech as it tries to make new highs above that February peak. If it fails and double tops, that’s going to be a problem. If it breaks upward, then the parabolic move is probably on, along with the same parabolic move in SPY.
IWM – The concern here is that the market is trying to form some type of rough head and shoulders pattern. I’m not much for technical patterns, it’s just a good common label to try and describe what I’m seeing. The market ran in February, pulled back and then ran to a new high in March. It’s currently trying to run again, but got rejected in the area of that February left shoulder high. If SPY and QQQ go parabolic, then I’d expect IWM to break that left shoulder high and make a run at the head high around 234. If that right shoulder forms though, the downside watch is at 210 on the neckline area. Again, I don’t put much faith in these canned patterns, it’s just an easy way to describe the chart in words that people seem to understand.
I’d really like to see IWM make one more blowoff move up toward 250. That’s where I’d like to take a shot on the short side. I’d also consider a short play in SPY if it blows off to the 430-440 area. Tech is a tough one to short because I think if the overall market does correct, a lot of money will move to the safety of megacap tech. I have no desire to short QQQ.
Energy XLE, XOP
I feel like XLE might be getting ready for a little shakeout to the downside and then a move back into an uptrend. I’m watching the 47-47.25 area on Monday to take a shot on the long side for a run back toward that thick 54-55 area. As I said above, watch the USD/CAD and UUP for dollar strength clues. If the dollar weakens, then USO should snap out of this current tight range and move back to the upside. Also watch the TLT. If it starts moving down again, then banks and energy should resume their rotation buying and both move to the upside again.
On a technical view, the XLE is sitting right on the 50 day moving average. XOM, CVX, BP and RDSA are right at the 50ma. Watch how the majors respond to any move below that 50 ma this week. The one problem area in energy could be the service names. SLB, HAL, HP and NOV all moved below and closed below their 50 ma’s. It’s the same thing for the refiners with MPC, VLO, PSX and HFC all trying to get below their 50 ma’s. If this market is going to gather some strength and try to bounce, this 50 ma area is the place where it should happen. If all these sector components start to lose the 50 ma’s, then the sector could have another leg down toward the XLE 42-44 area.
While the 200 ma is a long way down on most of these names, there is another technical level underneath this market. That level is the VWAP from those late October lows. If there are sellers in energy, they could push it to the average price on this entire uptrend from October. In the XLE, that VWAP is sitting 42.50-43.50. That range is with two VWAPs, one starting at the late October lows and the other starting on the November 9 gap up day. If there’s another leg down in energy, it should find demand in that 42.50-43.50 area. For the XOP, that area of demand should show up in the 67-69 area.
Trading Plan for the Week – The last three weeks of trading have been completely dead for me. I have no desire to jump in long at these levels in the SPY and QQQ. Sometimes you just have to let things go and sit back and wait. Patience really is a virtue. As for energy, it’s been even more dead than the rest of the market. This week the plan is to try an XLE long on any shakeout move down toward the 47-47.25 area and 50 ma test on Monday morning. Basically, I just need some signal that the low area around 47 (and the 50 ma) is going to hold. If I see strength under energy, a falling TLT, a falling dollar and a rising KRE and IWM, then I’ll be looking for a defined place to jump in long on XLE. All those things need to align though.
I’m still not interested in any individual energy names, but I do have one target that is interesting. I’ve mentioned WTTR a few times in the past and it’s one of the few companies that I’d actually be ok with holding for the longer term. If it makes a move down toward 4.50, I’ll start a scale in long all the way down to 3.50, hoping to end with an average price somewhere around $4.
I’m not interested in getting long in any other area of the market right now. In fact, the only trade outside of energy I’m looking for in the next couple weeks is an opportunity to get short on a parabolic blowoff move, hopefully in IWM.
Again, sorry for the lack of articles and Twitter posting lately, but I’m just not interested in this market where it is currently sitting. I think it’s incredibly overextended and controlling the downside risk just isn’t possible. When this market decides it’s time to correct, the move will be so fast that you won’t be able to get out. I’d prefer not to get trapped in that situation, so I’m willing to sacrifice some upside in the name of risk control and capital preservation. That’s just how I trade. If you decide to chase here and ride the parabolic move, just don’t get greedy. Make your money, take profits along the way and protect yourself for the coming move down. Good luck this week.