E-mail Comment Digg Reddit Technorati

Weekly Energy Equities Review, Market Outlook and Trading Plan for April 19-23

It was another week of rangebound trading for most energy names. I wasn’t going to write an article this week because there really wasn’t any significant movement or tradable setups to talk about. But after thinking about it, maybe that lack of movement IS the reason to write this week. The overall market continues to make new highs and almost every sector is participating. Everyone is making easy money these days, except energy investors. And that itself might be a big problem.


Back in November, many funds poured into energy. I’m not sure how they justified the investment over other sectors. Perhaps it was simply the fact that energy was so beaten down that it had to go up. The sector was so far below the pandemic start level of February 21, 2020 that the risk was worth the reward. And the sector is STILL well below that pandemic start by about 10%. The real question in energy right now is this: How much longer are these funds going to tolerate zero growth or return in energy when they could be deploying that money elsewhere for much higher returns? How much patience do these big holders have right now? At what point do they finally throw in the towel, take their profits and dump these energy names in favor of better plays?


I’m not saying that this is going to happen, but it’s something you really have to consider if you continue to try and play this sector on the long side. There’s also the additional problem of what happens in energy if this insane SPY meltup tops out and corrects, because eventually it will. I tried to point this out a couple months ago, but energy is a lagging sector. No matter how much people have called it an outperformer over the last 6 months, it just isn’t. If you go back to the pandemic start, most energy names are still well below that level. In the bigger picture, energy is a laggard in this market. And if the overall market does correct, you know which sectors will crash first? The weaker lagging ones. Sell weakness, buy strength. I’ve even seen many of the Twitter crowd justifying their energy plays on the basis that they are so lagging that surely energy has to catch up. That was their entire trade thesis. It did work for awhile, energy had a nice run. But will that logic work again at this point in the overall market cycle? The odds seem to be against it.


And again, I’m not saying we are looking at the sector collapsing. In fact, with the current market insanity, we could wake up Monday and energy could gap up and make a run at that 54-55 level in the next couple weeks. This market is manic right now and it continues to run on pure emotion and easy money. Believe me, I’d like to see energy make another run through 55 myself because trading has been absolutely horrible in the sector over the last 5-6 weeks. But trading is a game of odds, and the odds seem to suggest that the sector is weaker than the overall market and if you play the long side you are probably taking the short end of the odds proposition.


So the real question right now in energy is this: How long are the current players going to hold these rangebound positions when there are better opportunities elsewhere? And how quickly will they bail on these rangebound positions if the SPY tops out and corrects? Sell weakness and buy strength.


SPY – The SPY has lost all perspective and the emotional meltup is in full effect. Who knows where this stops, but it will stop and the correction could be substantial. I really don’t know how people are pouring their money into the market at a 417 SPY level, but they continue to do so. It really makes no logical sense. Why in the world are people so anxious to buy at these insane prices? I guess that is the rule of any bubble. At some point, this will be a great short, but I don’t think it’s time yet. Things may get even crazier on the meltup.


QQQ – Tech managed to propel through the double top situation that I set forth last week, but the action wasn’t as euphoric as expected. But still, new highs are new highs. The meltup in QQQ might march along with the meltup in SPY. As for shorting tech, just don’t do it. If this market does correct, I think there’s a good amount of money just waiting for tech deals. There’s also a lot of money that will move to the perceived safety of megacap tech if the overall market corrects.


IWM – The smallcaps are a concern right now. They just aren’t participating in this SPY/QQQ meltup. But remember, they were slow to participate in the move up when SPY and QQQ broke pandemic highs in August. The IWM didn’t manage to break out above pandemic highs until that November 9 vaccine jump day. I’ve been calling for a meltup in IWM toward that 250 level and I think we still get there. The IWM is representing a big head and shoulders pattern right now, but I think this one has a great chance of turning into a continuation pattern rather than a reversal pattern. Watch 226-227 this week for the breakout. When this thing breaks that level, it should push 234 within a few days, and then the meltup to 250 is on. I’ll be waiting at 250 with a whole lot of dry powder ready to get short in a BIG way.


TLT – The TLT really tried to make a turn to the upside, but it remains to be seen if this is a larger picture turn or just a dead cat bounce. A downward moving TLT (higher rates) has been an important factor for smallcaps, banks and energy. If that TLT trend reverses and heads up, that’s a negative for KRE and XLE. If I had to guess, I’d say this bond move was a dead cat bounce. There’s really no way that rates should be going down in the bigger picture given the inflation numbers and continuous free money being injected into the system. Keep an eye on the 137 level on the downside and the 141 level on the upside.


GLD, GDX, UUP, USO – The UUP has been in a sharp 12 day downtrend, but it  may be hitting demand at this 24.60 level. If the dollar starts to bounce, that’s probably going to be a negative for USO and XLE. If you look at USO and UUP side by side, UUP started a sharp move up on February 25. That move really sent USO into a flat rangebound pattern. That UUP move up topped on March 31 and headed down quickly, yet USO didn’t take advantage or move up on that dollar weakness, but it should have. That’s a clue. If the dollar bounces next week, watch how USO reacts. One more tip, watch USD/CAD for clues. Price really seems like it’s trying to make a bottom in that pair and buyers stepped up to defend this latest drop right in that 1.2450 area, which is exactly where they stepped in back in late February prior to the mid-March lows. It’s a bit of an inverted head and shoulders, so see if price holds that left shoulder, as well as the head down around 1.2375. If that long downtrend in USD/CAD breaks, that’s a big negative for USO.


The GLD/UUP correlation is working as expected. The sharp UUP down move that started 12 days ago has sent GLD and GDX moving up the last 12 days off that March low. Keep an eye on GLD this week, as it will also offer some clues on the direction of the dollar, which in turn offers clues on USO. One other correlation to watch is TLT/GLD. As the dollar has weakened over the last 12 days, both the TLT and GLD have moved up in response. GLD and TLT have been moving together since last August and continue to do so. Watch for any divergence between the two.


Energy XLE, XOP

Last week’s article was all about the 50 day moving averages in most of the energy names. The XLE made an attempt to get above the 50ma at 48.75, but it failed and closed at 48.40. The XOP made an even worse showing as it only managed to get above the 50ma of 81.17 for a short time on Wednesday before dropping back below on Thursday and Friday, closing well below at 77.51. That’s not a positive development. Three of the four majors (XOM, CVX and BP) managed to hold the 50ma, while RDSA failed.


The important thing to notice is that the 50 ma’s began to fail more as you move down in market cap. It’s the reason why the XOP performed worse than the XLE. That could be a sign that the faster trading money is leaving the sector. It’s fun when the small cap energy trash takes the XOP up, but not so much when they start to fail and take the XOP down. The XOP correlates more with the IWM, while XLE correlates better with the SPY. It’s simply a matter of the market cap of the individual components of each ETF. This week will be another battle of the 50 ma for most energy names, as well as a battle between the faster trading money and the longer term investing money.


One subsector in energy that I’d probably avoid this week is the service names. SLB, HAL, BKR, NOV and HP are all well below the 50 ma now, and falling. It seems like the service names should be seeing better buying with production moving back toward that 11 million bpd number, but they just can’t seem to get any traction. Is the service name weakness a leading indicator that production may fall in the coming months?


Three of the big four refiners also closed below the 50 ma. PSX, VLO and HFC closed below, while MPC barely held about 25 cents above, likely only because of the big gap up Friday morning. I keep seeing Twitter pumping strong gasoline demand, but the refiners just aren’t responding, even with USO topping out a bit.


The natural gas names all continue to lag well below the 50 ma. EQT, COG, RRC, AR all closed below the level. However, the UNG did actually try to make a run at the 50ma and I’d watch that this week to see if it can get above or if there’s a clear rejection at the 50ma around 10.05. If it clearly rejects, then that’s just another negative for the sector. But if it can get above, at least there’s some hope.


The strongest subsector in energy right now is the pipeline and midstream names. I don’t really follow this portion of the energy sector very closely, so I’m not sure if this is simply a factor of the way they make money with pricing or if traders perceive safety in these names. Whatever the reason, ENB, OKE, KMI and WMB all remain well above their 50ma. It’s probably a significant piece of information if those top out and correct and could point to a correction in the sector as a whole.


Trading Plan for the Week – This market has really turned into a daytrading market. I haven’t been doing any swing type trades, especially in this rangebound energy sector. I don’t have much planned for this week either. I need to see some real demand to spring these names off the 50ma’s. I’d be willing to try a few trades on the long side if XLE can take out that 50-51 level, but even then there’s the 54-55 level standing just a couple points away. As you guys know, I’m big on risk/reward with almost all my trades and buying 51 in XLE hoping for a reward of 54-55 just isn’t my approach. There’s just not enough reward in that little 3-4 zone to offset what could happen on the downside if this market tops out and corrects. I really doubt I’ll be doing any swing trades in energy this week.


However, a break of 50-51 does leave opportunity for much shorter intraday trades. I think if demand does take out 51, then it might be an easy move back toward that thick supply level at 54-55, so why not ride along on that move? I wouldn’t hold the trades overnight and expose yourself to gap risk, but buying any opening dip and holding for the day might be an excellent play.


I’m still watching WTTR for a long play if it breaks down under 4.50. It closed at 4.90 on Friday. I’d like to start a scale in at 4.50 all the way down to 3.50 for an average price on the long trade of somewhere around 4. This is a longer term trade though, not a daytrade or swing trade type play. I’m looking at 2-3 months on this one.


If the energy sector remains stuck in this range again this week, my attention will probably turn toward the IWM. I’m willing to take a shot at a 226-227 breakout and a run toward 234. Again though, this is much like the 50-51 to 54-55 XLE situation. The reward isn’t that large compared to the overnight gap risk, so I’ll likely play the IWM move as consecutive daytrades by trying to buy the opening dip each morning this week and holding for an all day run. If I catch half of the total IWM move, I’ll be very happy. Ultimately, I’m expecting a blowoff in the IWM toward the 250 level where I’ll be getting short. But why not jump on for the ride up to that level?


That’s really all I have for this week’s trading plan. I expect it’s going to be another very slow week. The first month of this quarter was pretty much a big fat zero for me and now I’m probably playing catch up to make the quarter goal. Patience is difficult sometimes. At least the month wasn’t negative I guess. Always look for the bright side. Good luck this week and stay on top of that risk management, this market can turn on a dime quickly.




Comments are closed.