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Weekly Energy Equities Review, Market Outlook and Trading Plan for April 26-30

Just a short writeup today. I promised the kid I’d clean out the garage so she could have a party and then it’s off for an afternoon of wine and music with the wife. Enjoy life.


I’m not sure what to make of this market right now. I’ve cashed out all my positions and I’m sitting in 100% cash. This just isn’t the kind of market I like to trade, nor am I good at trading these kinds of parabolic meltup rips. Money management and risk control are just too difficult in these environments. Sometimes it’s just best to realize what you do well and sit and wait for those conditions.


I really don’t know what this market is going to do. My best guess is that we are getting to that portion of the bull market where things go parabolic. I’ve been waiting for the IWM to make a run at 250 and that could happen soon. My ultimate plan is to simply wait for the meltup and then get short in the 250 area for a much needed correction. Here’s a quick run through the technicals:


SPY – Friday created a bit of a negative signal. I posted Friday morning that there was the possibility of the SPY putting in an upthrust pattern, and it gave that pattern a run but didn’t complete it. Price ran to an all time high at 418.25 and then reversed and closed below the breakout point of 417.91. True strength would have held above that breakout level, however there just wasn’t enough demand to sustain the high. The one thing I don’t want to see Monday is a big gap up and failure. If the market tests Friday’s high early and then fails, that’s an obvious bearish signal. At some point, the SPY will top. Does everyone “sell in May and go away”?


QQQ – The SPY managed a new high, yet the QQQ couldn’t even get above the high set on Monday of last week. It also couldn’t sustain Thursday’s high mark. That’s a negative divergence between SPY and QQQ. See if this divergence continues this week. I’m watching 334 for a breakdown in tech.


IWM – The smallcaps also put in a negative signal on Friday afternoon. That 226-227 area is a major test area and price failed again there on Friday. Price topped at 226.65 and then failed and closed back inside the prior week’s range at 225.63. If there was true strength, price would have held the breakout area, but it didn’t. Watch 226-227 again on Monday. If price can break above, it should see 234 quickly. If it fails again at 226-227, the downside is 207. I’d really like to see the IWM breakout with one more meltup to the 250 area to get short.


TLTTLT continues its short term upward trend, but it seemed to run out of steam late in the week. I wouldn’t be surprised to see it pull back to the 138 area this week for one more downside test. The equity markets seem to be satisfied with TLT just moving to a sideways range. As I’ve said before, rates don’t have to go down for the stock market to be happy, they just have to stop going up so fast. See if TLT simply evolves into a sideways range this week.


GLD, GDX, UUP – While TLT continued upward, so too did GLD. The pair continues to move together and was helped along with a weakening dollar. I’m watching UUP to see where it can find some demand. If it keeps falling, that’s a positive for GLD, as well as USO. GDX has clearly broken out of the downtrend that started last August. I’d like another chance to get long on it if price will drift back down to the 33-34 area.  The USD/CAD pair really got crushed this week as the Bank of Canada was pretty hawkish in their actions. A strong CAD is usually a positive signal for oil, so watch that currency pair this week.


In summary, I continue to think we are in the final meltup stage of this bull market. I have no idea where the top is, nor do I have any desire to chase this market trying to find it. Like I said earlier, I’m 100% cash and I’m content to watch the parabolic action and wait for some defined structure to develop. There were several warning signs on Friday afternoon, so I’m cautious.


Energy, XLE, XOP, USO

This has been one of the most boring two month stretches in energy. The issue for the sector is whether this latest range is an accumulation for another run higher or if this is a distribution and we are getting ready for another big drop. The chart is setup to suggest accumulation, but there are some warning signs that leave the door open to a possibility of a move down.


I’ve posted the XLE chart a few times this week and pointed out the nearly perfect Wyckoff accumulation pattern. This one has been building for about six weeks, so any move out of this range should be a big one. I really thought price might make a move Friday, but there just wasn’t any volume. It was one of the lightest volume days in awhile. While low volume usually sends a negative signal, this low volume could be the perfect Wyckoff signal, which is known as a hinge. The theory on this is that when the accumulation pattern completes, there’s simply no supply left on the market since it has all been accumulated. The buyers are waiting to collect more, however there just aren’t anymore sellers. If this is the case, that explains the low volume Friday. The key now is that once the buyers realize there’s no more supply to accumulate, they then have confidence that they can push the market as far as they need to unload the currently accumulated shares at the desired profit, likely north of 55. As a word of caution though, there could also be one more sharp move to the downside as the buyers test the market to see how much supply is actually left out there. If we get another spring that reverses quickly on low volume, that’s a perfect signal that there’s no supply left above this market. It’s a great entry signal.


If this does turn out to be a Wyckoff accumulation, the first positive signal will come on a break of 48 on high volume. That point is what’s Wyckoff denotes as “the creek”. I put the notation on the chart. When price takes out 48, it should then make a quick move at 49, pullback and test 48 one more time and then shoot straight for the upper bound of the range at 50. This price structure should provide ample opportunity to enter with a concrete stop and very safe risk control. I plan on taking this long trade and I’ll post the entries and stops on Twitter as the arise.


On the other hand, if I’m wrong and this isn’t an accumulation pattern, the point to watch is 46-46.25. Price should not get much below that for any significant amount of time. If it does, then there’s a chance this whole pattern was a distribution. The true skill in using the Wyckoff method is differentiating the accumulation patterns from the distribution patterns. It seems easy, but I can tell you that it most definitely is not. If this turns out to be a distribution pattern, the downside is likely the 41-43.50 area. I posted a chart on Twitter earlier in the week showing this downside structure.


One additional concern, if this does turn out to be an accumulation and we do get a break toward 50, there could still be several problems with this long trade. First, the XLE could break upward just as the overall market tops and rolls over. That would be some really bad luck, but if it happens the buyers could panic and dump their entire accumulation on the market, which would take it down extremely fast. A lesser problem with this trade is that you must get a good entry and you can’t be late on the trade. There’s a level at 54-55 that could stop this move cold. You don’t want to be getting in this long trade on the break of 50, that simply doesn’t leave enough reward for the downside risk of 45-46. The only entry that makes sense is an entry around 48, which leaves you about 6-7 points worth of profit with a 2-3 (maybe even 1-2) points of risk. If you miss the entry, don’t chase it.


One last thing on energy. A couple weeks ago I pointed out that almost all XLE components were struggling with their 50 day moving averages. Well, the XLE is now well below the 50 day which sits at 49.25. Almost every component in the ETF is also well below the 50 day ma. Watch this level on the way back up, it could be a big roadblock. The 50ma for XOP is up at 81.50. This little space between current price and the 50 ma could simply be a vacuum, so pay attention when price hits those 5o ma’s.


Trading Plan for the Week – I’ve got the long XLE trade described above on the radar and I’ve got an IWM short up at 250 on the radar. That’s really all I’ve got for the next week. I doubt IWM reaches an entry point, so really my only trade for the week is a long play on XLE if it completes the Wyckoff pattern.


One other little play that I’m still watching is WTTR. I had planned on scaling a long starting at 4.50 down to 3.50 for an average price of 4, but I decided against it. I’m going to watch that trade and really hit that one hard if this XLE pattern is a distribution instead of an accumulation. If the XLE rolls over with the overall market, WTTR could easily tank under 4, and likely to 3.50. I’d size the trade up a lot larger around 3.50. WTTR likely takes off over 5 if this XLE pattern is indeed an accumulation and then I’ll just let the trade go.


Sorry for the short writeup today, but I just wanted to get these few pieces of information down on paper. I’m concerned about this market. It’s overheating. While there might be some profits missed, the concern for me is preservation and avoiding getting caught in the big correction. Be safe out there this week.



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