Weekly Energy Equities Outlook and Trading Plan for January 21-24

It was another slow week in the energy sector, but sometimes that’s not a bad thing. In last week’s post, I pointed out that 22.68 was going to be a very important level in the XOP, and that turned out to be true. Monday’s low was exactly 22.68, Tuesday’s low was 22.71, Wednesday’s low was 22.67 and Thursday’s low was 22.73. That important level held for almost the entire week before failing on Friday. There was some demand at that level, but unfortunately it all got filled and the sellers took control on Friday. Now the question for this week becomes: Will the demand show up and reclaim that 22.68 level or do the sellers take further control and push this market down to 21.55?

 

As for Friday’s action, it was extremely discouraging for the bulls. SLB came out with earnings premarket Friday and it seemed like the market initially liked what they heard and sent SLB near 40, however the SLB sellers immediately took control, and they did it on fairly heavy volume. Surprisingly, HAL and BKR didn’t follow and finished green for the day. While SLB is a services name and not an E&P, that earnings report probably should have bounced the entire sector off that 22.68 level, but instead it was ignored. Also, on Friday SPY gapped up huge to new highs and held them all day, yet XOP finished at the lows of the day. The relative weakness is concerning to say the least.

 

Once XOP broke 22.68, it was an all day grind down bottoming at 22.33 and closing near the lows of the day at 22.37. XOP got within 5 cents of the 50 day moving average which stands at 22.28. I had 22.20 as my next level in last week’s post, which is the 50% retracement level of the December run from ~20. The bulls should try to make a stand at 22.20 on Tuesday. If that level holds, the bounce will be important to evaluate. If the bounce can’t clear 22.68, this thing probably tanks. If demand shows up in a big way and price can clear 22.68, we could be headed back up to test the 24 level.

 

XOM and CVX are still not showing any leadership. XOM closed the week at 68.56 and CVX closed at 115.58. Both finished near the lows for the week and that’s very discouraging, especially since both are big components of the DOW/DIA, which was just ripping up. This kind of extreme relative weakness of the two major players in the sector just can’t be ignored. The only thing that was encouraging to me was that the largest E&P’s like COP, OXY, EOG, PXD and CXO all looked better than the majors this week.

 

The real problem for the XOP was the smaller cap trash companies which are weighted equally to the majors and larger E&P’s. That’s the danger of an equal weighted index. Many of those smaller names really took a beating this week, especially the smaller natural gas names. That trash group of WLL, OAS, LPI, CPE, etc. has just been a huge drag on the XOP. I bet nobody realizes that WLL has a 2.35% weighting in the XOP, while XOM has a 2.34% weighting. CVX checks in at 2.33%. RRC has a 2.39% weighting in the XOP, and it was down 9% Friday. It only takes one of these trash companies to wipe out the changes of the top sector giants. Know what you are trading when you step into something like XOP.

 

Another concern was the refiners. VLO, MPC, PSX, HFC and PBF all had a very bad week and that had a hidden negative effect on the XOP. During the fourth quarter of 2019, refiners held the top 6 positions as the largest holdings in the XOP, reaching a total holding of about 18%, if I recall correctly. They are down to ~13% total holdings this week, but still have a huge effect on the XOP. Perhaps the refining component is also what  is weighing on XOM and CVX and the reason why the pure E&P’s are outperforming the majors. Those huge EIA builds in products might be about to catch up with the refiners and cause problems. The actual commodity, WTI, also had a rough week dropping back and closing below 59. Just too much supply. The addition of 15 oil and gas rigs this week didn’t help either. If demand starts to dip or the economy starts to slow, oil could really tumble. I’m watching the 55 level in the coming weeks.

 

Overall Market View

It was another week of parabolic action in SPY and QQQ, while IWM finally decided to join the party. I had one of my best daytrading weeks in a long time with the IWM. Every morning provided a nice entry and it was just a matter of riding the wave all day and not getting shaken out too early. As I’ve posted many times, IWM and energy stocks are very similar in that they are sensitive to the domestic US economy and consumer. The action in IWM and XOP diverged most of the week, but was similar on Friday. IWM topped out, put in a reversal and finished at the lows of the day, just as XOP did. They both showed extreme relative weakness to the SPY/QQQ pair. I’m not sure if this is a sign of things to come with real economy weakness possibly showing soon. It will be interesting to see if IWM can regain its upward momentum next week and test that ~174 level, possibly pulling energy stocks with it.

 

It would be extremely concerning to see IWM stall at that August 2018 level and put in a double top, especially if SPY and QQQ climax at the same time. The issue for me is whether the money flowing to small caps is based on real anticipation that the economy is going to get stronger OR if this money is just fast money chasing an underperforming sector for quick gains. This was the same kind of concern I had with the December run in XOP, was it real belief or just fast money manipulation? I guess we will find out in the next couple of weeks, but until then you have to believe that the trend is up and keep riding that wave. Getting short right now just isn’t an option, at least not for me anyway. I keep seeing guys trying to guess the top and they keep getting steamrolled. Just don’t do it. The market will give you plenty of time to get short when the time is right. I’m not saying that this market can’t go down from here, but rather the odds and payout on that trade just don’t present a very good combination for making money… yet.

 

I mentioned this in last week’s post, but I’m looking for the buying climax in SPY and QQQ soon, if we aren’t in a stealth climax already. The pattern has been progressing for the last couple of months. There’s no telling where it finally tops, but once it does, you immediately want to start looking for a distribution pattern. The longer I watch this, the greater feeling I get that this run is being manufactured to take the market up as high as possible so that the current holders can start unloading, or at least have that option if things turn sour. I think the presidential election might have something to do with this approach and I’m starting to get the feeling that a Trump win isn’t the sure thing it was a few months ago, therefore a high level distribution gives major holders an escape hatch if the election doesn’t have the outcome they desire. The public is being whipped into a frenzy right now and FOMO is spiraling upward. The anxiety of missing out is getting unbearable for most, and that’s usually when the distribution starts. As the old saying goes, “When the ducks are quacking, you have to feed them”.  Just be on the lookout for the distribution possibility once you see that defined climax.

 

This Week’s Trading Plan

You guys all know I’m bearish right now on energy, but this week’s plan is probably going to throw you off a little bit. My primary plays this week are going to be a pair of long setups.

 

The first long setup will be an XOP play on Tuesday (market closed Monday). I think this market will drop down and test that 50% retracement area at 22.20, possibly 22.00 and then try a bounce back to the top of the range near 22.68. I want to get an entry as close to 22 as possible and I’m willing to give this bounce a try with a VERY tight stop. I’m looking to risk 20 cents to try and capture a 60 cent move, and possibly turn it into a huge trade if XOP can take out 22.68 and squeeze toward 24. While the 3:1 odds are attractive, it’s the implied odds and home run potential of the 22.68 break that really makes this trade worth taking. I think the winning percentage odds are fairly low that this trade actually works, but the payout odds are positive expectancy and just too good to pass up.

 

If the market gaps down big or starts screaming to the downside on Tuesday, cutting through the 50 day ma and 50% retracement area with ease, I’ll probably wait for my second long setup to play out. If XOP takes out 22 with ease, it’s probably headed for the 21.68-21.55 area which was important from December 12-13. That area has been the middle of the range (fair value and POC) for the last six months. It was originally established back in August when OPEC started intervening in oil. That 21.55 point is the last stand for the bulls. They either save it there or it very likely is headed for new lows and a complete washout. I’m willing to give a long trade a play off of 21.55 for a bounce. I don’t plan on giving this one more than 20 cents of risk either (about a 1% drop from entry). The action at 21.55 may not last long and the direction on a break or bounce could be sharp. This is NOT a trade you want to take if you have trouble holding your stops. If this trade goes bad, it’s really going to go bad, so USE STOPS. I’d look for any bounce to at least test 22.20 and possibly 22.68 if it really gets some demand behind it. It also has the potential for a home run on a 22.68 break, but the realistic chances are probably smaller on this second setup.

 

I’m sure most of you are probably thinking I’m bearish and why not just go short? Because I don’t see any good setups short and because all the surprises in this market have been to the upside. It has evolved into one of those situations where the likely path is down, BUT the payout odds just don’t give you what you need to make a short play worthwhile, especially with looming landmines on such things as Iran. Who knows where the next landmine explodes, maybe it’s Iran, maybe elsewhere in the ME, maybe even here on US soil. I just never put myself in a spot where I’m risking more than I stand to gain. I’d rather be a trader who loses >50% of his trades, but makes twice as much on the winners as on the losers. I see so many people trying to win every trade and they totally ignore the payout on those trades. They incur large losses and small wins, and eventually go broke.  Yes, getting short probably has a greater than 50% chance of being the right direction, but are the payout odds worth it? I don’t currently think so. Maybe in the future that changes, but right now I have no desire to get short down here.

 

Last week’s post got way too long, so I’m going to cut it off here this holiday shortened week. Hope you all enjoy the Monday holiday. I’m still on my self-imposed Twitter ban, but I do check it each night for a few minutes, so feel free to DM me @oilstocktrader if you have questions or comments.

 

Energy Equities Outlook and Trading Plan for January 13-17

Last week was a great example of why you have to keep your personal opinions about the market completely separate from the actual signal the market is sending. Almost everyone out there thought the Iran situation was going to push oil stocks to the moon, but the initial market reaction on Friday, and subsequent action, clearly told you that the market didn’t see the geopolitical situation as being significant. Every chicken little on Twitter was screaming for the end of the world, yet it wasn’t. Here comes world war three. Just no. The E&P’s finished the week with the lowest close since December 20th. The SPY closed the week making another all time high on Friday. The markets are clearly screaming that the Iran events don’t currently matter. From what I can tell, there are a lot of new energy bagholders out there who let their personal opinions blind them from seeing the true short term message of the market. The market signal pays, your opinion does not.

 

This past week is also a very clear reason why I gave up Twitter. Almost everybody on Twitter was WRONG. Every news source was reporting their own version of the ‘story’, none of which contained facts. Everyone suddenly became an Iran expert. Being constantly bombarded with a never ending stream of baseless negative opinions is horrible for your trading. It makes you doubt your own thinking, or worse it convinces you to do things that you know you shouldn’t do. Fear is powerful, and there was a lot of fear mongering out there this week. Trading is hard enough without all that stuff. Turn it off, tune it out and trade what you see on the charts. Trade what you see, not what you (or Twitter) think.

 

So what actually happened with the price action surrounding all these geopolitical events? The buyers from December who caught the recent 20% run up in price were handed an absolute gift and they took full advantage by cashing out their profits.  I’m still suspicious that the December buyers had advance warning of a possible event like this, thereby creating the dead cat bounce from 20. After the assassination on Thursday, XOP opened Friday, January 3 with a gap up to 24.38 and the dumping commenced immediately and then continued during the most recent week.  Monday was a tight inside day and Tuesday only got a penny outside Friday’s range, so it was also nearly an inside day. That small range which formed with such emotional geopolitical events happening was a clear marker of distribution. Huge supply simply wouldn’t let price move upward and was poured on the emotional buyers, stopping price in its tracks. Then on Tuesday night, Iran bombed the Al Asad military base. This should have caused all hell to break loose in energy stocks, but the XOP opened lower and crashed down. Not only were the December buyers still selling, but now the emotional geopolitical buyers were urgently selling as well.

 

Wednesday was the trap day. It seems that the “attack” by Iran was simply a safe move to save face and show their citizens that they at least tried to respond. The “attack” was just a show. It was a few missiles sent to a target that the US had most likely abandoned long ago, or at worst had extensively prepared for. Once this became obvious, the buyers from Friday, Monday and Tuesday (as well as the remaining December buyers) all went running for the exit at the same time on Wednesday and continued selling into Thursday morning. Price found some support at 22.84 and bounced weakly. Friday’s action was an indecisive inside day with a tiny 27 cent range, closing almost in the middle of that range at 23.22.  This was the lowest closing price since December 20, before Christmas!

 

The action on Thursday afternoon and Friday was that group of contrarian buyers who tried to hang on to the war narrative hoping that WWIII really was still going to happen. They are still hoping for more conflict and bombs. They bought in hope that things would escalate again. Who knows if it does or not, but if things don’t spark back up soon, those guys who bought Thursday and Friday will likely dump and give up, probably on Monday or Tuesday after a quiet weekend of no geopolitical escalation where they have time to think about their mistake.

 

Remember, I’m a short term trader. I focus on short term action  ranging from hours to maybe 5-6 days. Almost everything I post here is geared toward that timeframe, and if I post a longer term view, then I always try to state that. I don’t know what is going to happen longer term with XOP, all I know is what happened in the short term this past week. Could oil and E&P’s run back up from here? Sure. There were a lot of buyers with nice profits who used these events to cash out. What happens when those guys are no longer blocking the price path? Once these short term events pass, maybe the longer term fundamentals kick back in as they did in December, who knows. All we can really say is that if you bought this past week based on a theory that geopolitical events were going to save these stocks and drive them sharply upward, you were wrong (again) in the short term and you are now sitting with a losing position.

 

Everyone was wrong in September when the Saudi attacks happened, they were wrong on the November false breakout and they are wrong (so far) again on these Iran events. The market has cried wolf a few times lately, will the buyers even bother to return on the next cry, whatever future event that might be? You have to consider the way other traders might start to view geopolitical events and how they are positioned. The market seems to be building up a tolerance for these events. The geopolitical ‘risk premium’ just doesn’t exist anymore, but many just can’t seem to let their old beliefs go. Think about how other traders see these events, and then use that to your advantage.

 

Overall Market View

I’ve been focusing almost 100% on the IWM, and the action there this week was concerning. There was simply no demand, but luckily, there wasn’t any supply over the market either. It’s as if everyone ended 2019 and just didn’t come back for 2020, at least not yet anyway. The first 7 days of the year have remained in a very tight range. What should have been tons of money flooding back into the market for the “January Effect” just didn’t happen. Maybe the January effect this year is telling us that the year is going to be one tight range of distribution of the past several years’ gains. The IWM is one of the best measures of domestic business and the real economy. It also mimics the yield curve. It has lagged the SPY and QQQ, however it seems to be sending the same economic signal as the energy stocks. That signal is that the real economy is weaker than what the SPY and QQQ imply.

 

I’m starting to get the feeling that the run from October was a stealth climax move which will soon lead to a distribution in all markets. Much of my trading is based on the theories and methods of Richard Wyckoff, and this latest action fits the pattern of a buying climax or parabolic action, which normally precedes a sideways “phase B” distribution. The only factor that doesn’t really fit is that we never had that single few days of extreme volume. However, it is possible for a distribution to start without it, and that’s why I referred to this latest run as a “stealth” climax. Maybe it wasn’t just a few days of extreme volume, but rather an extended parabolic run spreading the volume. If you pull back to a weekly chart starting from the 2008 area, the climax and parabolic action becomes more clear. We will have to see how it develops, but if we get a pullback in the next few weeks, the distribution could be on.

 

This is just my opinion, but a distribution is the most likely path from here, as I don’t think this huge market run is going to end in any sharp crash type action. There are so few holders of a majority of the stock that I think they will be able to skillfully orchestrate a calm distribution before the actual crash happens. With so few players holding the majority of the stock, all they have to do is work together to distribute it. The FED has made sure that they will work together. I don’t think there is a single holder, or small group of holders, that could effectively take this market down by themselves. The selling is going to have to come from one of the major players, and I don’t think anyone wants to be first, as doing so would tremendously anger the FED. The FED gave these holders the money to buy the stock in the first place, and you know that free money came with strings and directives not to sell until allowed to do so. However, once a calm distribution is completed, the crash is likely on, and it could be blindingly fast this time. Keep an eye out for a developing distribution pattern over the next few months, as that could be your only warning of a coming bear market. I’m not saying that a bear market is coming, but rather just pointing out what you might see if it were to happen.

 

Trading Plan for the Week – I think you have to let the trapped energy traders figure out what they are going to do on Monday before you decide to enter. After seeing the lowest close since December 20, there are many longs who may feel trapped. Most of these longs are going to be very emotional traders who don’t really have a trading plan. They are the types who saw, “WWIII is coming, buy oil”, and loaded up without giving it much thought. Emotional entries usually lead to emotional exits. Let them dump. Maybe this thing sparks up again and pops price to let them off the hook breakeven. Either way, I think there are longs looking to get out early this week, so let them. If you want to get long, take advantage of those trapped traders and let them give you a nice entry point.

 

Technically, Thursday’s pullback went right to the most logical area. The 22.68 level was important on the way up and acted as nice support on Thursday’s dip. It stopped just a bit short at 22.84, but I think that range boundary is what the market had its eye on. 22.68 will be of major importance this week. If price dips back under it, there’s a good chance it runs right back to the middle of the range at 21.55. The biggest point to watch between the 22.68 and 21.55 areas is 22.20, which is the 50 day moving average and also the 50% retracement point of the December run from ~20. The 22.20 and 21.55 points would probably be the only places that I’d be willing to try a long with size this week. If 22.20 or 21.55 hold, the bulls could return and try to make a stand for another run back toward 24.

 

If the XOP gets trapped back under 22.68 for any length of time, it will likely retest the lows again in the future. It had every chance to escape the range which began in August and start an uptrend, yet it seems to be failing. This would be the third failure of that level, so this week’s test will be crucial. We had huge EIA draws of 10+ million for a few weeks and all the geopolitical events that an oil bull could pray for, yet the XOP couldn’t create the much needed escape velocity. If those events couldn’t get this thing moving, then what could? In fact, these most recent serious events couldn’t even take XOP past the price level of the September Saudi attacks up near 26. The market is sending a message, all you have to do is listen to it.

 

In the bigger picture, I believe we haven’t yet seen the final lows in XOP. If you are in this sector for the long term, keep an eye on how far down we go in this range we have created over the last six months. If price gets below the midpoint at 21.55, you should probably get concerned. If XOP gets to new lows, it’s probably going to be helped in that direction by bad economic news. The most likely news is a sharp decline in demand for energy. If you start seeing negative news regarding the demand side of the equation, this sector could finally get that much needed washout into the teens. Keep an eye on the IWM since it closely tracks domestic businesses and consumers.  Huge EIA draws, being on the verge of WWIII and $60 WTI haven’t moved the needle. We’re still sitting near 23 with all those positive events. Another concern is the two biggest oils, the generals are still a drag on my bias. XOM dropped well be low that important 70 level, closing at 69.14, while CVX gave up that 119.59 level days ago, closing at 116.44. What happens in energy when all these positive things fade away and negatives replace them?

 

My bias is definitely bearish, but just to make the oil bulls happy, I’ll throw this out there. If XOP does drop down and test that 21.55-22.68 area and it holds, that would be a positive signal. You could definitely make the argument that this 4.5 point run from the December low around 20 was the first leg in a new uptrend. IF it was, then this first pullback in the new trend is incredibly important. If the XOP gives up less than half of that 4.5 point run, the pullback could produce another very similar leg of 4-5 points to the upside, which would take price to the 27 level. There would be a level at 26 to cut through, but I think 27 is where the next major supply would appear. I don’t think this scenario is what’s going to happen, but it definitely helps to have a picture of what could occur if a bearish view is wrong. If this pattern starts to develop, I’d have no choice but to change my bearish thinking. If you are bullish and this is your theory, then this week should offer a great entry point to take advantage of the second upleg of the new trend.

 

Ouch, that went 2500 words, sorry guys. The important support points this week are 22.68, 22.20 and 21.55. I’m usually around if anyone has questions or comments, so send me a DM. It’s finally above 60 degrees here, so I’m headed to the winery to sit in the warm sun this afternoon with my wife and a couple bottles, what a great day. Enjoy the rest of the weekend and good luck this week.

 

Trading Lessons I’ve Picked Up on the Journey – Accepting Risk

My journey in trading just hit year 20. I was one of the masses who gave up a real job in the internet bubble of 2000 to chase digital riches in the market. I succeeded greatly and failed greatly during that time, and also failed for several years after that period due to all the psychological damage I suffered and bad habits I picked up in those roller coaster years. I’ve recently started writing down many of the issues I’ve been through over the years and figured maybe it would help someone just getting started. Good trading karma, you know?

 

Probably the biggest mistake or issue that I’ve had in trading over the years was the inability to accept risk. I’ve tried to avoid risk, outsmart risk and eliminate risk. I’ve tried to structure it out of my trading and even tried to eliminate the risk averting emotions like fear and greed, but I can definitely say none of that works. The only way you can succeed in trading is to simply accept risk and learn to live with it, to make it your friend. Without risk there can be no reward. Without risk, there is no trading game.

 

Specifically, the risk of each individual trade has to be accepted before the trade is ever placed. I know it sounds so simple, but it never was for me. I would place a trade without defining my stop, which was basically ignoring risk. I would place a trade without a profit target, which was both ignoring the absolute amount of risk and the cost of that risk. Once in the trade, I would micromanage it because I couldn’t handle the risk. I’d either let the trade run past my stop (ignoring risk), cut it early before it hit the stop (escaping further risk) or cut it at breakeven if my prayers were answered after an initial adverse move (escaping further risk). I would take positions that were way too small so that I could avoid risk.  I’d cut winners short because I didn’t want to risk the small profit I was up. All of these issues existed because the initial risk of loss wasn’t fully defined or accepted BEFORE the trade was taken. I’ve seen it likened to buying a lottery ticket. You pay the clerk $5 and get your ticket, the money then belongs to the store. That’s accepting the risk of a $5 loss. I always wanted to get my ticket first, scratch some of it off and see a few numbers, then decide if I wanted to accept the risk and give the clerk $5.

 

All these mistakes of ignoring stops, micromanaging trades, cutting winners early, cutting losers too early and not letting trades work were all a result of not fully accepting the risk. It’s a single mistake that shows up in many ways. At some point, I decided that once I found the trade I wanted, I simply considered the money lost. I love poker, and much like poker, once you push that money to the middle of the table, it’s no longer yours. It’s the same with trading. When you enter that trade, you have pushed your money to the middle of the table. It’s resolved with a profit target or a stop loss, either your cards win or they don’t. Once you have accepted the risk of loss and that the money is no longer yours, you can let the trade work.  You are then totally free. There’s no fear of loss, because you have already accepted the loss before the trade is ever made. Without that fear, there’s no impulse to micromanage, no impulse to cut the trade short and no impulse to ignore the stop. It probably seems like the most common sense thing in the world, but it just never occurred to me that this was a problem of mine. I thought I was just being careful and prudent, protecting my capital as all the “gurus” said to do. But I wasn’t, I was costing myself huge with grinding losses, as well as the occasional big loss when stops were ignored.

 

The constant fear of risk would also wreak havoc on my emotional state. Once I entered the trade, I saw nothing except information that would support my trade. My biases went absolutely crazy because I hadn’t accepted the risk and I was living in constant fear. When your mind is obsessed and being influenced by fear, you can’t see the true market. I would miss every danger signal the market offered and every opportunity that those signals could have presented.

 

So why was accepting risk so difficult? I can only speak for myself, but most of my problem was likely because I grew up not having much money and even as an adult I was pretty cheap. If you come from the same kind of background, you know what I mean. When you don’t have much money, you do everything you can to protect it. My parents always stressed saving and never being frivolous with money. Those childhood lessons stuck and unfortunately those lessons just don’t mesh with trading. To me, that $100 trading loss was losing a night out or some nice clothes, but in trading you just can’t think that way.

 

Money in trading, much like poker, is just a tool. It’s not cash or clothes or nights out. It’s capital that you use to make your product, which in our business just happens to be more cash. I had to stop thinking of money in the ways I had always been taught as a kid. It kind of gets to the point where you just have to lose respect for money. It’s not that you don’t care about it, but you just have to see it in a different light, not as money, but as a capital tool in your business. Like they say, losing money in trading is just the cost of doing business and until you can view it like that, you will always fear risk. And as long as you fear risk, your brain will never be free to do what is necessary to trade.

 

Another factor for me was that I jumped right into trading after quitting a job where I was making decent money. Risking money meant risking being a failure and having to crawl back to my old job. From an early age we are taught as kids that failure is bad and should be avoided at all costs. Even as an adult, you experience the same thing because you don’t want to be seen as a failure by your friends or spouse. If you don’t risk, then you can’t fail. At least that was my thinking at the time. If I could only find a way to avoid risk and be profitable in trading, then I had it made. In my mind, if I just avoided risk then there was no way I could fail! I just didn’t know the game well enough to realize that this thinking was so hilariously far from the truth. Sometimes you just don’t know what you don’t know.

 

Everyone has a different view of risk. The views above were specific to me. If you are having any of the trading problems that I mentioned above, then you should take some time and really explore what risk means to you and why you might be avoiding it. There are probably as many reasons for avoiding risk as there are traders. Until you define risk and realize how and why it affects you, then you haven’t truly made friends with it.

 

One other quick thing on accepting risk: Always make sure you are getting paid enough to accept the risk. Always know the profit potential associated with the risk you are taking. You can accept all the risk you want, but if you aren’t being compensated enough to accept that risk, you will lose in the long run. For many people, accepting risk becomes easier if they are getting paid more to accept it. Accepting a $100 risk is easier to do if you are getting paid $500 to do it. Always know the R multiple (Reward:Risk) of every trade you take. And be realistic in your assessment. Dreaming of big profits that aren’t realistic won’t work, if anything, be conservative in your profit potential.

 

As much as I tried, I never could eliminate risk or the associated emotions. And believe me, I tried everything. It just isn’t possible, nor is it recommended. You just have to accept risk and learn to live with it. Once you accept risk, so many emotions dissipate and mistakes disappear. A feeling of freedom takes the place of that risk fear and you are free to trade your method with 100% of your brainpower. It’s really the only way.

 

More next week. Hope you guys had a great week trading and I’ll post this week’s review and next week’s trading plan on Sunday. Have a great weekend.

 

Energy Equities Outlook and Trading Plan for January 6-10

What a day to return to Twitter on Friday. I debated not returning after spending a few weeks away from it, and I probably should have stuck with that plan. It was so relaxing being in my own world with my own thoughts. For me, I think Twitter has finally “jumped the shark” as the old saying goes. I’m done with it. The level of bias, virtue signalling and sheer stupidity has become epic. It’s as if everyone is more concerned with agreeing with everyone else and protecting their pride than the are about promoting new and exciting ideas that could be useful. If everyone all says the same thing, then what’s the point?

 

If anyone is interested, I’m still going to write here on my blog and I’ll post a link when I do, but I won’t be on Twitter. It’s been a great ride and has filled in many hours of boredom, but it’s starting to cause me more harm than good. It has become a psychological distraction for me, as the way I see the world just doesn’t seem to mesh with the masses. Maybe it’s because I’m just way older than a majority of users, I’m just not sure.

 

Also, I think it is finally time to back away from energy for awhile. I’ve pretty much switched all my trading to IWM and the results have been surprisingly good. As I’ve stated in some of my posting, I’m a big believer in focus and standardization and trading one vehicle at a time is the best way for me to trade.

 

OUTLOOK FOR OIL PRICES

As for energy itself, the volatility is going to be fairly large for awhile, but the inevitable endgame is new lows. After the actions on Friday, I think Trump has a longer range plan that nobody is seeing yet. The killing of a single Iranian general in itself was NOT significant, it happens all the time and has been happening in every administration. Targets are taken out all the time, however they usually aren’t done publicly with advertisement. The real significance was how it was received and propagated in our media, and how it is being promoted socially on sites like Twitter and Facebook. The snowflakes are losing their minds right now calling for the end of the world. The significant thing to me wasn’t the actual event, but rather the surprising way it was interpreted by the masses. As for the sheer Twitter stupidity I was talking about, I’ve actually seen people defending evil. So many have forgotten September 11, 2001. Watch how fast those same individuals change their tune if an event happens on US soil and they demand to be protected from evil. Can’t have it both ways snowflakes.

 

My guess is that the events aren’t leading to an invasion or expansion of US involvement, but rather they are leading to an intentional isolation of the US from major sections of the rest of the world, which has likely been the plan all along. I could see Trump taking out numerous dangers around the world and then pulling the US back into its homeland and then raising the figurative walls around us as protection. Destroy the power structure (and the energy structure, refineries) around the most unstable part of the world and let them kill each other while we stand by and watch. That’s what the Democrats want, right? Bring all the troops home they say. Even Iraq is voting on asking US troops to leave. If they ask us to leave their country, you think Trump isn’t going to ask them to leave ours? Trump might be more than happy to grant everyone’s wish, as he’s backed them into a corner. He’s letting others make the call so he doesn’t have to, which is genius. He’s baited them all, and they are falling for it. We’ve been through the immigration bans and border walls before and this is likely just the latest method to achieve those ends.

 

The really sad part is that an attack here in the US is inevitable, and if it happens it will be used to further our isolation even more. No good crisis should ever be wasted, right? The snowflakes will lose their minds when any terrorist attack happens and the event will have proven Trump correct in his views all along. He’s forcing the Democrats to side with the terrorists, and they are blindly taking the bait as they always do. Talk about firing up the voter base. Any terrorist event on US soil probably wins the election immediately for Trump. After any such event, everything outside the US will then become evil, immigration will halt immediately and the immigrants who are here will be attacked until they decide to flee. It probably won’t be long until those immigration bans show up in the news. Next you will see news of current immigrants being attacked and harassed here in the US. When you see it, that’s part of the endgame.

 

The problem with this approach is what happens to oil longer term? Who do we sell to? What do we do with all this light oil that our refineries really aren’t equipped to use? Without regulation of oil producers outside the US, what do you think those producers are going to do? They know how to put US Shale out of business, would they turn on the taps and do it? On the other hand, if they decided to target the overall economy what would be the best way? An oil price spike? As I’ve been saying for awhile with regard to inflation, any spike in oil is going to kill this economy a lot quicker than it has in the past. If the outside world uses oil as a weapon, the US is going to feel it in the overall economy. That price spike would likely crush demand, which in turn would crush US producers. Leaving oil prices in the hands of outside forces is a no win situation for the US.

 

TRADING PLAN AND OUTLOOK FOR US E&P’s

So what to do with the XOP? At this point, the safe play is to do nothing at all. Let the dust settle for a couple of weeks and then re-evaluate. This kind of volatility isn’t suited for 90% of traders and it will just cause you to make mistakes. But, if anyone does decide to ride this wave, here’s my take: I think what we saw on Friday was a bit of an anomaly. I posted before the market opened that the buyers from December would be selling into this demand to take their profits, and that’s exactly what happened. The real question now is how many of those guys are left and what happens once all those profits are taken and that supply is dumped. I don’t think we will get a true picture of where XOP is going until those guys are out of the way, and I don’t know how long that might take. Volume in the first two hours on Monday will be a big signal.

 

The oil market and XOP sent a clear signal Friday that the geopolitical events were not significant. You can have differing personal opinions, but you have to listen to what the market signal is telling you. Right now, most traders’ personal opinions are deviating from the signal that the market is sending, and that’s a situation where you should probably be out of the market. Maybe the market changes its signal to match personal opinions, I have no clue, but you have to wait for that to actually happen before trading it.

 

My opinion is that the XOP is hitting the top of a fairly well defined range and has stalled into large supply. Under normal circumstances, I would have been all over that short, but getting short into events like these just ignores every rule of risk control and money management. The XOP has the potential to really pop to the upside if things escalate. Just think of the reaction in XOP if major portions of the ME energy infrastructure and refineries got taken out. But until that happens, you have to keep the powder dry. There will likely be a great short setting up in a couple weeks, but you have to be patient enough to let things play out and let the climax happen first. I have no desire to get caught short in this manic geopolitical environment.

 

On the other hand, trying to get long this market could leave you hugely exposed in a market that has already run 20+% in the last few weeks. Did those buyers have advanced warning of Friday’s events? There have been reports that the attacks were discussed with other nations, such as Saudi and MBS. You think he wouldn’t front run the market on this information? So the trap you could step into on the long side is buying AFTER a runup created by buyers who had advanced warning. You would be cashing those guys out, and that’s never a position you want to be in.

 

If this whole situation dies out (as I think it probably will), then you just bought the hype and the panic. You bought the emotional extreme, not good. At this point, I just don’t think we have enough information to make a call either way in this market. While either trade could work, the risk is multiples of what it usually is for the XOP. I just don’t think the reward in either direction is worth the elevated risk.

 

I’m going to be on the energy sideline this week with 100% of my attention focused on the IWM. If you guys do decide to jump into the mania surrounding oil, be very careful and please use those stops. This thing could make a VERY large move in either direction.

Also, I’ve still got some general trading articles coming, so I’ll post the links on Twitter. I’m always around if anyone has questions or comments. Good luck this week.

 

Creating Standardization to Improve Your Trading Process

I hope everyone had a great Christmas break. I know I definitely needed some time off to recharge, review and get ready for another year of the grind. I wrote down some things that I thought some might find useful to improve their trading process, and I hope it helps someone out there trying to find their way in this game. I’m also putting together a list of trading tips that I wish I’d found on my journey, which I’ll hopefully get posted this weekend.

 

When I started trading, I would trade anything, whatever was popular that day. I’d watch the market, find some hot stock and just jump in with absolutely no real plan. I had no process and nothing that I could repeat day to day, each day was different. I couldn’t improve myself because I basically had no process to fix or improve. I had no starting point from which to build. I was always just hoping that I was going to get lucky each day and hit the next random trade. I had no repeatable setups, no standardized way of evaluating the overall market strength, no set risk or position sizing. I gave my brain absolutely no structure to work with, and of course you know what a brain without structure will do in these markets. I did this for a long time, simply because I didn’t know any better, and I’m guessing there are many traders still doing this. Trading without standardization DOES NOT work.

 

Probably the most important thing for me in trading was to create a standardized trading process. Standardization creates Repetition, which creates Intuition, which creates Expertise. If you never standardize the way you trade then you can’t repeat it, you can’t fix it when it’s broken and you can’t improve it if you aren’t really even sure what you did in the first place. Everything must be defined and have a label. Each piece of a system is its own entity with its own rules and specifications.

 

The beginning for me was to just start reviewing my mistakes. It always seemed like I was making a million mistakes every day, but at some point I started keeping a journal and writing them down and why I made them. To my surprise, I found that I really only had about 10-12 mistakes which caused all my losses. And those 10-12 mistakes were mostly caused by 3-4 psychological weaknesses that I had to fix. It just seemed like I made a million mistakes because I never labeled them or explored them. I eventually started assigning a number/label to each mistake and would record it every time it occurred. Everyone will have different mistakes, but a few of mine go something like this:

1 = Not defining my risk/reward (R) before entering.
2 = Not accepting the actual risk of the trade.
3 = Micromanaging a trade after it’s entered.

 

I’ve currently got a list of about 10 things that I know that I commonly do wrong. Each one has a page in my book. Some I’ve dropped off the list because I just don’t make them anymore now that I’ve created structure to avoid them. With a list of labeled mistakes, I find it easier to focus on staying on plan. I’ve standardized all the places where I know that I commonly go wrong. Most traders know they are making mistakes, but they never really know AHEAD of time what those mistakes are so they can avoid them and they also never really try to address or fix them AFTER they happen. When I make one, I simply write the number of the mistake down in my journal to review after the market closes.

 

And when I say write them down, I don’t mean just jot them on a sticky note and put it on the computer screen. The guys that do this just drive me crazy. Stopping at that shallow level is a total waste. You will ignore that sticky note a week from now as your brain gets used to it being there. What I mean is devote a page or two in your journal to each mistake. When you make it, write out what happened. Write why it hurt, what it did your your mood, how much money you lost and how you felt. Write out how to avoid it and what signals usually appear when the mistake situation is about to develop. Dig deeper and keep adding to each page so it sticks in your brain and reinforces WHY you have these standardized rules. A sticky note just doesn’t cut it, it’s lazy and a useless quick fix to a problem that needs more attention.

 

When I first had someone tell me to do this, I was skeptical, but it really does work. If you know yourself so well that you can assign a number to the mistakes you are likely to make, it becomes much easier to avoid them. Simply knowing where you usually go wrong is half the battle of correcting it.

 

On the technical side of things, every trade setup I use also has a number/label designated to it. When I make a trade, I write it down as a number. In the journal it’s something like this: “Trade #3 at PDH”, which stands for a buildup breakout trade at the previous day’s high. I’ve got six basic daytrades that I describe by number:

1 = Spring/Stop Hunt/False Breakout
2 = Impulse/Pullback
3 = Buildup Breakout
4 = Breakout Retest
5 = Overextension/Climax
6 = Climax Retest

 

Each of these trades has its own description, and much like the sticky note situation above, each requires a fairly deep dive in detail. I’ve got a list of conditions/context where each is ideal. I’ve detailed the entry and exit methods of each, the profit potential of each, the volume I want to see, the volatility, etc. Everything is optimized beforehand. If I’m watching the market and I see a trade setup that isn’t on my list, then I know NOT to take it. If I can’t assign a number to it, it doesn’t exist for me. Many traders don’t really know what they are looking for during the day and they are simply trading impulsively. Labeling the trades you are looking for focuses you to create a plan and stick to your plan.

 

More importantly, defining and labeling your trades like this takes all of the details out of your head while you are trying to focus on the market. Nobody wants to be sitting there trying to figure out how to enter, how much to bet, what kind of volume they want, how far the trade can go or other details while focusing on the market. The brain just can’t handle that much information, especially when emotions kick in when you see opportunity. All of those technical things should be defined and labeled well before the market opens. Label and standardize, commit it to memory, then all your brainpower is available to evaluate the market.

 

All parts of the trading system should be standardized and have a label. Parts of a system that must be standardized include:

A – How much are you going to risk on a trade (money management)? For me, I risk about .25% of my account on my daytrades. It’s ALWAYS a standard amount. When the trade sets up, there’s no wondering how much I’m going to wager. I know EXACTLY what the bet amount is and this keeps emotion from taking over and causing bets that are too big (or too small) which can affect psychology. What kind of risk vs. reward situation are you looking for? 1:1? 2:1?

 

B – Where and how to place the stop. You can preset it or use a mental stop if you know you can depend on yourself to take it. If you have a difficulty taking your stops, then preset because you don’t need that emotion while you are trying to watch the market. What kind of levels or barriers do you want between your entry and your stop?

 

C – Where and how to exit. Do you want to trail a stop? How much are you willing to give back during a trade? Are you scaling out or taking the entire position? These all need to be standardized so you don’t have to waste precious brainpower on them while you are watching the market.

 

D – What stats are you going to keep during the day? How are you going to evaluate the market action during the day? I divide my day into 13 periods of 30 minutes each and keep track of volume, range, change, average price, MFE/MAE and VWAP for each period. I’m not sitting there evaluating the market in a million different ways. I’ve standardized how I monitor the market and I do the same thing EVERY day. Standardization creates repetition which creates intuition which creates expertise.

 

E – What points in the market are you focusing on during the day and where are your prime trade locations? I listed 10 standard points that I’m always watching during the day. I call it my Environmental Framework. Things like previous day hi/lo, previous week hi/lo, VWAP, today’s open, etc. I’m not sitting wasting energy on random action at random points. I’ve standardized what I’m looking for. You just can’t sit and aimlessly watch a market, your brain will cause you to do really strange things. It will lock on to meaningless points of reference and meaningless action because the mind has no structure. Give your brain a structure to follow during the day and let it focus.

 

F – Where and how to enter? Scale in or all in? Limit order on bid or market order on ask? Waiting for a down move or waiting for the breakout? Information risk or price risk? Wait for confirmation before entry or get a better price without waiting for confirmation? Entry is probably one of the most important things to have standardized because this is where the emotions normally kick in as the excitement and nervousness starts for most people when risking  real money hits them.

 

There are several other system parts, as well as a whole list of psychological attributes, but these are the major tent poles. The basic point is this: STANDARDIZE your entire process so you don’t have to think about it during market hours. The human brain has enough trouble evaluating market action, therefore you can’t burden it with all these other details that can be standardized during non-market hours. It’s a huge task just to keep your psychology straight, and having a thousand technical trade details floating in your head doesn’t help.

 

Also, something else I always had a problem with was this: Don’t be so exact. Nothing in trading is exact. Everything is an area or a level, never an exact point. Everything is gray, nothing is black and white. Your trading process doesn’t have to be perfect, it simply has to be standardized. There are a million ways to trade, just pick one. In the long run, your chosen method really doesn’t matter, almost any process can work. The real key to trading is to choose your process and then repeat it to the point where you develop intuition using it. Trading has almost ZERO to do with your chosen “method”. Trading has everything to do with using that chosen method to know how and when your method will work, when the market is deviating from your method and when opportunity is available for your method.

Sorry that got kind of long. I’ll cut it here and try to move to a general list of rules and tips in the next post. I’m always around and glad to help if anyone has questions.

 

 

 

Measuring Price Action within market structure

Yesterday I posted a short article describing how I set up my charts to track market structure. That list of 10 points describes places where liquidity is likely to be and these are the places where I want to trade. The key to knowing whether or not I want to trade at those locations is how price acts as it moves between those levels and how it acts when it approaches and reaches those levels. To accomplish this, I use only three things: Volume, a 30 period moving average on a one minute chart, and envelope channels set at .1, .15 and .2% set around that 30 minute moving average. I don’t use any other indicators to trade, as the 30 ma and bands, combined with the market structure I described yesterday, tell me everything that a set of many different indicators could, and probably more.

 

I primarily work off a one minute chart, but I also use a 30 minute chart. I divide each day into 13 periods, each of 30 minutes. I track range, change, volume, MFE/MAE and average price for each of those 13 periods. Those stats for each period help describe the volatility, direction and force of the market during each period throughout the market day.

 

Now, back to the 30 minute moving average and the envelope channels.  I daytrade the IWM, so I’ll describe the settings for that trading instrument. If anyone decides to use this method, you will have to determine your own setting for the envelope bands for your specific trading instrument. The settings for the bands are dependent on the normal volatility of the instrument you are trading. For the IWM, the normal move above or below the 30 minute moving average is about 16 cents (about .1%). This first channel is colored green. The next channel is set at 24 cents (about .15%) and is colored yellow. The third envelope around the 30 ma is set at 32 cents (about .2%) and is colored red.

 

So how do we use this? One of the most common indicators I see people use is a stochastics indicator. They usually set it at some random interval like 14, which makes absolutely no sense to me. A basic stochastics indicator set like this basically looks back 14 periods and tells you where current price resides within the range of the last 14 periods. The moving average channels do something very similar, and they are easier to read. All you have to do is look where price is within the bands. If price is near a red band, then that is the equivalent of an extreme stochastics reading (oversold/overbought). Once price reaches the outer envelope, there’s a good chance it will reverse. When using stochastics, I’m usually only concerned when price reaches an extreme, so these bands work well for that purpose.

 

Another stochastics related measure is determined from the points I mentioned yesterday. If we want a rough larger term stochastics reading, then I simply look at where price is in relation to the two light blue bands (last week’s high and low). Then drop down to the intermediate level and see where price is between the red and green lines (yersterday’s high and low). Then we can drop down to an even smaller timeframe and see where price is in relation to the intraday high and low (which I don’t mark on my charts). The shortest timeframe, again, is the location of price in between the two red envelopes. By doing this it is easy, and extremely quick, to look at a single chart and see where you are on four different timeframes of stochastics. That’s something that a single stochastics indicator at the bottom of your chart just can’t do.

 

The next most common indicator I see people use is Bollinger Bands. I think the moving average envelopes are much more useful than Bollinger Bands for measuring volatility and momentum. When you use Bollinger Bands, you are simply measuring the last 20 periods of price. If for some reason IWM price has been in a five cent range for the last 20 periods and it then moves 10 cents very quickly, then the Bollinger Bands basically explode and tell you that massive volatility has hit. But has it? Is a 10 cent move really massive volatility in IWM? It isn’t. As you may remember, the first envelope channel is set at 16 cents for IWM (this is average volatility). So the 10 cent move which Bollinger Bands show as an explosive move doesn’t even represent average momentum or volatility for IWM. Basically, the moving average envelopes go way back in time, whereas the Bollinger Bands only go back 20 periods (which isn’t much on my one minute chart).

 

The Bollinger Bands never really let you develop any sense of what a common or average move is for IWM (or whatever you trade). Without a standardized way of looking at something, you can never develop any intuition. The green envelope is at 16 cents, no matter if it’s 20 periods back or 2000 periods back. The envelopes allow you to get an intuitive feel for how the IWM moves over an extended time, not just the past 20 minutes. When it moves 16 cents, it’s an average move, not really much momentum. When it hits the outer envelope at 32 cents, that’s a big momentum move. The Bollinger Bands just can’t give you this information, because they only show you the move in relation to the prior 20 periods, not the past 2000 periods.

 

The slope of the moving average in the center of the envelopes is also an effective tool for judging momentum. The higher the slope, the stronger the momentum. It was a bit difficult to judge this with the eye at first, but after watching it for a few weeks, it’s easier to develop an intuitive feel for the momentum/slope. You can also get a feel for momentum by noticing how long price stays away from the moving average. I know if I see price stay a good distance above or below the 30 minute ma for say 30-40 minutes in IWM, that’s a strong trend. Normally, it revisits the 30ma in about 20 minutes or less.

 

I’m not going to dive too much into volume here since I think most people know how to use it pretty well. One resource that I would point out that really helped me learn to use Volume Spread Analysis is Tom Williams’ book “Mastering the Markets” that he has on his site volumespreadanalysis.com. There’s a free copy online here and it’s well worth the couple hours it takes to read it. If you want a new view on how to better use volume, give it a read.

 

Traders also use other indicators to judge momentum. Things like MACD, RSI, Momentum, etc. The envelopes can pretty much do the same job as all these momentum and overbought/oversold indicators. I’m definitely not saying that what I’m doing is better than what others are doing. Everyone should do their own thing. The point is to pick ONE thing and stick with it. That’s the only way to develop feel and intuition. For me, I picked envelopes because this one indicator can do the job of 3-4 different indicators (stochastics, Bollinger Bands, Momentum, Overbought/Oversold, Trend/ADX) and that’s just easier and quicker for me to use and helps develop intuition on several different levels simultaneously. Simpler is always better.

 

So now we have market structure and a way to measure price action. There are still two more steps to creating the trading view. For me, an edge situation is defined as price action within market structure within context. For the next post, I’ll explain the context element of the trading plan. Once the context part of the plan is defined, then I’ll follow up with the final piece, which is specific edge price action within this structure/PA/context model. Basically, once I have the right location of market structure, a good handle on the price action characteristics and a handle on the overall market context, I’m then looking for very specific price action which has an edge. I’ll cover that specific price action in an additional article.

 

I’m out of here on Friday, so the final two parts probably won’t get done until I get back. I’m also going to put together an article on a list of general daytrading rules and ideas that I’ve collected over the years. I know how hard it can be to find real information on daytrading. There are so many fake gurus out there charging for things that just don’t work. Hopefully, these posts will help someone find their way. If you have any questions at all, feel free to contact me, I’m always glad to help. Trading isn’t easy and sometimes just finding one or two good ideas can start a chain reaction to reach profitability.

Merry Christmas and I’ll see you guys in January.

How I View market structure as a Daytrader

I’ve been meaning to get a few posts up on my daytrading process, but just haven’t had the time to do it. Maybe it will help another daytrader, or at least let you guys know what I’m looking at each day. Not much going on today, just waiting on the XOP trade to play out. Tomorrow is the last trading day of the year for me, so it’s pretty dead.

 

The basis of any plan has to have a structure of context, a larger picture view. Even as a daytrader, that’s always the starting point. It’s what I call an Environmental Framework. It’s basically like any intelligence you would have in something like a war or battle. Know where the fortified areas are, where the rivers are, key passes, mountains, etc. There’s places during the day where you want to get involved and places where you want to avoid engaging the market. As a daytrader, I want to engage where there are areas of liquidity and avoid areas where there is no liquidity. Basically, price moves from fair value to fair value, liquidity to liquidity. The trading between fair value areas is what we all call a trend. I want to be able to glance at the chart and know where the next speedbump is, where to anticipate an entry or where to plot a profit target. The whole purpose of putting these things on the chart is so I don’t have to think or check notes, those positive expectancy areas are just right there in my view at all times, which keeps me from engaging in bad locations or entering where there’s very little reward. It just keeps me out of trouble.

 

So setting up the day here’s the way I structure my charts. I trade off of a 1 minute chart, but it’s really more of a zoomed out 1 minute view, not focusing so much on each individual candle, but rather the flow of the market and general areas. (I’ve attached a pic to this Twitter thread):

Previous Day Hi – Horizontal Red Line
Previous Day Low – Horizontal Green Line
Previous Day VWAP – Horizontal Purple Line
Previous Day Close – Dotted Yellow
Today’s Open – Dotted Blue
Today’s VWAP – MA Purple (curved)
Previous Week Hi and Low – Horizontal Light Blue
Previous Week VWAP – Horizontal Orange
Current Week VWAP – MA Orange (curved)

 

That’s it. Everything you need for larger context is right there in view at a second’s notice. The previous week’s lines provide a larger term view, the previous day’s lines provide the intermediate term view, and the current day’s lines provide the shortest term view. As a daytrader, I rarely need anything longer term than these and they are all right there on the chart.

 

These locations are merely a starting point, an overall market structure. Once the market structure is in place, the next step is to evaluate the price action at these points, as well as the action as price moves between them. I’ve got a second set of tools that I apply to the the 1 minute and 30 minute charts to measure price action within this structure and I’ll try to post those tomorrow. I know that seems like a lot of lines on the chart, but it’s easy to get used to them once you work with it, and once you get used to it you’ll wonder how you ever got along without the wider view of the market.

 

 

Energy Equities Outlook and Trading Plan for Dec 16-20

This week is going to be the last week of trading for the year for me. I’m out of here Friday to the warm Bahamas for Christmas. Hope you all have a very Merry Christmas and Happy New Year.

 

As for the XOP, it really doesn’t feel like it’s in the Christmas spirit this year. More new SPY highs, China Deals, OPEC cuts, EIA numbers and the E&P’s show no desire to do anything at all. With all those great catalysts, they are just dead money stuck in this same range we have been in since August 5. I think Friday was probably one of most disappointing days I’ve seen in energy over the last five months. SPY had a green day, Oil was almost touching that magical 60 price, yet the XOP tested the top of its range and got absolutely smacked back down. Total rejection. Crash and burn. It barely managed to hold the middle of the fair value range at 21.55.

 

If we dig a little deeper into the individual energy components, the problems start with the leaders of the sector. XOM and CVX both failed at very important points on Friday. CVX failed at that 119-119.50 area, which it has tested many times since August. XOM failed at that 70 level which has been significant supply since August. Both of those stocks had every opportunity to break out on Friday (especially since they are two large DIA components and SPY components). The fact that they ignored the larger market and failed so badly while the overall SPY and DIA were green is a big relative strength clue that things might not be so good in energy. The real problem for energy is what happens when the overall market tops and has the next pullback. If they can’t even run with a market making new highs, how bad are things going to get when heavy selling starts?

 

During this past week, the important points for XOP were the middle of the range at 21.55 and the top of the range at 22.68. The XOP spent Monday, Tuesday and Wednesday trying to chew through the 21.55 level, which is acting as point of control for this range which began in August. It managed to break through and looked pretty good on Thursday making a run as high as 22.31, which should have set up a continuation to the top of the range on Friday. We got a nice open on Friday and price ran to within 10 cents of the top of the range, touching 22.58 before totally collapsing. The only positive for the day was that it held an important point at 21.68. That point was the Tuesday and Wednesday highs, which is now acting as a balance point. That point will be the focus for the upcoming week. If it holds, there could be another run at the top of the range. If it fails, the most likely path is all the way back down to the bottom of the range.

 

I guess the real question is ‘why’ did it fail? I’m just not sure. I thought maybe tax loss sellers were hitting it hard, but I’m not sure that tax loss selling is a valid reason this late in the quarter. The only reason that makes a bit of sense is to look at oil prices. WTI reached the 60 level, which has acted as the top of its range since July. While oil and E&P’s haven’t been moving in exact lock step, they have both been respecting the top of that 5-6 month range. Both seem to have gotten rejected on Friday. Maybe $60 is as good as anyone expects oil to get. Maybe it’s all downhill from here in oil, and therefore the E&P’s topped out. Or maybe things just got too extended this week and needed a breather before taking another shot at the top of the range. Who knows. All we know is that price failed at a very important upper boundary while the rest of the market looked good. Don’t ever ignore relative strength clues.

 

Trading Plan for the Week: Since I’m leaving on Friday, I’m a bit limited in the types of trades I can take this week. My favorite trade is going to be a long off of the 21.68 point first thing on Monday. I’m hoping for an open near Friday’s close and a light volume pullback to test that 21.55-21.68 range. I want to see it hold and then hit it hard once it climbs back above 21.68 and hopefully head back up for another test of the top of the range around 22.68. I might possibly scale in small starting at 21.68 on the way down and then add as I see it holding any significant intraday low, and then really hit it hard as it reclaims the 21.68 level. It really doesn’t matter how you enter on this one, the 21.55-21.68 range either holds or it doesn’t, just be sure to have stops in place. If I can get a price near 21.68, there’s the possibility of about a dollar of reward up to 22.68. On the downside, I’m cutting it at 21.30 for a total risk of about 38 cents. It’s a decent risk:reward on the trade, especially if I can improve the entry a little closer to 21.55.

 

Edit: I just posted the chart for this week’s price paths and trade locations and wanted to point out one more trade possibility. If the XOP makes a run at the top of the range early in the week, I might give the breakout trade a try if there’s a decent sideways buildup at the upper boundary. You can see what that might look like on the chart I posted on Twitter, it’s labeled as point “C”. Everything will need to be perfect with this situation to try it, but just thought I’d point it out.

 

I won’t be doing any swing trades or longer term trades through the rest of the year since I’m not here to monitor them. The only thing I will be doing is putting some buy orders in the 17-19 range while I’m gone. Maybe we get a replay of last year’s Christmas massacre in energy. Would be nice to return from vacation to an XOP 17 position.

 

Anyway, that’s really all I’m looking at this week. It’s mostly just a week to wind it down and work on some record keeping and review the trading journal from the last few months. Hope everyone has a very Merry Christmas and I’ll see you all in the new year.

 

 

 

Energy Equities Outlook and Trading Plan for December 2-6

It was another week of decay for the XOP. The overall market was making new highs, with the SPY touching 315, yet the E&P’s closed a few cents from all time lows. The previous week set up a rising wedge pattern, so the breakdown wasn’t totally unexpected. The issue now will be what happens on the open this week as we test that 20.28-20.32 area. Does demand show up or does this thing just totally washout down to the 17-19 area, or lower? I think the key this week will be what happens with the SPY. If we get any significant pullback, energy probably gets crushed, especially the commodity itself.

 

I didn’t take any intraday energy trades last week, as there just isn’t any significant reward in this tiny range. As I wrote last week, the XOP has become untradable on an intraday basis for me due to the lack of range. I’ve switched all my daytrading over to the IWM, which managed to move straight up about $5 last week. The only thing I can do with the XOP down here is to try and catch some multiday swing moves.

 

The only other option for me in energy is to switch to the XLE for intraday trading. It still has some decent range up near 60. I also think that if the longer term players do come looking for energy, they will only go for the larger cap, higher quality companies. The only negative about trading the XLE is the large weighting of XOM and CVX in the ETF. For me, it’s actually easier to trade either Exxon or Chevron individually rather than trading the XLE. If the XOP continues this slow decay, I’ll probably start posting more on the XLE and individual names. I don’t really like that, but you have to adapt to what the market gives you.

 

As for individual names, I’m really not seeing much opportunity. I’ll be watching XOM in the 66-67 range, CVX at 115 and COP at 57. The service companies are an attractive trade possibility. I’m watching SLB at 37.50, HAL at 21.50 and NOV at 24.50. If the sector does somehow make big reversal, the service companies might be the first movers.

 

Oil itself took a hit toward the end of the week, but those kind of moves in very low holiday liquidity are hard to trust. I want to see if the bounce will take out that 57-58 area. The strength of the initial bounce on Monday will likely set the tone for the entire week. If the bounce is weak and/or gets cleanly rejected at 58, oil will probably breakdown and take XOP with it.

 

Trading Plan for the Week – So what is available this week in energy? The simple answer is “not much”. There’s really only one or two trade possibilities this week. The first trade is a reversal trade on the Monday open. If the XOP gaps lower or makes a sharp move lower on the open, I’ll be waiting for some type of selling climax. Let it bounce off that high volume climax, evaluate the strength of that bounce and then let it come back down and retest the climax low. If the volume is low on the retest, then give it a shot long with a stop just below the intraday low. If the volume is high, then just step aside and let it fall. The more conservative entry on that trade is to let price get back inside Friday’s range low and then enter, while using the intraday low as your stop. That method requires a little smaller position sizing, but the confirmation entry of getting back within range somewhat offsets the risk on the climax retest entry.

 

The second trade on the XOP is to just let this thing totally collapse and hope that the last players capitulate. This might take 3-4 days of down action and could reach the 17-19 range. It needs to be on absolutely huge volume. If the volume is light on the washout, then I’d be hesitant to step in.

 

The goal on a capitulation is to get a majority of the shares into stronger hands who will hold the shares for the longer term and not dump them back on the market every time there is a bump in the road to recovery. As long as there is heavy supply out there, the scale can’t tip in favor of the bulls. All that supply needs to be locked up for at least a year in the hands of holders who won’t dump it. I think there is some price point at which longer term players will return to the sector, but I just don’t know where that price point is. I think that point might be somewhere around 17.

 

If this sector gets down in that 17-19 range, I’ll be looking to start a long position. My scale in for entry will depend on how much volume there is on the move down. Higher volume will enable a quicker scale in.

 

I also want to throw a quick mention in here about GDX. I posted on it in the Twitter feed a couple weeks ago for a nice trade off of 26 up to 27.40 and then for a reload trade down in the 26.20-26.50 range. It ended last week at 27.10 and there could be a great long trade if it can break the 27.50 level. If you pull up a weekly chart, the first thing that hits you is the almost perfect cup and handle type setup. That falling wedge starting back in September could break for a huge spike upward past the 31 level. If this thing breaks 31, it’s off to the races for a monster long trade. I’m going to be looking at this first thing Monday for a longer term trade using 26 as my stop for position sizing.

 

Sorry for such a depressing writeup, but there’s just not much available in energy this week. The key is to let the XOP test the lows and see how it reacts. I’m hoping for a total capitulation, but fear that we simply get more of that low volume, slow bleed downward to new lows, and that’s just not tradable for me.

 

Also, as I posted last week, I’m limiting my Twitter posting. I just can’t take the constant barrage of negativity anymore, it just isn’t worth it and it’s not healthy. I’m still around though, so if any of you guys have any questions, just send a DM. Good luck this week and be safe if you try to catch this falling energy knife.

Energy Equities Outlook and Trading Plan for November 25-29

As the overall market keeps making new highs, the E&P’s just keep decaying to new lows. The XOP has been my best friend for years, but I think the relationship might be coming to an end. As any short term trader will tell you, there has to be range and volatility to make money. The XOP has lost almost all range and volatility on an intraday basis, making it nearly untradable at these prices, and there doesn’t appear to be any great spike back up in price happening anytime soon.

 

We got the test of the 20.37 low on Wednesday morning, but the bounce wasn’t very impressive, topping out around 21.25. It should have easily traded back up to fair value at 21.55. The fact that it showed no real demand makes me think this is probably headed even lower. At this point, I just don’t think there is any reason to be in these if you are a longer term investor. Eventually, there should be some type of washout down to the 17-19 range, but even then I’m not sure how much reward is available in this group. Sometimes things just die out as the world moves on. I’m sure at some point oil will finally get that move back up, but there’s also a chance that it never really gets much above where it’s at, and an even greater chance that it falls under $50 when the inevitable recession hits.

 

It’s one of those situations where if you have a pile of dollars that you have to invest, why in the world would you waste that pile on this sector when there are so many other opportunities out there in the market? I think that if any larger players do choose to take a chance on energy, that they will only play the larger, safer names. The days of speculation in small, risky oil startups is probably over.

 

While the longer term looks bleak for energy, there will still be opportunities to trade them on a short term basis. This sector can rip on occasion when all the right factors line up. The problem is the long dead periods that you have to sit through between those rips. For me, this sector is going to move to the back burner for awhile. I’ll still be looking for some of the swing type moves, but daytrading this sector just isn’t as attractive as it used to be. Even the individual names have suffered the same fate, most of them falling under $25 and showing no tradable range. There used to be about 40-50 names that I could trade on an intraday basis, now there might be 12-15 names left.

 

Unfortunately, I’m going to be moving all my daytrading to the IWM for awhile. I’m sure energy will eventually make a comeback, but there are just better opportunities out there for daytrading. Having said that, I’ll still be watching the sector for swing trades which I’ll post here.

 

Trading Plan for the Week: We’re stuck in this 20.28-21.55 bottom half of the range right now and I’m not sure which way this breaks. My gut says it breaks lower and gets that much needed washout into the 17-19 range. The controlling factor over the next few weeks will be the SPY. It has been ripping to new highs almost every day, yet the XOP sits at lows. I really think this sector is going to get crushed when the SPY finally makes a reversal and pullback, especially if the cause of that pullback is recession or economic slowdown related.

 

There are really only two trade possibilities this week. Either let this thing fall and see how it acts on the next test of the lows at 20.28 and then buy it for a bounce or let it break above 21.55 and get long hoping for a run back to the top of the range at 22.68. Neither of these trades is very attractive because the reward on both is pretty small, probably a dollar or less.

 

The only other move I’d consider this week is to just stand aside and let this thing burn out. Let it take out the lows and hope the SPY turns down at the same time causing a complete capitulation and then possibly start a slow scale in for a long play. It’s really hard for a sector to get back into a bullish trend until a majority of the shares get back into strong hands who will hold for the long term and not dump the shares on the first sign of trouble.

 

As you can see, I’m pretty down on energy right now. For me, it’s not strictly the fundamentals of the sector itself, it’s more that the sector has gotten in such bad shape that other sectors are looking that much better with more opportunity. The way I trade requires range, which energy just doesn’t have right now. Energy used to be a constant source of opportunity, volatility and tradable movement, but times have changed. Have to change with them. I’ll return to the sector when it can manage to get back above 22.68 and show that the lows are in for a longer term trend.

 

Since I’m moving energy to the back burner until it can recover, the holiday month of December is also a good time for me to move away from Twitter for awhile. I keep saying I’m going to give it up, but I always seem to come back to it out of boredom during the trading day. I’ve noticed lately that it has started to affect my mental calmness during the day, and anything that affects my trading isn’t a good thing. Just seeing all the negativity and the way people treat other people is disturbing. I need a break from all the impeachment, boycotts, shootings, etc, etc that bombard me all day. It just isn’t healthy. I’ll post charts a few times a week, but I’m going to try and limit things for awhile.

Good luck this week.  Keep those stops tight and be safe.