Thoughts on the 2021 Trading Year

I think this is the year shorting finally returns to being a profitable strategy. Why? Mostly because everyone else is on the other side of the boat. Are there any bears left? Is anyone at all playing the short side anymore? Traders often focus on situations referred to as “crowded trades” and the normal logic is to avoid them, especially once they become very mature. This market is getting very mature and very extended. I think this is the year that logic finally applies to the overall market. I’m certainly not going all-in short, but short trades will certainly be more common in my 2021 trading. At some point, all this bubble inflated stock is going to have to be converted back to cash, and who’s left to buy this expensive overpriced stuff? The greater fool theory is getting near its cyclical end.

 

I’m not sure what the catalyst or signal will be when the market reaches that tipping point between bulls and bears, but there will be one. Sometimes it’s big, sometimes it’s barely noticed, but there’s always a catalyst. The real key to making money on the short side is timing. The account destroyer is being early on the short side. Let the catalyst happen. Let the reversal happen. Try not to outguess the market. When the market is ready to turn, there will be a signal, but it’s our job to stay alert and look for that signal. Don’t let greed cause you to miss it.

 

I guess my point here is not to get too confident. Stay focused on your risk control. I went through this in 1999-2000 and I’d love to have kept all the money I made in that bubble, but I hadn’t been trading long enough to understand how bubbles work and the need for keeping risk control. I got blinded by greed and thought that if everyone else was bullish that the party would never end. What was even worse was my arrogance in thinking that I would see the turn and get out before the bear took my profits. I didn’t. But it was a much needed lesson and probably the only reason that I’m still in the game. Be careful this year. Respect the lofty levels of this market and know that at some point the game will change. There will be a signal, so be attentive. Risk control is the top priority.

 

The first week of this new year is going to be an important one. I think we get a big run up for the first week or two of 2021, especially if there’s a favorable result in the Georgia Senate races. I closed out 2020 in 100% cash, but I’ll be putting some money in on the short side (probably IWM) if we get some type of buying climax as new money floods in to start the year. Many traders watch this “January Effect” situation, so be patient and let it play out, as it could be a good predictor of market direction for the next couple of months.

 

As for energy, I really didn’t focus too much on it through December. I spent most of my time focusing on the macro picture. I’ve really let my bigger picture view slide over the last six months and wanted to sharpen it again. I feel like I’m caught up there, so I’ll be posting more stuff that is energy related this year. It will be really interesting to see how energy stocks start off the first two weeks of 2021. It feels like there’s at least one more little push upward for them, but after that who knows where we go. I’m not bullish on energy at these levels and I think oil could top out soon. I’ll be trading them on the intraday level for the next month or so. I’m not really interested in trying to outguess the energy market with longer term trades.

 

My view on the real economy is probably more bearish than most. I really don’t think traders are focusing enough on the psychology of the public. It’s pretty depressing out there and most people have been trained better than a circus monkey with regard to this Covid stuff. I think most people have been psychologically damaged and I don’t think it’s going to be possible to simply flip a switch and undo that damage. Everywhere you go you see these masks. I don’t think we realize how much psychological damage these things are doing. It subconciously keeps the virus fear front and center every second of every day. There’s no escape from it. It’s even invaded TV commercials of all things. There’s no way in hell you are getting people to give up those masks even if things get better. I’d be willing to bet that 50% of the population will continue to wear them even when there’s no real threat left. People are going to continue to be fearful of going out for a long time. The market expects human psychology to change on a dime, but it just doesn’t work that way. The economic recovery is going to take MUCH longer than most people think.

 

There’s also plenty of things that can still go wrong with the Covid situation. New strains, problems with the vaccine, public perception and fear if people still die after getting the vaccine, etc. I think we’ve moved from a truly health centered problem to more of a psychology centered problem, especially for the economy. The fear is really excessive compared to the true underlying numbers. The media isn’t helping the situation, nor are the politicians. I’m really not sure if politicians even want this problem to go away, then what would they use as an excuse for all these funding bailouts and money printing? And this doesn’t even begin to consider the things we don’t know about yet. There’s still a whole world of problems that have been brewing while our eye has been off the ball and focused on the pandemic. And then there’s always the black swans we don’t know about. As I wrote a few weeks ago, this market is priced for perfection and there’s so much out there that could go wrong. Some call it a wall of worry, but this market has already climbed nauseously high up that wall, how much is left before it falls off?

 

Sorry for such a depressing view of the world, but that’s where my trading focus is at to start the year. I’m super cautious right now and I’m not willing to tie up money in longer term trades. I’ll be mostly daytrading over the first couple months of the year to avoid the increasing market risk. The only two longer term trades I’ll consider are a short trade on a buying climax in the first few weeks of 2021 or a long on a really big pullback in February/March. Other than that, I’ll be keeping it short term and mostly intraday. Good luck this year and keep that risk control tight!

 

Weekly Energy Sector Review, Market Outlook and Trading Plan for Final Two Weeks of 2020

Sorry for the lack of energy sector info on the Twitter feed the last couple weeks. I’ve been working more on my macro picture trading and just winding it down for Christmas. I’m probably done for the year in energy, but just wanted to make one final short post for 2020.

 

The only question I have about this market for the remainder of 2020 is where does this Election/Christmas rally stop? I’m still waiting for a spot to get short the IWM and I think I’m going to get that entry this week. This has been a crazy run that started around election time. If you would have told me back in October that Biden would win a contested election involving court battles, I still wouldn’t have been able to catch this 30% move in the IWM. I don’t follow politics closely, but I don’t think anyone expected this kind of move on a Biden win. But then again, maybe this move isn’t about the election results, but rather stimulus and vaccines.

 

I have to admit though that I’m pretty bearish right now. I’m not convinced that the vaccine is going to provide the public the safety it wants. There will be new strains of virus and vaccine side effects, and we haven’t even begun to see the media panic when vaccinated people start getting the virus. I think people have that 95% number stuck in their head, but when the true numbers come out, I think that number is going to be much closer to flu vaccine numbers in the 50% effectiveness range. When that happens, the media will once again begin their fearmongering and public confidence will take a few steps back, as will this market. I don’t think this virus problem is anywhere close to being over.

 

The market also expects more stimulus than I think the government is going to be willing to provide. How long can we keep throwing money at this problem before huge collateral damage begins to start showing? The consensus seems to be about 900 billion right now and then a second round of stimulus when the Democrats gain power. We may get that 900 billion round this week, but I think that’s already been priced in and could be a sell the news event. Another factor that isn’t getting enough attention is the Senate race in Georgia. If the Republicans win those, then there probably won’t be a second round of stimulus getting through a Republican controlled Congress. If the Democrats win those, then the Senate becomes locked at 50/50 and essentially disappears. With a locked Senate, all decisions are then made by Kamala Harris (tiebreaker), who would also have presiding powers over the Senate, as well as the tiebreaker vote. Let’s see how the market handles that situation in a year. I’m guessing it won’t handle it very well when things move from stimulus to tax increases and more frivolous legislation aimed at regulating corporations.

 

And what about the other black swans that are surely out there? Could we even handle another one? Could we afford it? Could the public survive even more stress and psychological pressure? I’m pretty sure that every troublemaker in the world is going to step up and test the new kid sometime soon after the inauguration. How will Biden respond? Would one of those troublemakers really step over the line into some kind of attack? If someone wanted to push America over the edge, now is the perfect time. Kick them while they are down. These things trouble me and I hope we never see them, but I think you have to account for their possibility in trading. And like they say, it isn’t even a black swan if you can predict it. What happens if there’s a swan that nobody could have ever predicted? I just think this market is priced to perfection right now and there’s just so much that could go wrong. I’m not willing to play these levels on the long side for the last couple weeks of thin holiday trading. Yes, I may miss a big run, but I’m also going to miss any big down move. Sometimes the market just isn’t in a great risk/reward position overall. I’ll wait for the new year.

 

Quick technical look around the market:

SPY – Watching 372.50 on the upside. If Stimulus gets passed this afternoon, then I think we gap up above that level. If things get delayed, then 362.50 is the spot to watch on the downside. Overall, I think the market probably ends the week within last week’s range between 364.50 and 372.50.

 

QQQ – Tech is still the place to be and if the market moves to a risk off view, I think money will rush back to big cap tech as sort of a safe haven kind of play. It clearly broke to the upside out of that three month consolidation and 298-300 seems to be solid demand.

 

IWM – What a crazy run in small caps. As stated for QQQ, if the market moves to a risk off environment, the rotation trade from tech to cyclicals could reverse and take small caps down for a much needed pullback and consolidation. There’s an area between 178-182 that should provide very solid support for any pullback, but that’s still a hefty 10% drop. I’m looking to start in short in the 200-205 range, but trying to be as patient as possible. If trading really is thin this week, there could be a nice FOMO meltup area for an entry short.

 

XLF and KRE – The financials are following rates very closely lately. The tech to banks/energy rotation has also been dependable. See if those to correlations continue. If financials start to head down, that’s likely a bad signal for energy. Watch the correlation with IWM and TLT for the financials.

 

GLD and UUP – The dollar continues to weaken and gold finally started to respond positively last week, as did the GDX. I’m not willing to chase gold or the miners up here, but when the dollar does find a bottom, then gold should get a nice pullback for an entry long. Gold also still not following the PDBC (general commodities).

 

PDBC and TLT – Commodities continue to run and have almost moved through that red resistance level I posted on Twitter early last week. As commodities have moved up, rates have tried to keep pace. The TLT tried to break the downtrend line (with GLD) last week but failed and the downtrend (higher rates) continued. If PDBC keeps going up, rates should continue to follow. As rates continue to climb, at some point that could halt the equity run. Inflation could be coming and the only cure for that would be higher rates. I think there could be a battle with the market trying to push rates higher while the FED desperately tries to hold them down. Powell said on Wednesday he wasn’t moving out in duration to try and control longer term rates, but the market really acted as if he were actually doing that behind the scenes. At some point, he’ll have no choice but to extend duration and try to hold those long rates down. Mortgage rates also remain a target for FED manipulation.

 

In summary, the macro picture shows commodity prices moving up (inflation) with most of that being caused by a weak dollar. Rates, in response, have started moving up in anticipation of that commodity inflation. The real question for this market is how high would rates have to go before the equity markets get spooked? The FED has quite a battle on its hands and at some point I think the market wins by forcing rates higher, leaving the FED on the losing end of the stick.

 

Energy

I haven’t been trading energy since December 1. Prices have run so far that there’s nothing I’d buy, but there’s really nothing I’d short either. I think the sector may be digesting the latest gains with another run possible on the horizon. I don’t agree with it and I don’t think the economy warrants another run, but the tech/cyclical rotation could still produce enough moneyflow to push the sector a little further. I think we could possibly get a run at the June highs on the next move, whenever that might be. On a longer term view, I’m bearish on the sector. It’s just too much run too fast and I don’t expect that the economy is going to recover like everyone thinks. Of course fundamentals matter less and less these days as the fast money has taken over the sector. The real key will be the reaction when the economy doesn’t recover, will oil be the first thing to get sold off? Are the recent energy buyers long term believers or just fast money year end players looking for quick returns? Time will tell I guess.

 

The technical picture for the XLE is pretty good. There seems to be good demand in the 36-37 area to stop a pullback. VWAP from November 9 sits around 37.50 and the 50% pullback of this entire move sits around 35.75. If the XLE dropped back under 35, I’d likely be a buyer with a stop around 33.75. If price takes out 32.50, something has probably gone very wrong in the market.

 

Trading Plan for the Week – My primary target for the remainder of the year is a short IWM play. I’m hoping for a gap up on Monday and a run at 200 to start the scale in entry. There could be another 5-10% in this run which could take it as high as 220, but I’m willing to size in at a level where I can take some pain on this one and then add when it starts moving in my favor. The problem that always arises for me is that these shorts move so fast that you need to at least anticipate for part of the trade for a solid average position price. XLE was a great example back on November 9. If you weren’t already in with a partial long, then entering after the gap up was very difficult, especially on the risk control side.

 

My second target is still the ITB. It’s not really acting like I thought it would, but I still think if rates start moving up again then mortgage rates may get caught rising which could make new homes too expensive. If consumers are paying higher rates, then that’s less money they have to buy the house and home prices might need to drop to compensate for those extra interest rate charges. On the other side, commodities are getting expensive and those houses are costing more and more to build. If rates rise and costs rise, the homebuilders could get squeezed from both ends. And this doesn’t even take into consideration the longer term outlook for housing. People are paying some absolutely crazy prices for houses right now. Given unemployment levels, I have no idea how people are affording it. Are banks lowering qualifications? Delinquencies have to be rising in this pandemic environment with so many people behind and begging for stimulus. Houses are incredibly expensive and if the market begins to slow and home prices start dropping, how will the system handle underwater mortgages?  And what happens with this supply of houses if the economy doesn’t recover? I think the homebuilders are priced to perfection right now with growth being seen as linear from here. I’m not sure we learned anything from 2007.

 

That’s really all I have on the radar as the year winds down. It’s been a pretty good year and I’m content just to slide into 2021 and start fresh. No sense in getting hit during a thin holiday market and losing hard earned profits. Much rather spend that time with the wife and family. Hope you guys have all been trading well. Good luck this week.

 

Weekly Energy Review, Market Outlook and Trading Plan for December 7-11

The market has almost reached the 380-400 goal that I’ve been writing about over the last several months. I expect that it will get there in the next couple weeks, but what happens then? This post election and Christmas rally was also expected, but it’s growing old too. One reason I write this article every week is to record what I’m thinking at the time so I can go back and review it to see where I was right and more importantly where I was wrong. The question now is whether or not we get the market reset once the price target has been reached and the celebration of the election is over. Short answer, I think we do, but how big will the pullback be?

 

Last week, I wrote about a possible coming spike in interest rates and we did get a significant move this week with the 10 year almost reaching 1%, while the TLT took a dive toward the June lows. It’s really not a huge market moving event yet, but if rates continue to move up at a faster than normal pace, the market could get spooked and rates could be the thing that causes the next market pullback. I think traders are soon going to start asking WHY rates are starting to climb. The primary answer is inflation. Can the economy in its current condition absorb price increases while so many remain unemployed? And what happens to prices when (if?) the rush of demand returns on a lessening of virus concerns? Where does the money come from to buy all those expensive houses and cars? Stock profits?

 

The one market that really seems to be a concern for me is housing. I really don’t think anyone is paying attention to this sector yet and the signal it is sending. House prices are shooting up everywhere. At what point do the price increases force a move up in mortgage rates, which also track the 10 year Treasury? I know we live in a market of FED manipulation, but there are still real market forces out there called supply and demand. I’ve been watching a short ITB trade for the last few weeks and I think there’s a good chance that sector rolls over if rates continue to rise. If rates do rise due to market forces, then house prices will necessarily have to come down. There’s also the possibility that the market starts seeing increasing mortgage delinquencies as employment continues to lag. Remember how that decreasing home price, rising mortgage delinquency combination worked out about a decade ago? Right now banks are offering the cheapest money ever to buy the most expensive houses ever, that can’t end well. Keep an eye on rates this week and whether the bond market is in fact leading the stock market in direction. The TLT has clearly turned down from its uptrend that started in the fall of 2018, which coincidentally was also the start of the ITB uptrend. Do they now trend down together? Does the stock market soon follow with at least a pullback, if not an extended move down? Don’t ignore the ITB signal.

 

Overall Market Macro

SPY – The move since November 2 now stands at about 15% to the upside. That’s 15 percent in a single month. A single month. At what point do we maybe start considering this to be a blowoff phase in very mature bull market? 20%? 25%? Given all that has happened in 2020, the SPY is up almost 15% for the year. If you knew all that would happen in 2020, would you have taken that bet? Are we melting up in a final move? I think we are and FOMO is running rampant. There are no technicals or road signs on the upside anymore. On the downside, I’m watching 360 and 352. If we do get a meaningful pullback soon, I think the most obvious level would be 322, which is about a 13% move down.

 

QQQ – Tech broke out of the consolidation pattern that started back in August and closed at an all time high. It’s an obviously bullish signal, but could quickly turn into a bearish one if price fails and moves back into the consolidation pattern in the next week or two. Watch price this week and see if it pulls back toward the 295-298 area.

 

IWM – This is my short bet. I’d like to get short in the 190-200 range. This one has just melted straight up from 150 to 188 in a single month to all time highs. That’s a 25% gain in a single month and it’s a textbook blowoff top. I will be getting short this week in a very big way for probably my largest sized trade this year. At some point Main Street and Wall Street have to intersect again. When you look at the real economy, unemployment rates and rising inflation, there’s just no way small businesses should be valued at this level. Is it possible that the short trade is wrong here? Absolutely. But I’ll gladly take this trade and if I’m wrong so be it. I think there’s an easy 10-15% profit in the trade as a pullback likely takes the IWM back toward the 170 level. If it keeps moving up, then I’ll keep adding to the trade up to the 210 level.

 

TLT – The TLT started an uptrend about two years ago, November 2018 and now finds itself testing the trendline from that point, as well as the summer lows of 2020. This is probably the most important watch of the week. If it takes out the 153-154 area and gains speed, the stock market may get a shock from rising rates. If it bounces, then 161 becomes the target on the upside which could establish a short term bottom in rates. I think there’s a real possibility the market is taking rate decisions out of the FED’s hands and that could cause the stock market some stress.

 

UUP – The dollar continues to weaken with the UUP falling, but there could be support coming soon around the 24-24.25 area. Rates and the dollar are currently competing against each other with regard to the effects on commodities (PDBC). The weaker dollar is pushing the PDBC up, while rising rates are a response to that commodity inflation. Who wins? At this point, I think the market would prefer the dollar to find a bottom soon in hope that commodities would slow their rise, which in turn would likely slow the current rising rates. If the UUP continues to fall at its current pace, then the TLT likely follows and rates continue to rise, which eventually ignites a stock market pullback.

 

PDBC and GLD – I watch general commodities through the PDBC. There are several different ETFs which measure general commodities, but PDBC has the most liquidity. If you place the PBDC and UUP charts side by side, the inverse correlation is obvious. As UUP falls, PDBC rises. PDBC contains an large weighting in oil and energy, so it does reflect the XLE chart somewhat. The current PDBC move up is reaching a very strong resistance level around 15.00 which started back in 2016. If it breaks that long standing level, inflation concerns will only grow. I think it will break that level. Another clue is the XME, which measures industrial metals and gold. It has moved from 24 to 32 (with gold components negative) in the last month, which is a signal that other general commodities may not be far behind. The one commodity that isn’t cooperating though is GLD. The UUP has moved down sharply, the PDBC up, yet GLD has fallen since August, along with TLT. It should be going up, and up sharply. There’s an argument that traders are bailing on it as a safe haven play and it’s no longer wanted after the vaccine news, but the inflation angle may kick in soon and start pushing it back toward the 195 highs. I started a GDX long on Friday and I’ll be adding to that position if gold does start back up.

 

So when you put this macro picture together, what we currently have is rising commodities (inflation) being caused by a weak dollar, which in turn has set rates off to the upside with that commodity inflation. And this negative cycle is going on in a pandemic environment where unemployment is at record levels and people are getting behind on their mortgages, rent and other obligations. The real question is how far do these intermarket forces go before they put a stop to the current bull market in stocks? How long can the stock market ignore real world forces? And what happens if you throw in rising gasoline prices, rising food prices and higher taxes? At some point, this fantasy world of Wall Street is going to have to acknowledge the reality of Main Street, but as usual, the opportunity for us as traders to take advantage of this always comes down to timing.

 

Energy

Sorry that macro review was so long, but that is where most of my attention has been focused over the last month. You have to know where you stand in the larger picture before ever thinking about the narrow energy sector. So how does energy, and the XLE, fit into this macro picture?

 

As general commodities have risen, so too has the USO. This rise in the USO has been helped along by a weak dollar (specifically the USD/CAD pair), and all this has pushed the XLE from 28 to 41. The sector has also been helped by a rotation trade out of tech (QQQ) and into financials (XLF) and energy. With regard to the larger macro picture, the question for XLE now is how long does the weak dollar and rising PDBC propel the USO, and how long does the rotation trade cause money to flow to energy? If the SPY does have a pullback, how loyal are these recent new longs in energy going to be? Will they throw it all back on the market at the first sign of a pullback or are they long term players? I really don’t know if this energy move has been just a year end fast money play looking for quick returns or if these traders really believe in a long term future for fossil fuels. I think we may get the answer to this question in the next month or two.

 

On the technical side, XLE has now run 50% in the last month. I’ve seen some good runs in energy over the years, but this is top 10 for sure. I really have no idea how far this goes, but I do think it needs a pullback soon if it wants to establish a dependable long term trend. If this just shoots straight up, the buyers from lower levels are just going to bail and take sizable profits, which leaves many bagholders. I’d much rather see a pullback and a grinding type uptrend than this parabolic move. The XLE is now reaching that early June blowoff area and price could possibly test those highs around 45, but again, the real problem is what kind of structure is it building underneath with this parabolic kind of run? As we saw in June, the parabolic run had absolutely nothing under it, so is this a repeat?

 

I’m definitely getting interested in a short position in energy soon and it think the opportunity could present itself this week with a simultaneous blowoff in the XLE and IWM. I started a very small short position at 40.50 and I’ll continue to build that position up to the 45-46 area. I have absolutely no desire to get long any individual names way up here. We still have a pretty pathetic economy and there’s no guarantee this vaccine produces the pre-pandemic demand levels. There’s still a huge supply of oil sitting just over the market which has been building over the last eight months. These companies still have tons of debt, bad fundamentals and a current group of declining wells which will need to be replaced. CAPEX is going to have to increase soon if those wells are to be replaced to prior levels of production. Do these companies have the money to increase CAPEX and what does that do to their cash flows? That has always been the problem with shale, they have to replace these quickly declining wells so quickly that CAPEX eats the profits.

 

One other thing to watch for in energy is secondary offerings. As the equity market continues to advance, individual energy names will surely take this opportunity to come to the market for funds. That dilution could really make some names dangerous, especially the ones who are already weak and need the funds the most. I’d recommend staying away from the lower quality names for this reason.

 

In summary, this energy run has been nice, but is there any future in it or has it just been a quick money trade in the final blowoff of a very mature bull market? I’ve always seen this market cliche that when energy is your leading sector, the end of the bull market may be at hand. I don’t know if it’s true this time, but given the larger macro picture, I wouldn’t be too surprised if it was. Be careful and really consider the risk you are taking if you get long on these names after this gigantic run.

 

Trading Plan for the Week – I have only four targets this week: short XLE, ITB, IWM and long in GDX. I’ll be focused on these four and I won’t be trading any individual energy names or any other sectors.

 

I’m looking for a move up in XLE toward the 45 area to build a short position. I’m willing to stay in this position for awhile and incur some pain in it. While I would like to think the energy sector has bottomed, there are just too many other larger factors that say this is just energy getting swept along with the larger market and not a specific move based on the internal factors of the oil market or the fundamentals of individual energy names. Target on the play is 32-35.

 

I want a short in IWM in the 190-200 area this week on a parabolic move. The key here is to watch the QQQ/IWM correlation and hope that money reverses flow back to tech and away from small caps, banks and energy. Any acceleration to the downside for TLT would also benefit a short play. Target on the play is 170.

 

I’ve already tried the ITB short and made a small 3% gain, but price hit my trailing stop and knocked me out late last week. This is still my favorite trade opportunity in the current market.  I was hoping for a nice retracement back to the 56-57 level as the SPY made new highs, but the ITB really couldn’t muster any strength at all, which tells me a short is the correct play. This short play depends strictly on the TLT. If the TLT finds a bottom this week, I’ll probably avoid the ITB short play for now. The reason behind this play is that mortgage rates should follow the 10 year yield up, which will force house prices down. Also, as copper, steel and other building materials increase in price, builders aren’t going to make the normal profit margins, especially if house prices fall due to increasing mortgage rates. It’s a really dangerous combination of rising input costs and rising financing costs, not to mention the employment and consumer debt picture. With this current economy, how are banks able to approve this flood of buyers, especially at these high prices and low rates? Are requirements being relaxed like they were in 2007?

 

The last trade on the radar is a long in GDX. This is the tricky one of the group. I started a long at 35.25 on Friday for a short term trade, but I’d really like to see this fall to the 30-32 area for a longer term play. As inflation starts to become a threat and the dollar continues to fall, gold should soon find a bottom. I think there could be a nice entry window when the dollar finds that first temporary bottom. Usually gold and the dollar move inversely, however GLD has been moving down with UUP and TLT. If we suddenly get a strengthening dollar, that could send GLD/GDX down sharply. If gold is moving down on a weak dollar, then it makes sense that it should move down even faster on a strong dollar. If this happens, then that’s your entry. The window will be very small and will look extremely scary, but you have to plan for it and execute without thought when it happens.

 

That’s the plan for the week. It’s mostly going to be a week spent waiting and watching for these four setups to form optimally. This is a dangerous market and FOMO is getting out of control for the crowd. Watch sentiment and be ready for the turn. This could be the final blowoff in a very old and very extended bull market. Good luck this week.

Weekly Energy Sector Review and Market Outlook

Hope everyone had a great Thanksgiving week. It was a nice vacation and some much needed time off. I’m ready to get back to trading this week. Before jumping into the regular top to bottom energy macro analysis, I took a few minutes this morning to examine the areas that were NOT moving this past couple of weeks. Sometimes the clues don’t come from what is moving, but rather what should be moving, but isn’t.

 

There are a few areas of the market that might be offering some signals for what we might see in the next few weeks, specifically Homebuilders (ITB), Mortgage Securities (MBB) Utilities (XLU), Gold Miners (GDX) and Real Estate/REITS (XLRE). As the overall market has advanced sharply, these areas have lagged or even moved opposite the larger market picture. The question is, what are they trying to tell us?

 

The common theme among these sectors is interest rates. The fact that these sectors are fighting the overall market direction means that something is holding them back and I think that something is a coming increase in interest rates, which could be a warning for oil and equities. The most common interest rate indicator I follow is the TLT, which represents longer term rates and also has the most bearing on inflation. It’s an interesting picture if you compare the TLT chart with the TIP chart. I think the most sensitive sector out of the handful that I have chosen is the homebuilding sector (ITB). That chart really looks like it might be about to top out and roll over and that makes perfect sense if you assume that interest rates are about to rise sharply. Higher mortgage rates make houses more expensive and less obtainable, which may be why this chart looks to be putting in the famous head and shoulders formation. Real estate (XLRE) is the same and of course utilities (XLU) is not something you would want to own in a higher interest rate environment either. Of the eleven SPDR S&P 500 sector ETF’s, utilities had the worst performance since this market run started on November 9.

 

One curious area that requires attention is mortgage securities. The largest ETF for this is MBB. That instrument has been falling since May and that’s even with the FED buying heavily in that ETF. They are trying to hold price high (rates lower) to promote homebuying, but the instrument is still moving down. If rates start to accelerate to the upside, this one could fall sharply and take ITB down with it. One other thing that I thought was interesting is that if you look at mortgage rates these days, the 30 year fixed rate is LOWER at some banks than the 5/1 ARM. That just shouldn’t be, but I’m not exactly sure why this is happening. Are banks (or the FED) discouraging ARMs?

 

These hidden interest rate warning signals that are flashing in the market need to be respected. If rates are about to spike, and I’m not saying they are, then risk management in equities needs to be tightened and extreme caution used. If anything is going to bring this market down, it’s a spike in interest rates, whether market forced or FED forced.

 

Macro Picture for Energy

With that warning out of the way, let’s take a look around the macro picture for oil and try to figure out what to expect this week. The SPY just continues to grind higher and the QQQ decided to join the party last week by breaking out of a pennant type formation which started back in August. I think the more important indicator of the two for the energy sector is the QQQ. If tech really breaks higher this week, the tech to cyclicals (XLF/XLE) trade could pull back sharply and force the XLE to pullback and digest some of its gains. If the QQQ fails and heads down this week, then it’s possible that the XLE could grind higher. The real question here is how long does this tech to cyclicals rotation continue?

 

One clue for the rotation can be found in the other cyclical area that has been climbing along with energy, the XLF. The banks have a benefit that the XLE doesn’t have and that’s higher rates. As rates climb (TLT down), financials perform much better on margin interest income. This week it will be interesting to see if the XLF and XLE finally start to diverge. If rates stay flat or rise and the XLF starts to fall, then I think you have to get out of energy in the very short term. However, if there’s any divergence where financials fall and energy grinds higher, that would be an incredible show of strength by energy.

 

The next clue for energy is the IWM. Small caps have been the strongest part of the market and have correlated very well with energy for the last several months, but at some point this run needs a rest. During the month of November, the IWM has moved from about 151 to 185 and that’s an extreme move for such a larger portion of the market. I wouldn’t be surprised to see a pullback to at least the breakout point around 170. Since the IWM and XLE have been so correlated, any pullback in small caps should be accompanied by a pullback in energy. Keep an eye on the QQQ/IWM correlation to see which is stronger as an indication of the tech to cyclicals rotation. If QQQ opens the week strong while IWM lags, then it’s probably time to get cautious on the XLE.

 

I base my macro market view on correlations, but one important thing to know about this approach is that correlation DOES NOT equal causation. As I compare all these different market areas, I’m not saying that all these moves cause or are caused by other areas. The only goal is to use these correlations to notice when things change or when relationships don’t make sense. The underlying “why” is often very difficult to ascertain. As an example, one correlation really has me stumped right now and that’s the Dollar (UUP) to Gold (GLD) correlation. The weakness in the dollar has been providing a tailwind to oil lately and that same tailwind should be showing in gold, but it’s not and I really can’t explain why. A weaker dollar should indicate higher gold prices, especially since other general commodities (PDBC) are rallying on the weak dollar. Gold is suggesting that the dollar may be getting ready to firm up and bounce in the near future, and if it does, that could be a warning for oil. I posted a UUP/USO side by side comparison chart Friday which shows an almost perfect inverse correlation. If UUP starts to move up, then USO should start down.

 

One other relationship that might also be offering clues is the TLT/GLD correlation. They have moved together for months and what we have been seeing is gold moving lower on rising rates, yet other commodities are moving up. The GLD/PDBC divergence is confusing. If there really is a chance of inflation picking up (as indicated by rising rates) then gold should be moving up with the other commodities, yet it’s not. The only other reason might be if the recent GLD rise was heavily caused by a safe haven type of trade. There was a fairly large gap down in GLD on the November 9 vaccine announcement. That’s really the only reason I can show for why gold has diverged so much from general commodities. The important factor to keep in mind here is that gold could be leading the other commodities, so keep an eye on the PDBC to see if it turns down along with any move up in rates.

 

In summary, the clues are pointing to a pullback in energy this week. If the UUP bounces, the TLT rises, XLF falls, QQQ rises, IWM falls or USO falls, then energy names could get hit. A positive picture on Monday morning would be a flat QQQ, higher IWM, lower UUP, higher XLF and a lower TLT (although TLT is the tricky one).

 

Energy Sector Technicals

I’ve stayed away from individual energy names over the last couple weeks. The only trades I have on right now are a short on the XLE with an average of 39.90 and a long on GDX with an average of 33.50. I’m still scaling in on these, so I’ve only got partial positions right now. I think the XLE finally pulls back this week, but I’m not sure how much. The most obvious level for any pullback is the 35.50-36 area. That would correspond with the gap up last Monday and last week’s lows. It would also correspond with the VWAP from the November 9 move which sits at 35.50. If you average all the buying since November 9, the volume average weighted price is 35.50, so that’s a pretty strong indicator of fair value. That fair value level would also be about a 38.5% Fibonacci pullback of the November 9 move. If the sector truly is strong and this isn’t just a fast money rotation trade, then price really shouldn’t drop any lower than that.

 

The next level down in the XLE would be the 34.50 area, which corresponds to a little over 50% pullback of the recent run. If that level fails, then the sector is probably in trouble and the only level that can save the day is the 32-32.50 area. It would pretty much be a complete disaster if 32 failed at this point. Something really bad would have to happen to cause a move back into that November 9 gap. Maybe an OPEC meeting surprise?? If XLE gets back in that gap, I’d say it’s probably headed for new lows, however I really don’t see much chance of that happening.

 

On the upside, the first level to watch on Monday is last week’s high at 40.42. The only important area above that is the 41.86 (Friday March 6 OPEC meeting gap) to 41.93 (June island reversal) area. If price can clear that small range area, there’s really nothing stopping a run for the June highs.

 

MajorsXOM continues to lag CVX. These two have traded near 2:1 in price, however CVX has recently extended that to 91:40. Perhaps the difference in opinion has been caused by the CVX still be indexed to the Dow as it surged past 30,000. RDSA has been the second strongest, while BP is dragging up the rear again. I still like XOM for a longer term trade, but I really need it to pullback significantly to get interested. I’d be interested in the 35-36 area.

 

E&P – These have just ripped over the last three weeks and there’s nothing attractive about these prices. They are priced to perfection right now and the only people who could profitably touch them at this level are investors who plan on trying to capture a multi-year run, and that’s definitely not my style.

 

Services – Same story as the E&P’s only more so. The only possibility that I see for a shorter term trade is NOV on a pullback to the 11-12 area. SLB, HAL and HP have all run so far that buying at these levels in the short term just isn’t possible.

 

Refiners – This was the trade I wanted the whole time, but I missed it. The group will be my primary watch if the sector pulls back in the coming weeks. I really doubt that I’m going to get a buyable pullback, but I’d be interested in MPC in the 33-34 area, VLO 48-50 and PSX 55-56. The vaccine news really treated these well since they are closest to the actual consumer.

 

Trading Plan for the Week – I’ve got my XLE short position and I’ll probably spend Monday just watching that to determine whether a pullback is actually in the cards for energy or if price is going to grind higher. We’ve got an OPEC meeting this week and the March meeting is still a fresh wound for many traders, so I expect that traders will be cautious early in the week. The price action might take until Wednesday to take a defined direction, so the best move this week is probably patience. If price grinds higher, I’ll just let it climb and continue to scale into the short up to 43 as planned. If we get a gap up and fail, then price is probably headed down for the week. This week really all depends on the OPEC meeting and the macro factors discussed above. The dollar, tech and rates will control the picture. I won’t be trading any individual names this week, as I’m more focused on the bigger picture for the month of December. I usually taper down my trading during the first two weeks of December and then take a couple weeks off at Christmas.

 

So, not much to do in energy this week, but there are other opportunities in other sectors. I’m definitely considering starting a short position in the homebuilders (ITB) and some of the associated housing services like Z and RDFN. Some suppliers might also be attractive like MAS and LPX. Two names that might also be interesting for shorts related to the homebuilders are HD and LOW. Specifically, HD is sitting right on a nice support area that corresponds almost exactly with the support area in ITB. Those two could break lower together or even offer a long trade if the downside break gets solidly rejected.

 

I’m also long GDX, but I’m really not crazy about that position right now and I’m probably not going to add to it this week. I’ve got an average price on the trade of 33.50 and I’ll probably put a breakeven stop on it there for the week. If it takes that level out, then I would imagine it will make a move toward that 30-32 area for a better trade.

 

I don’t often get involved in tech, but AAPL is a watch this week as it continues to wind tighter in a consolidation pattern. I think this becomes attractive in the 108-110 area for a long play, but with very tight risk control and if it takes out 105 you have to let it go.

 

My last watch this week is the USD/CAD pair. I’m looking at getting long for a bounce in the dollar. If I can get something under 1.2950, I’ll probably start scaling in for a move up. As I said before, gold and rates are giving the signal for a stronger dollar, and oil is stretched to the upside, so price could be getting ready for a big move up in the USD/CAD.

 

It’s Sunday morning and I’m off to get a Christmas tree with the family. It could be a really slow week and energy might be a bit disappointing, so it’s one of those weeks to be really patient and let things play out. Keep tight control on the risk. Good luck this week and be safe.

Weekly Energy Review and Some General Trading Thoughts

What they say about trading is true, it isn’t you against the market, trading is a battle with your own mind. Anyone can read a chart and recognize where the levels are and what direction price is heading. The real trick is being able to trade that external chart without your own internal bias interfering. I’ve managed to mostly win that battle over the years, but I’m definitely not undefeated during that time and the last couple of weeks I have lost that battle. I know which way price is going and what the chart clearly says, but my mind has a totally different opinion about what is going on in this market. As I said in last week’s writeup, I am conflicted, but standing aside and just watching the action this week has been incredibly helpful. I’m probably not ready to jump back in head first, and I’ll be taking this holiday week off as well, but I’ll definitely be sticking a toe back in soon. Sometimes the correct move really is to step back, take a deep breath, organize yourself and then proceed.

 

In trading, one of the more troublesome biases isn’t really a bull or bear bias, but rather a recency bias. Let me see if I can explain this clearly, because it has been a problem that I’ve encountered in the past that might help someone else. I mostly daytrade a single sector and sometimes when you get so focused on what is currently happening in the day to day moves, you lose sight of the larger picture. Sometimes you expect the most recent moves to be the true and correct price, when in fact the bigger picture has changed, or was always wrong. If you continue to anchor your thoughts to the most recent prices, you miss the larger picture moves because you can’t change your view.

 

I think what has happened to many traders, myself included, is that we focused on the day to day energy stock prices and anchored ourselves at ridiculously low price levels and we began to accept those prices as true and correct, when in fact they may have never been correct to begin with. However, if you focus on something day after day after day, you forget to even ask yourself if those prices are correct, you just trade them on the assumption that they are correct. When you do this, you leave yourself susceptible to larger market moves like we saw in energy the last two weeks. That move from 27 to 37 was ridiculous, or was it? Maybe this group was always underpriced, yet we focused so much on the recent day to day fluctuations that we never saw the bigger changes. We set our mental price anchor at a level that wasn’t correct. And then the price adjustment happened all at once, not because of some great change in the fundamentals, but because the overly depressed price was never correct to begin with.

 

I think that was my mistake with this most recent energy move and the reason I didn’t catch it. The fundamentals of the energy sector haven’t changed, yet the price changed in a very big way, and that caused a very big conflict in my trading and put me off my game. Many times when we trade, we expect a change in fundamentals to produce a change in price, yet the opposite isn’t always true. The only way to fix this kind of conflict is to take a break and move up a level to the bigger picture. Pull up the anchor, look around and get your bearings, set yourself and then put the anchor back out based on the new market information.

 

My second mistake was becoming fixated on how the overall trend in the market SHOULD change. I knew there was a trend change coming and if you read the last couple months of writeups I have been looking to get long in a big way for the coming move up. The mistake was that I thought this market downtrend would end with a final washout to the downside with an extreme volume capitulation that would wipe out all the weak supply and allow the market to then trend up. But instead, the downtrend ended with an extreme gap up on incredible volume that wiped out all the weak supply, thereby allowing the market to trend upward. That gap up change in trend is not common and it really isn’t something that you can practically trade. But it does occasionally happen. If you go back and look at a thousand charts, you won’t find this type of trend reversal in very many of them.  As a trader, all you can really do is trade things that are tradable, like a downside washout. There really just wasn’t any way to know that the market would change with a high volume gap up. You trade what you can and don’t beat yourself up too much about the moves you miss, because they weren’t catchable to begin with. Had the sector made a high volume washout to the downside, I was there, but it didn’t so all you can do is let it go.

 

Success in trading isn’t necessarily about catching all these big pivot moves. The real trick to staying in the trading game is the skill to be able to adjust to the big pivot moves (and avoid the adverse side of them) and then re-enter the market to resume normal trading. And even if you do get caught on the wrong side of big pivots, the true skill needed to survive is the ability to withdraw from the market and re-evaluate. Simply take a break and get your head right. I’ve found that trying to power trade through these moves with shaky psychology never works. Some people can adjust quickly on the fly, but I know that isn’t a strength of mine. I know I have a weakness in that my overall view of certain markets is sometimes slow to adjust. Taking a break is really the only move to protect against that weakness. There’s no shame in taking a step back, clearing your head and then coming back, the market will always be there.

 

So where does the energy sector go from here? The XLE has recovered about five months of selling in about ten trading days, so naturally the correct assumption is that it’s due for a pullback. The depth of that pullback will tell a lot about the true health of the energy sector. At this point, I have no desire to chase price up here and I’m content to sit and let the pullback happen and then make a decision about what to do. I think if you chase this rally, the trades become extra expensive and highly risky. The market is hyper sensitive right now. What if there’s a disappointment in the vaccine or some other external negative event (there are still unknown unknowns out there)? I could see the XLE easily giving up half these gains in a single gap down and that’s not a risk exposure I want.

 

Technically, there’s also a chance that what we are seeing in the sector is a larger picture accumulation rather than a true trend change. We got the selling climax back in March, an automatic rally in April/May, then a pullback to retest the selling climax lows in September/October. We could be looking at a long term sideways range between 30-40 for the next 6-9 months. We’ve had the big price change, now I think traders could take a rest and see if the fundamentals adjust also. If things get better in energy, there should be price discovery above 40. If things start to drag again and the lockdowns dampen the economic picture, then I wouldn’t be surprised to see price come back down and test the bottom of the range around 28-30 again. As for whether the lows are now in, I really don’t know. I do know that my view has adjusted. A few weeks ago it was my opinion that we had NOT seen the lows yet, but that gap up wiped out a huge amount of weak supply, so are there really that many sellers left that could take it down? On the other hand, that buying was likely concentrated in a few buyers, therefore if they do stop buying, or worst case if they start dumping it back on the market, then how far down do we go? I still think there is a chance that the low isn’t in, but that chance is much smaller than it was before the big gap up a couple Monday’s ago. I’m just not ready to say the lows are in yet, because if this really is a larger picture accumulation, then there will be a shakeout before the real and final trend up.

 

The Macro Picture

The week off has been informative. I’ve focused strictly on the bigger picture macro all week and have noticed a few things. The most important thing in this market right now seems to be which direction the dollar wants to take. It’s at an important pivot point and the next move will likely control equity market direction for the next several months. So many individual currencies are at longer term inflection points and this could impact stocks. Pay attention to whether the media starts to focus more on dollar direction in the coming weeks. The UUP has been forming a large base near lows since late July and closed Friday right at the bottom of that base at 24.93. The UUP has trended down (weak dollar) since March 23 while the SPY has trended up since March 23. What happens if the UUP breaks out of this base to the upside? And if you look at the QQQ or SPY charts, they too have been in somewhat of a base, just like UUP, near highs for the last few months. If UUP breaks out of its low base and trends up, does that signal that SPY/QQQ will break out of their high bases and trend down? How much of a headwind would a strong dollar be to US stocks?

 

If the direction of the dollar is important, then what clues might tell us which way it is going to break out so we can position correctly with stocks? The most dependable correlation with the dollar is usually GLD and GDX. The falling UUP (weak dollar) has pushed GLD straight up since March. If the correlation remains true, then a move up in UUP should produce a move down in GLD. However, if you look at GLD and GDX, they have already topped out and have been moving down. The AUD/USD specifically could also be topping out in the .73-.74 area, which would be a further negative correlation for GLD. Is this failure by GLD (and AUD/USD) an early signal that the dollar is about to strengthen (UUP breaking out to the upside)?

 

The EURO is the most prominent currency in the DXY, and just like the UUP has been stuck in a base since August, the EURO has also been stuck in a base during that time. Watch that 1.19 level for a breakout or rejection. If 1.19 fails again, then 1.16-1.1650 becomes the downside watch. The GBP is also looking at a big breakout level around 1.34-1.35. If it fails there, the pullback could be sharp. The YEN is really trying to base around 103.50 and if it does there’s a big downtrend line from 2015 that could be broken for a huge move back toward 1.10. The weak dollar has been an important tailwind for the SPY over the last few years and I really don’t know how it will perform if the dollar changes direction. All I do know is that many of these currencies are at really important inflection points and that could have a large impact on the future direction of stocks.

 

With currencies in mind, watch the USD/CAD this week. Much like the AUD/USD offers clues for GLD, the USD/CAD does much the same for USO. The CAD is sitting on a major level around 1.30 and could make a big move soon. That major 1.30 demand level for the CAD corresponds to major upside supply level of 43-44 in WTI (29.50 in USO). A breakdown of this 1.30-1.34 range would be a positive signal for oil, however if 1.30 holds and the CAD starts upward along with strength in the UUP and currencies above, then commodities, including WTI, could suffer. Keep an eye on the CAD/USO correlation over the coming weeks.

 

Besides the currency and commodity correlations, the TLT could be offering some useful signals for stocks as well. If we go back to November 9, which was the day XLE gapped up, the TLT has been moving straight up since then and now appears to be trying to break out of its larger picture slow grind down which started early August. Also, notice that GLD also started it’s slow grind down on the same date as TLT. Bonds and gold may break back to the upside together (implying a weak dollar), which could be a good signal for stocks. While these correlations can diverge at any time, they do offer good background signals. The divergences themselves can also offer good clues.

 

As for the equity indices themselves, SPY and QQQ remain in a consolidation, however the IWM has broken to the upside. The important watch this week will be how IWM handles a pullback to the breakout point around 170. The QQQ continues to evolve into a tightening triangle since topping out in early September and the upside points to watch there are 294 and 300. For the SPY, much like the IWM, it should pullback toward its recent breakout point around 350-355, at which point it will offer some good clues about the underlying strength and whether or not this election/Christmas rally is out of steam. While I don’t think there’s any real danger of a big breakdown in any of these indices, they could fall back into a consolidation range and be very difficult to trade.

 

I think the most important stock sector this week will be the financials (XLF and KRE). The pullback in TLT, which began back in August, has fueled a nice run in the bank stocks, but it will be interesting to see if a larger picture move up in the TLT (lower rates) will stall that run in the banks and move money back to tech. It’s difficult to determine how much of this move in financials has been due to the tech to banks/energy rotation and how much has been due to rates creeping upward. Banks and energy stocks have moved together on this latest move up, so if financials start to diverge to the downside, that could be a signal that energy could be running out of steam.

 

As for energy itself, I really tried to divert my attention from the individual energy names and keep my focus on the larger picture last week. It’s been an amazing run, but the XLE is hitting that summer range and also the 200 day ma, so it may be time for a pullback to see just what kind of demand is now under this sector. The levels on the downside to watch are 35 (last week’s low), 32.50 (prior week’s low) and 30 (original demand level for this entire move). There’s also a minor level around the 50 day moving average around 31.25, but if price falls that much this week I doubt that level would stop anything. I don’t have any trades setup this week, but if price somehow makes a crazy move toward 40, I’ll start in short. If we get some type of major pullback, I’d be willing to start in long at 30. Like I pointed out earlier, we may be looking at a longer term consolidation range of 30-40 over the next few months, so playing the edges would be attractive.

 

I’ll probably stay off Twitter again this week, and honestly it’s been a great break from the distraction of social media. Sometimes I think we don’t realize how much mental energy we waste on social media. It has its purposes and can cure boredom, but often those advantages are heavily outweighed by the disadvantages of distraction, anger and confusion with the opinions of others. So I’ll be watching the big picture again this week and I’ll pop on Twitter if I see any good trades in the macro. Hope you guys have all been having good trading results and I wish you a Happy Thanksgiving with your families.

 

Thoughts on This Week’s Big Energy Move and a Nagging Bearish Bias

I’m conflicted right now. Something changed in a major way last week and it was likely completely external to oil and its fundamentals. I watched my energy names all run about 10% last week and about 25-30% over the last three weeks, but my directional bias moved more to the bearish extreme rather than toward the bullish action being represented on the charts. The real problem is that I don’t have one specific concrete reason for it. I should be bullish. There was massive buying which lasted most of the week. The overall market is at all time highs. The election is done and behind us with good results for the market with a split Senate and presidential winner. Things should be perfect to jump on the bullish train and ride it for all the profits it gives. Except something is different and it just doesn’t suit the way I trade. Mostly as a therapeutic exercise, I’ve tried to list below all the reasons for my bearish bias.

 

The only logical answer I can come up with is that none of the fundamentals of the energy industry have changed. If anything, things are about to get much worse as more waves hit and more lockdowns take hold. This is going keep dragging on until spring, if not longer. This virus, just like flu and colds, is here to stay for the long run.  I posted this on Twitter back in March and I’ll say it again: “We will ALL get this virus eventually, get your body in shape now”. If the energy fundamentals haven’t changed (or are getting worse) and the stock prices are going up, then something else external must have changed. I think what we are seeing in energy is purely a technical event, not a fundamental one.

 

The problem with technical events is that they usually make no sense when compared to the fundamentals. And that’s exactly what bothered me last week. There was no fundamental reason for what we saw. The only justifiable reason was that energy was the other side of a tech trade that was being unwound. Some would say it doesn’t matter, simply buy and ride the ride. I mostly agree with that, but that logic is difficult in energy, especially if it conflicts with how you trade. When you try to trade based on technicals that are directly opposed to the fundamentals, it’s so much harder to control risk and almost every trade becomes way more expensive than it should be. There’s a double whammy on every trade that elevates risk above normal:  either the technicals will reverse because of something that has absolutely nothing to do with oil OR the technicals will reverse because of something that has everything to do with oil, however you don’t know which it is until the move is over. It’s like trying to play two games at once, and that’s difficult.

 

So what to do? For me, I have to get out of the way here. My plan this week is to take a step back and probably take the week off, watch the action and let these opposing fundamentals and technicals sort themselves out and get back in alignment. The market will still be there the week after and if things settle out and show me something good, then I’ll gladly jump back in.  However, there are just so many conflicting issues right now that I don’t really see a clear path. This is a different writeup than usual, mostly because it is just me trying to figure all this out on paper and record it for later review to see how things transpired. I’ve posted a lot of bullet points below that are just thoughts on what I’m seeing. Some probably make no sense, but I like seeing other people’s thought process, so I figured I’d offer mine. So here we go.

 

1   This week we had two opposing forces hitting simultaneously:  new waves of lockdowns and vaccine hype. Which side won? Why did the vaccine hype win this week according to stock prices? Will the pendulum swing right back if the vaccine fails in any way or if the lockdowns intensify in control or duration? And what do we know about the Biden lockdown approach that begins in about eight weeks? If the market swung that big on a simple vaccine hype, then how far does it swing to the other side on any announcement that might be equally as bad? Are we looking at another Monday in the opposite direction soon? How do I control risk if such flimsy news announcements are causing such huge moves?

 

2.   What are the odds that everyone could have moved to the same side of the boat Monday at exactly the same moment? The standard deviation on this move was realistically impossible according to quants. So what really caused it? Was it really the vaccine hype announcement? Or was it something else completely? Is our stock market so concentrated in the hands of so few major holders that their moves are this massive? There’s a huge amount of stock in the hands of the Blackrock’s of the world. If these kinds of moves can happen, then it’s equally possible that any day we could wake up to a move in the opposite direction. If so, how do we even begin to control risk if infinite standard deviation moves happen?

 

3.  What kind of players entered the market on Monday’s move? Is this just a temporary fast money play or was this longer term players expecting a long term trend? If we don’t know, then how can we put on trades with any normal risk control? If it was short term players, then this move could reverse just as quickly as it occurred, especially on a larger external event opposite of “vaccine hype and hope”.

 

4.  If this market moved this much on a simple “vaccine hype” announcement, that what kind of move could we be looking at on a much more serious news event? A geopolitical event? A terrorist event? How much is risk elevated now and how do we safely play in this kind of environment? What would happen to the relatively fragile market on a true black swan event?

 

5. The primary unwind right now is the exit of QQQ with that money moving to XLF and XLE.  Generally, it’s a tech to cyclicals move. However, the correlation only seems to be working at certain times of the day. Traders are unwinding this trade randomly during the day. They are also randomly unwinding it on certain days. Monday, Tuesday and Friday were unwind, Wednesday and Thursday weren’t. How can I trade this random movement with any consistency? How can you hold any trades overnight with such randomness on the primary cause of market direction?

 

6. Not only is there a randomly occurring QQQ to XLF/XLE correlation going on during the day, but there’s also the Dollar/Oil (UUP/USO) correlation happening. We have two correlations competing in effect on XLE. How do I trade energy names with two very large correlations often competing with each other and moving in opposite directions? Neither the QQQ unwind nor the weak Dollar is dominant right now. These correlations are the basis of my normal trading, so how do I trade when these two correlations turn on each other at totally random intervals?

 

7. For any longer term energy positions, how long will this QQQ unwind trade last? How big are the players who need to unwind it and how long is it going to take them? Are they going to unwind it all the way down? Is this just one or two players unwinding? If I don’t know the extent of the unwind, then how is it possible to put on any longer term trades? I saw a Barron’s article today suggesting this rotation could last for “months”. I doubt it, but obviously there are people out there who read it and believe it. I could put on a long term trade today and the tech to cyclical trade could end tomorrow, especially if this whole thing was caused by something as flimsy as “vaccine hype” in the first place.

 

8. At what point would this tech to cyclical unwind turn into an all out squeeze or meltup?  Will there be momentum funds that blowup and get liquidated, thereby pushing the market further than it would normally go on this kind of news event? Would that be the prime spot for a trade, specifically a short IWM or short XLE trade if this unwind trade gets out of hand? Is the market creating a situation completely controlled by portfolio rebalancing rather than fundamentals, and if so how do we take advantage of that?

 

9. The XLE has moved from 27 to almost 35 in twelve trading days, which is about 28%. At what point are you late on this trade and chasing the action for a horrible entry price? Do the fundamentals even come close to justifying this or is this move purely caused by the tech rotation unwind? If we don’t know, then how can we trade it with any confidence? If we can’t trade with any confidence, then how can we control risk?

 

10. While the XLE appears to be looking exceptionally bullish on the outside, how much hidden damage has occurred that has weakened the inside underlying structure? This bullish move has created a couple of bearish problems. First, all the shorts are out. They did their buying and they are out of the market. What happens if this great unwind trade suddenly stops or some other external event occurs and the XLE starts down quickly? Who stops the fall? The cushion of shorts covering on the collapse is not there anymore. Also, if the guys who have been shorting energy are now out, then there’s a really high probability that they are waiting to put those short trades back on just above the market. So they can cap the upside action. Also, the XLE did 297 million shares last week. I can’t remember a higher volume week. If the XLE starts down again, where do those new buyers get nervous and throw those 297 million shares back on the market? And even if the XLE goes up instead, were these new buyers short term players who will sell for 10% gains and therefore cap the action near the summer range? Have we created a situation with new shorts waiting just above and new longs ready to take profits just above that we have effectively capped the reward on any trade taken here, but we still retain large risk back to lows? How fast would these new longs bail on the market and accelerate any move down?

 

11. How much supply is sitting just overhead that remains from this summer’s range? Are those players just waiting to get out breakeven? With all this buying power being used up, will there be any left when we reach that summer range? Will there be enough buying power left to take it out, or is price capped there for a high risk, low reward trade?

 

12. Almost every energy name is now sitting squarely between the 50 day and 200 day moving average. Prices just moved above the 50 day last week, but are still below the 200 day. Are these names merely bouncing back the the 200 day moving average as a regression to the mean? Will prices be capped there? Will there be enough buyers remaining after such a large run up that they will be able to take out the 200 day? Or is price once again finding a cap for a low reward, high risk situation?

 

13. The UUP is making a solid base in the 25-25.50 area. What happens to oil if the dollar bottoms here and starts upward? Can XLE and USO survive with that kind of headwind, especially if the tech to cyclical unwind stops? What if the USD/JPY has just had a false breakdown and it finds big demand in the 104.25 area? Same for the USD/CAD pair at 1.3050? Both of these currencies tried to break down but failed. Can oil continue to ignore these signals?

 

14. When does the TLT find a bottom? If it does, and rates start back down, will the financials follow it down? Would that kind of TLT move stop the tech to financials portion of this tech to cyclicals rotation? Banks and energy have a very high correlation right now, so will the two diverge or will energy follow banks down on any big TLT move up?

 

15.  Are traders really going to abandon tech? Are they really going to abandon the one area with the most growth prospects? Maybe it is extended and maybe it’s time for cyclicals’ day in the sun, but when things get tough and the fundamentals of cyclicals don’t improve in a Covid handicapped world, will players rush right back to their old tech love? Will the flavor of the day banks and energy names just get tossed back on the scrap heap? Will the fundamentals of energy EVER be better than the fundamentals of tech? Now that energy names have jumped 28%, how much would energy fundamentals have to improve to justify that price? Now that tech has dropped so far, how much would tech fundamentals have to improve to justify their price? Has the recent price move actually made the fundamentals of energy LESS attractive now as compared to the fundamentals looking MORE attractive in tech with the associated name prices?

 

16. From a technical point of view, is the QQQ chart really breaking down or in any danger of breaking down? Or is it consolidating for a major breakout to all time highs with a big stimulus package on the horizon? I’m not willing to bet against tech here. If you are playing energy long based on the external unwind of the tech trade, you might as well be shorting tech. I don’t short tech. Ever.

 

17. At what point do all the headwinds above start to overwhelm the tech to cyclical unwind? And how fast do these extended bank and energy names fall if these headwinds take hold AND the tech to cyclical unwind stops?

 

18. And if all the above weren’t enough, oil is still a shit business that doesn’t really make any money. It’s a stagnant, debt ridden industry that is decaying as renewables and electric vehicles take over the world. How exactly do funds plan on selling a new fossil fuel dream to their holders, especially in this age of ESG investing? Was this week’s big move really new buyers? Or was it simply funds covering short trades which were acceptable to their ESG clients?

 

19. What about the political landscape for energy? How will things change under a Biden administration? Is this latest move really a reflection or expectation that this administration is going to help fossil fuels in any way over renewables? Or again, was it just short covering on the tech unwind? And if all this was just because of the unwind and there’s no real fundamental reason for funds to be in fossil fuels, is this whole move just an illusion waiting to be shattered when the unwind is over?

 

20. The XLE and USO diverged sharply on Friday. Has the commodity run out of steam first? Is this a warning that the energy equities have been caught up in FOMO buyers? Does the divergence continue? Also notice that the USO topped out right at a major level around 29.50-29.75. Does it make another run at that level?

 

21. And one last one for the conspiracy theory voice in my head. You ever wonder if funds would actually orchestrate a “value narrative” in the media just so they can have a reason to dump all this shit they know is NEVER coming back? I mean look at the tiny 2.5% pullback from all time highs in QQQ. Does that really justify or correspond to a 28% move up in energy? Is this whole “tech to cyclical” rotation just a fabricated narrative to take advantage of the naive?

 

As you can see, I’m definitely conflicted on energy right now. With so many crosscurrents, it’s hard for me to have any confidence with the short term way I trade. But more importantly, it’s also hard to have any realistic risk control. So what we have here is me trying to trade my normal method in an environment for which it isn’t suited and at the same time taking very expensive trades with almost non-existent risk control. Not a good combination. Sometimes the market just isn’t conducive to certain types of traders and I feel like that’s me right now. Sometimes the smartest move is to just step aside. No need to be a hero and chase this energy move. The market will still be here when it’s over. Don’t let greed entice you into doing something that you aren’t good at. Anyway, just wanted to try to explain why my bias is so bearish in the face of such a bullish move in energy. It definitely hurts to miss the move, but it hurts worse to violate all your trading rules and lose because of it. So I’m on the sideline this week. The only way I get back in the game this week is if the XLE makes an absolute meltup to a ridiculous level, which I’ll gladly short OR if the XLE totally collapses, at which point I’ll have no problem starting in long at the right price. I have no idea what those prices on either extreme might be, but hopefully I’ll know them when I see them.

Good luck out there this week. Take it slow and play it safe in this environment. Keep the powder dry.

Weekly Energy Equities Review, Market Outlook and Trading Plan for November 9-13

It’s going to be a short writeup, just not enough hours in the weekend. I’m probably on the sideline this week, still just too much overall market uncertainty and energy looks horrible. The conspiracy theorist in the back of my head is also screaming again, and he says that there may be people who would like to punish the election winner by handing him a totally broken stock market to ruin his victory party. Even without crazy conspiracy theories, there’s still the election contest, new Covid waves and a very unpredictable Trump. Does this market rally hard Monday or is it a sell the news event? I have no idea. The only thing you can do is have a plan for both situations and follow it. My plan this week in energy is to get out of the way and hope this thing collapses for some great entry prices on longer term plays. I have no desire to daytrade this week in energy.  Here’s a quick look at what I’m watching:

 

SPY – My view in these writeups over the last few months is that the SPY is headed to the 380-400 level. Price closed at 351 on Friday, so a 7-10% run on the election celebration and early Christmas rally isn’t out of the question. Once that target is hit, a whole new evaluation will have to be done, especially after we get the chance to hear how Biden wants to put his cabinet and advisors together. The market could have some interesting reactions to his new choices for important financial positions. I could see the SPY gapping to the 355-360 area Sunday night, but I have no desire to chase it. A market reset is coming, it’s all a matter of timing it right. Don’t get caught in a blowoff top, avoid FOMO.

 

QQQ – Same view on tech, it should take out the 300 level and be off and running. I have no idea where the top is in tech, but it could be higher than many think possible.

 

IWM – Small caps have been incredibly valuable in leading my energy decisions. As SPY and QQQ continued to run to new highs, small caps struggled to break above 164. That failure and rejection in small caps transferred right to energy with the XLE closing down 2%. I expect a big gap up on Monday for the IWM, but the real information will be the way it handles 164 again from above. If it breaks out and fails again, it’s likely coming down hard and that’s a signal that the XLE is headed for new lows.

 

UUP, GLD, USD/CAD, USO – I didn’t like the political uncertainty in the market last week, but that wasn’t the main thing that kept me out. The primary reason I stayed out was that the bigger picture macro suggested that oil and energy should be running big, yet it wasn’t. Something is holding energy back. The divergence was very strong and that’s too much of a red flag to ignore. Specifically, the dollar was incredibly weak and GLD was opposingly just as strong. The USD/CAD was so weak it broke below a major level at 1.300. Yet with all those positive tailwinds, energy did nothing and XLE finished the week below where it opened on Monday pre-election. Something is broken right now in energy, but I just don’t know what it is. Some would say it was just a reaction to the Biden win, but I really don’t think that’s the case. At least most of the positions that I sold for profits on Monday morning actually closed lower than where I sold them, which at least makes me feel better. If oil names can’t make a run on a weak dollar, then what’s going to happen when the dollar bounces soon? Is a dollar bounce going to be the ultimate cause of an energy selloff?

 

XLF – My writing time has been cut short because I’ve spent a lot of time this weekend researching the financial sector. My short term trading has been suffering because energy just doesn’t offer enough individual names with enough range to provide sufficient opportunity. I need another sector to fill in the gaps and provide daytrading opportunity. I’m going to be posting more on the financials over the next couple months, but I’ll try to keep it in check because you follow for energy, not banks. Energy and Financials have been moving similarly, so transitioning to adding them isn’t too hard. I’ll post financial sector trades when I see them.

 

Big Picture Energy

Last week was mostly a continuation of the consolidation which started back in late September. We had one dip on October 29, but most of the action over the last six weeks has remained between 29 and 31. How long does this continue? But more importantly, how does it end? It has been my opinion that it needs to end with an extreme volume washout and I still feel that’s the case. I was really hoping that a Biden win would cause a kneejerk reaction down and chase out the last sellers and cause a big dip for an entry, but so far that hasn’t happened. I’m really not sure what the catalyst for a selloff would be at this point. Without the final shift in shares to strong long term hands, this sector will just drift around on short term news with no real longer term trend.

 

Majors – Like I said to start today’s writeup, I’m only looking for longer term (1-3 month) buys this week, no short term trades. My favorite target is still XOM and it’s possible that there could be an opportunity for a 30-31 entry soon. 32.50 is the line in the sand this week, so see if that holds that early in the week. If it does, then there could be a bounce to 34.50. I also want CVX, but I need to see that one down around 65. Watch CVX 69 for clues. RDSA has moved too far up to get a good play, however I still like BP for a play if it moves back to 15.

 

E&P – The play in this group is COP. I’ll be starting a scale in position in the 28-28.50 area this week, with the hope that it completely breaks down for a 25-26 entry. Second choice is EOG and the 31-32 level. I have no plans to do any short term trading this week, but if I do, the primary play will be a PXD long off of 77. Great risk/reward setup on that one with an $8 reward on the risk of a buck or two. I still have HES on the radar under 36. One small cap that is getting back on the radar is MTDR. It has refused to drop much since the June 8 highs, but the last week or two have started to wear on it with a close Friday of 6.48. This is the kind of stock that can absolutely tank in a selloff and I’d have no problem loading up if it went under 5. I’m still not interested in any of the second tier names. The only other one I liked was DVN, but it jumped way out of the buy zone.

 

Services – My only energy holding to close the week was WTTR at an average price of 2.97. There was a great opportunity early in the week to build this one on a subpar Tuesday earnings report. If it drops back under 3, I’ll build the position even more. The big services names including SLB, HAL, NOV and HP just aren’t in very good trading positions from a risk/reward point of view. I’d need to see a pretty big fall to get interested in these. The only short term play that I can see here is an HP long off of 15 for a 16.25 breakout and run to 18. Could probably get away with a 50 cent stop. I still have LBRT on the radar for any move under 6 for a long play.

 

Natural Gas – I still have no interest in this group. UNG just refuses to show any dependable trend or longer term strength, so I’m out of this group.

 

Refiners – This is still my favorite group and the primary focus of my attention this week on a dip. MPC is by far the strongest of the group, but it really isn’t giving much of a long term play. I’d have to buy 31+ and there’s no concrete stop until 26-27. I could justify a short term play this week off of 31.25 to try and catch that 32.75 breakout, using a 30.75 stop. VLO and PSX offer much better long term setups. PSX is my favorite and I’m watching 43-44 to start in. On VLO, I’m watching 35-36.  I’ll also be putting money in HFC under 17. This group is where I’ll have my largest energy bets and the largest portion of my overall account over the next 1-3 months.

 

Trading Plan for the Week – Pretty simple plan, just get out of the way and hope there’s a big washout this week and then swoop in for some longer term buys. I’m not going to be daytrading energy this week and I’ll probably be a little scarce on Twitter if there’s no selloff. If I miss a rally, then so be it. Sometimes you just have to be patient and get the deal you want. Avoid FOMO.

 

Technically, I’m watching the 28.57-28.77 area to see what kind of demand is available for the week. If that level breaks, then price is probably headed to the October lows for a test. The volume on that test will be important. I’d really like to see a high volume move on a test of the lows, which would then be followed by a low volume retest of the new lows for a resulting buy signal. On the upside, 30.28 is the spot to watch. If price can get above that, there might be another dollar of upside to 31.25. Also, be sure to check the XLE moves against the IWM moves. Notice any divergences between the two. It’s a much safer trade if both are confirming each other, along with the dollar.

 

Outside of energy, I have only a single play that I’m watching. That’s a short on the IWM. The plan there is to get short on any move above 170. If the market can breakout above 164 early in the week, this trade could setup by late Wednesday or early Thursday. I’ll be using a scale in approach in pieces, but I’ll definitely post them to Twitter when I start in.

 

Again, sorry for the short writeup this week, but luckily it’s one of those weeks where there really isn’t much to do but sit back and wait for your pitch. Also, I feel like I’m getting burned out on all the political Twitter, but I’ll pop in to post my trades if I make any next week. There’s no shame in minimizing risk and staying on the sideline if you can’t find any plays you like this week. There’s still much uncertainty out there, so keep the powder dry for the BIG opportunity. Good luck.

Weekly Energy Equities Review, Market Outlook and Trading Plan for November 2-6

The election is finally upon us and I’ll be glad to see it pass. I hate politics and if there was any way to remove it from my Twitter timeline, and the world for that matter, I would. That’s not to say I don’t have opinions on things that happen in the world, but rather politics just isn’t the solution to most of those things. Politics usually makes them worse. Good luck and I hope your candidate wins, but to both sides, after the election just let it go and move on with life. There’s too much good stuff going in life to waste time worrying about politics.

 

As for the market, Monday and Tuesday are probably wasted days this week. The liquidity will likely be very thin and the news headlines are going to be crazy with both sides getting in their final attacks and bribe attempts. There’s also the doomsday possibility that this election ends up being contested for weeks and we won’t know who the winner is for some time. For this week’s writeup, I’m mostly going to skip the Monday and Tuesday action and try to find some opportunity on the election outcome. I think we could have a great opportunity in energy if Biden wins. I’ve also got some already established positions which should pay nicely with a Trump win. The market has somewhat priced in a Democrat win, but I think their party position on the energy industry could take the sector down on Wednesday for a great entry. The first kneejerk reaction on a Biden win will be down, but once traders have a few days to really think about it, the sector probably bounces with the rest of the market. No matter what the final election outcome is, the SPY will likely continue its journey to 380-400 in the month after the election, but at some point in December I think we are headed for a market reset. Not a crash, just a much needed pullback to wash some excess out of the market and give money a chance to get back into the market at much lower prices.

 

SPY – Price closed the week with a perfect bounce right at that important 320-325 area high from June which was retested from above in late September. There has been a lot of action in the 320-325 level and I think that’s probably the line in the sand for this week. Use that point as a reference after the election to determine the short term direction. If 320 breaks down, then the next level comes in at 300-305. If 320 holds, then it’s on to test 355-360 and then 380. I still see many people talking about a double top, but I still just don’t see that at all. If anything, this is just a consolidation in the two months ahead of the election as traders positioned for a very uncertain event. Personally, I’d like to see the market reset early 2021 somewhere in the 275 area for another run over the next four years. I think the very worst case in an absolute economic disaster would be 200-210, at which point I’d push all my chips in at that price.

 

Ideally, what I’d like to see after the election is maybe a little dip to 310 and then a retest of 320-325 from below, a break back into the 320-360 range with a little more consolidation and then a big run at the top of the range for a break to 380. One other point on the SPY, I keep seeing a Twitter timeline full of people complaining about how it’s all a house of cards and can’t last forever and that it’s all going to come crashing down. All I can say to those people is that you are killing your trading success with these thoughts. Yes, the game is rigged, but the people rigging the game are in total control. This game could easily go on for another 20 years. You have to play the game you are given, no matter whether you think it’s rigged or not. If you will just accept that the game IS rigged, you can then take an approach to beat the game, which only requires beating the complainers who can’t beat the game because they assume it’s rigged and unbeatable. You don’t have to beat Goldman Sachs, you just have to find spots in the market where retail is simply making mistakes and beat them. It’s kind of like the joke about not needing to actually outrun a bear in an attack, you just need to outrun your slowest friend.

 

QQQ – The action in tech was stronger than SPY, which could have been due to megacap tech being seen as somewhat of a safe haven during the pre-election uncertainty. Price never made it down to the bottom of the range around 260, even with all the disappointment of earnings misses. If Trump wins on Tuesday, there’s no telling how high this thing goes. Just as 320-325 is the line in SPY to watch, 260 is the QQQ line to watch for direction. The downside of tech making a big run up after the election is that the rotation to tech from energy/banks will probably continue which means a headwind for energy.

 

IWM – Small caps also came right down to that June high like the SPY did and found solid demand, but almost all of that move was the big gap on Wednesday morning. After that gap down, price didn’t change much. I think small caps are going to be the most important signal to watch after the election. The IWM needs to reclaim 159 fairly quickly and then take another shot at 164. If it can take out 164, then energy will likely turn upward and move back toward 31.25. On the downside, 144 is the worst case for IWM and I’d probably be a buyer there. A fall to 144 probably takes XLE down close to the March lows, where I would also be buying heavily.

 

UUP, GLD, USO, TLT, XLF – The dollar made a huge run this week, but I’m not sure if it’s a real move or a short cover ahead of the election. If it’s a real move and continues, that’s going to stop USO in its tracks and probably knock it down to the 22 area. The one clue that makes me think the dollar move was a short cover was the action in GLD. A dollar move like that should have knocked GLD down pretty far, but it hung in there this week and held that late September low point. GDX also probed below the 37 level, but found solid demand for a good bounce on Thursday/Friday, even with UUP rising. If the dollar move was a short cover and it starts weakening again, that could send USO back up to the 27-28 area later this week. Specifically, watch the USD/CAD pair and the 1.3425 area. The CAD was weak all five days and should test the range highs soon. If it breaks the 1.3425 level, the next significant level doesn’t come into play until about 1.3600

 

The TLT was looking good Monday through Wednesday, but fell off a cliff on Thursday and Friday, closing at the low for the week at 157.57. That probably should have helped the XLF a little more than it did. The XLF managed green days on Thursday and Friday, but I’d really like to see the XLF recover and move up since it has been decently correlated with energy. A down move in TLT should be a good signal for energy if filtered through the financials.

 

In summary, I think the XLE held up fairly well considering all the headwinds. The dollar was ripping up, the IWM moved down large and money rotated back to tech and away from XLF/XLE. If energy is going to recover after the election, it really needs the macro to return to positive correlations including UUP down, GLD up, IWM up, XLF up, TLT down, QQQ flat.

 

Energy Big Picture

The XLE had been consolidating in the 29.75-31.25 range since late September, but it broke that range this week and closed below it. In last week’s writeup, I was struggling with the decision of whether this latest range was an accumulation or a distribution and whether or not there was going to be a final spring/washout at the end of the range. Well, the odds suggest that the range was indeed a distribution and that we haven’t seen the final lows yet. I could try to make the case that this week’s move was the spring, but that consolidation just wasn’t long enough to reverse the fall from XLE 39. I still think we need that extreme volume washout to establish a final low. I’m hoping that the election result might create that final washout. A Biden win could easily cause a final spike down, which I will be buying.

 

I took some positions this week ahead of the election and all of them are green except COP. I’m still not sure if I’m going to hold these through the election. If the market has a big up day on Monday or Tuesday, which many people would really like to see, I may cut them for a nice profit and take the reload opportunity on a Biden win. That would really be risky, because I think the positions are going to pay off nicely with a Trump win. Also, I did see that Trump threw energy a bone this weekend with an order relating to fracking. A Hail Mary to pickup votes in the oil states, but still helpful if he wins and maybe something that could produce gains on Monday. There’s also the option of cutting positions in half, locking in a partial profit to reload. If the market somehow tanks on Monday, I’ll just ride them all since I’m going to be buying on any big move down anyway. I’ll make the decision Monday and post the exit prices if I take them.

 

Majors – Earnings were mostly a non-event on Friday. XOM caught the worst of it with the possible writedowns on dry gas properties. I think CVX did some partial writedowns in the past, but they were also smart enough to sell much of their mixed gas properties to EQT rather than letting them rot like XOM has. People criticized the CVX move and said EQT was stealing the properties, but at least getting some cash (almost a billion) is better than writing them off for a loss. You really have to ask yourself, who’s smarter, CVX or EQT? I’d put my money on CVX and really question the wiseness of EQT paying a billion for similar assets to what XOM just wrote down for a loss. From a purely technical trading standpoint, I still think XOM is the better trade, even though it’s probably not the better company. I was really hoping that XOM would make a move on the March lows after earnings, but buyers showed up and minimized the downside. I still like CVX, but I just can’t find a safe play since it needs an entry down around 65 to produce a stop that controls risk enough to make the trade worthwhile. If the sector moves down after the election, XOM is my play on majors.

 

My best trades of the week were in BP at 14.88 and RDSA at 23.35. These were trades around 4:30 am Wednesday and the biggest reason that I continue stay with Interactive Brokers because of their 4 am open. These will also probably be the first trades that I cut on any big move up on Monday. I’m watching the March low of 15.51 low in BP. It closed 15.48 on Friday, so there’s a really playable point in that March low.

 

E&P – My worst trade of the week was COP. I’m really not sure what’s wrong there, but I can only assume that the CXO purchase still isn’t being received well by larger holders. COP is my third largest trade and I have about a third of what I want, so I’m willing to buy this down pretty far. This is going to be the largest independent survivor and probably the biggest pure play on oil. When the sector turns, this should be the first trading target on the long side. PXD has been moving similarly to COP after their purchase of PE. Maybe that combination is also having some problems. I’m watching the 76 level for PXD and would like to pick some up on any significant break below that. I took a partial position in EOG at 34 and I think that’s going to be the other large survivor after this whole downcycle is complete. If it makes a move close to the March lows, I’ll be loading it long as my second favorite behind COP. I’ve still got HES on the radar, but just haven’t started a position yet. I’m still not buying any second tier names yet, but DVN is getting interesting

 

Natural Gas E&P – I really can’t make up my mind on these. They occasionally look really good and then they just tank. I do worry that XOM and CVX are basically writing off or cheaply giving their gas properties away, and that just doesn’t say anything positive about the future of natural gas. Why would they dump these if there was good profit in them? Did EQT just buy a worthless property that CVX dumped rather than writing down? COG and EQT are still the only two that I would consider. Ignore RRC, AR and SWN.

 

Services – I had NOV lined up to buy in the 8-8.25 range and just didn’t pull the trigger. I’m probably going to regret that one. I haven’t been too interested in this group, but they are starting to get attractive and I’ll be buying on the next dip. SLB is still the favorite target with HAL in second place. I have no problem with positions in NOV and HP either. I still don’t trust the smaller names, but one I would add to the watchlist is LBRT. If it makes another run below 6, I might pick some up. The only other small name that I like in services is WTTR. Water processing is going to be important, especially if the Democrats decide to start regulating with all kinds of safety rules. Clean drinking water and fracking are both political target and WTTR could benefit. I started a position at 3.07 and I’ll be looking to add on the next dip. I’m planning on going fairly large on this one for the final position size.

 

Refiners – This group continues to frustrate, but it’s still my favorite energy trade opportunity. MPC remains the strongest and found solid demand again around 26.75. Unfortunately, I missed that entry and still don’t have a position in it yet. PSX is my favorite pick in the space and I’ve got a position at 46.50. It closed Friday at 46.66. This one got close to testing the March lows and I think it probably takes another shot later this week, and if it does I’ll be adding. I also built a small position in VLO at 38.10. It closed 38.61 Friday. I’m hoping this one also takes another shot at the March low to build the position. HFC is interesting and it managed to take out the March low of 18.48. It struggled to climb back above that low, closing at 18.51 Friday. I’ve got a position in that one at 17.25. This group is the primary watch this week and the opportunity that will probably get the largest chunk of my longer term (1-3 months) money.

 

Trading Plan for the Week – I’ll be on the sidelines Monday and Tuesday, so I probably won’t post much on Twitter. I’m really trying to avoid all the political stuff. The only play that I might consider is selling current positions on any big move up before the election. I’d be willing to pocket the profits and then take the chance to reload. One thing that really pushes me toward this option is the possibility that this election is so close that it becomes contested and we don’t get a clear winner. I think that might just knock this market down to the 300 level. There are so many loose ends and landmines that have already been planted that I really feel both sides have pre-planned a contest of the results. I got trapped in the Bush/Gore election tie and I don’t plan on going for round two on that kind of event, it wasn’t fun. However, if I was in cash, I’d love to see the tie and move down for a purchase.

 

This is in no way an endorsement, but I think Biden probably somehow wins this thing and if he does, energy is going to have a kneejerk reaction down and that’s when I want to get the big entry. If there’s no big move up on Monday or Tuesday, I’ll just hold all positions and take the profits on any big bounce on a Trump win. If it does turn out to be a Biden win and I’m still holding, then I was going to add to the positions anyway, so no big deal. The only thing I would recommend against is chasing a Trump win. If we get the big bounce on a Trump win, that’s a chance to exit existing longs, not chase FOMO prices up the ladder for new positions. There’s a reset coming, simply wait for it and don’t put yourself in a bad spot by chasing and taking a bad entry price. That makes a very expensive trade.

 

Technically, there’s a few spots to watch in XLE. Most important is probably 28.44, which was last week’s VWAP. Price should rotate around that point on Monday and Tuesday. On the downside, 27-27.50 should provide demand and on the upside 29-29.25 should show big supply. The XLE is a little tricky though because on Friday XOM was down -1% while CVX was up +1%. See if those two start to move in the same direction, and if so there could be a directional move in XLE toward one of the extremes. If they continue to move in opposite directions, XLE likely just rotates close to VWAP.

 

All my trading attention this week is on energy and the IWM, so I don’t really have any short term intraday type plays for the week. In energy, I’m watching these points on the downside for longer term (1-3 months) plays:

XLE 26-27
XOM 30-31
CVX 63-65
COP 26-27
EOG 30
PXD 73-74
HES 33
SLB 13-14
NOV 7.50
HP 12-13
MPC 25
VLO 34-35
PSX 42-43

 

This should be a fascinating week. My only advice is to take it slow, let the election play out and have a plan for how you want to attack based on the possibility of each individual outcome. If things evolve according to your plan, then stick to it and pull the trigger. Action will be wild this week and volatility will be high. Having a plan going in will keep you from losing your nerve when things get crazy. Good luck this week and let’s put this whole election shitshow behind us and move on with life.

 

 

 

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

The XLE had a decent week and remains in that 29.75-31.25 range that began back in mid-September. It was encouraging to see that big gap down on Thursday get bought right back up into the range and nearly make a run all the way across the range for a look at the top. There’s still no clear breakout direction, but the longer things consolidate after that big fall from 39, the more it suggests that this is an accumulation (and a likely reversal upward) rather than a distribution (and more selling). However, I do still think the sector needs that one final shakeout before turning up. If this range continues to evolve, there should be a Wyckoff spring associated with the pattern sometime in the future, possibly after the post-election rally which may run through December. Things are looking good in energy, just need to let the pattern play out and then jump on the resulting trend.

 

As for the overall market, the SPY created a nice range this past week between 341-346 which seems to be the final pause before the election. It probably sits in this 340-350 range until the election and then breaks out the top once the outcome is known. It would be a success if the SPY could close this week in that 351-359 area. I expect that the SPY will likely run for a few weeks on the clarification of the election uncertainty and top out sometime in December around SPY 380-400. After that, reality may set in and this market could be ready for a big reset, especially if it’s a Biden win. Jubilation for a new candidate and new hope always occurs, until people realize that the new guy is just like the old guy and nothing will change. Being born with Lyndon Johnson in office, I’ve seen a lot of presidents and nothing ever really changes, it’s all just a show and pageantry as big government steamrolls on.

 

One thing I would also keep an eye on this week is the stimulus plan. If they are going to pass it, then I think they will probably do so next weekend so the news hits the market the day ahead of elections. A 500-700 point up day on November 2nd is probably what the Republicans want. If it does hit this week, you don’t want to be short, but you don’t want to chase it on the long side into the election either.

 

There’s a beautiful setup this week in the QQQ. I don’t often play tech, but I’ll be putting on a long trade Monday using 279 as a stop. The slow consolidation has pulled back exactly to the 281 breakout point and there’s a good chance traders may move to safety this week in the megacap tech names. There could be an easy ten points in the trade to the 290-295 area ahead of the election. Although this is a great trade, it’s probably not what you want to see if you are in banks or energy. The rotation out of tech and into banks/energy has been going on for the last few weeks and that could reverse sending energy down. Keep an eye on the QQQ this week for rotation clues in energy. Also, if anyone takes a long on energy names, a long in QQQ is a great hedge for that energy trade.

 

The most important indicator for energy this week is once again the IWM. The small caps put in a failure at 164 early last week and that  put a cap on energy. It did find solid support right where it should have in the 159 area and the Thursday morning bounce back to 163 was encouraging. The key this week will be another test of 164. If the IWM breaks out of the 159-164 range, then I expect energy will also break out of its 29.75-31.25 range. However, the more likely outcome this week is that the IWM stays in this 159-164 area ahead of the election uncertainty, so buying any breakout is going to be a very risky trade. Technically, I’m going to be watching 161.50 for a long trade early in the week. Price should find solid demand at last week’s VWAP before making a run at 164.

 

The UUP and USO correlation was confusing last week. The dollar continues to sit near range lows, yet oil also remained near its range lows. The inverse relationship just wasn’t there recently. The bigger range for the UUP has run from about 24.95 to 25.35, with Friday’s close at 25.03. The bigger range for USO is 27.75 to 29.30, with Friday’s close at 27.89. One of these two is temporarily moving in the wrong direction. The key to the puzzle might be the GLD. Gold normally moves up with a weak dollar, yet it also closed the week near the lows of its current 177-181 range. Both commodities were weak with a falling dollar, which hasn’t been the normal correlation. The missing link could be the TLT, which has been getting crushed. A falling TLT means higher rates. These higher rates have pushed the bank stocks upward, but rising rates usually have a detrimental effect on commodities at some future point. The stronger correlation right now seems to be an inverse rates/commodities one rather than the recent inverse dollar/commodities correlation. See if that continues this week.

 

In summary, the key takeaway from the above analysis is to recognize that there are several forces competing against each other, which might explain why markets remain in a consolidation over the last month or so. The market needs these correlations to all start moving in the same direction to break out of this current balance. For energy, the ideal macro would likely be a falling UUP, rising USO, rising GLD, rising TLT, rising IWM.

 

Energy Big Picture

I know this week’s writeup is kind boring and a partial repeat of last week, but nothing has really changed lately in energy. The XLE started its big fall on August 11 from about 39 and that trend bottomed out in late September. Once that trend ended, prices moved into a sideways consolidation which is where we still sit. This consolidation is healthy, but unfortunately it needs to keep evolving for a few more weeks in order to reverse the downtrend. It’s not much fun trying to trade a sector in a choppy consolidation. As I’ve said over the last few weeks, I still don’t think the lows are in for energy and we need that one final washout to shift the balance in supply to longer term holders. However, things don’t always go according to a set plan and there’s always the possibility that a new uptrend starts without a washout, so be careful if you are playing around short in the energy sector. Energy can surprise and the moves can be very unexpected and very large.

 

MajorsXOM and CVX make up about 45% of the XLE, so their charts are very similar to the XLE sector chart. Both are in consolidation ranges, XOM from 33-36 and CVX from 71-75. I’m interested in trying to establish a longer term (1-3 months) XOM position on the next dip toward the bottom of the range. I’m going to start in long on any break of 33 and continue to scale in as it moves to a test of the March lows around 30. XOM is my favorite long term energy pick right now. CVX is probably my second favorite pick and I’ll start a long position at the bottom of the range around 71, but I probably won’t scale into that one as quickly as XOM, since it’s still pretty far from the March lows. There’s just no real stop to play off of in CVX, so the position probably needs to be smaller. RDSA is probably third best of the majors and BP drags up the rear in fourth place. There just doesn’t seem to be a bottom in BP at all.

 

Also, earnings for XOM and CVX hit Friday, which probably couldn’t be a worse time for earnings on the weekend ahead of the election. I won’t be holding either through earnings unless there’s a huge dip before Friday. However, if the earnings are bad, that could present a big opportunity if traders exit the sector with earnings disappointment and the fear of a Biden win. You have to be ready to go in strong if the opportunity presents itself Friday. Have a plan ahead of time. Figure out where you want to enter and stick to that plan.

 

E&P – It was a strange week for COP. After the purchase of CXO, there has been a good bit of selling weakness that I wouldn’t have expected. I probably made a mistake on this one and should have been long term buying down under 31, but I got greedy and wanted to see if it could take out 30 for a larger position. I did scalp a few small moves, but I regret passing up the longer term play. The 32.50 level will be important this week and I’ll be looking for both a short term and longer term trade if it drops back toward the 30.50 low. PXD also behaved a little strangely after its purchase of PE. While a dip in the acquirer is common, it probably shouldn’t have been so large in these COP and PXD moves. Watch the 35-38 range in EOG and the 37-40 range in HES for opportunity. I still don’t like OXY as a company, but might be willing to give it a smaller play under 9.50.

 

At some point, the second tier names are going to be longer term plays. Most are setup with very clear support which enables great setups with tight risk control. I don’t think they are plays yet, but might be getting close. APA has nice demand at 9, DVN at 8.50, FANG 29 and CLR around 12.50. I still prefer the higher quality names for longer term plays, but another big dip and the second tier names will be attractive. I’m seeing traders also mention trying to make buyout trade plays, but the lack of real premium on these recent deals really makes that approach a high risk, low reward strategy.

 

Natural Gas E&P – These are still too choppy with no direction, but may be setting up for a breakout attempt soon. COG at the 21 level and EQT around 17 could present some opportunity if breakout trades are your thing. I’m starting to like EQT more, especially after the CNX rumors. Much like the oil E&P sector, the NG portion could also consolidate into a few remaining giants. Eventually, I think there will only be two, maybe three, COG and EQT, and then some combination of the remaining players. I’ve got these on the back burner for now to see if they do breakout, at which point I’ll probably make a play as they fall back down to the breakout points for a retest from above.

 

ServicesHAL still looks like the best play in services with a good breakout of the 13 level after earnings. There’s a possible trade there if price falls back toward 12.75, with a 12.25 stop. SLB still looks a little weak as it continues to consolidate after earnings took it down about 8%. There’s now a couple levels of supply overhead and it seems trapped between 14.90 and 15.80 for now. There’s also a level at 16.50 which would further cap any upside. NOV might be my favorite setup. There’s a strong level to play off of at 9 for a possible 9.50 breakout and move back toward 11. Worst case on the downside is probably 8.50, at which point I’d probably add and turn it into a longer term play since I’d buy 8.50 anyway. HP is also showing some strength, but that trade is probably too expensive since a 14 stop is probably needed on any position and the reward is probably capped short term around 17. If it drops back toward 14.50, I’ll probably give it a look.

 

Refiners – This has been the absolutely most difficult subsector to time right lately. I’ve been looking to get in long term positions in MPC, VLO and PSX, but every time it dips price shoots right back up before I get my full position. I took a small starter in PSX Thursday and sold it on the Friday open, but really missed an opportunity for more. I’m watching 48 in PSX, 39 in VLO and 27.75 in MPC to start scaling in longer term (1-3 month) plays.

 

Trading Plan for the Week – One curious pattern over the last few months has been selling in energy on Monday, Tuesday and Wednesday and strong buying on Thursday/Friday. The last few Thursdays have been great days to establish long positions for quick moves. Maybe that pattern continues this week. For me, I’m probably on the sideline or playing small if I do play this week. This choppy range between 29.75 and 31.25 has not been productive at all and the month has been really slow. I’m mostly willing to just watch from the sideline until the election is done. The primary plan for the week in energy is to simply wait for the next big dip to start a few longer term positions. My attention is going to be on trading the QQQ and IWM, and possibly a move in AAPL.

 

The only thing that might get me interested in energy would be a first 30 min Monday dip in the XLE back to the 29.50-29.75 area for a short term intraday bounce long. If price instead breaks to the upside, I’m not interested in chasing it and I’ll just watch energy for the week and wait for it to come back down and retest the upside range breakout point from above and then decide if I want a position long.

 

My two main trades for Monday are long QQQ for a bounce off of 280-281 with a $1-2 stop and a long in IWM off of 161.50 for a breakout of 164.

Other possible non-energy plays:

AAPL – If the QQQ does what I expect, then AAPL should be a great long play off of last week’s low around 114.50. Ideally, I’d like to see a gap down and reclaim of Friday’s low for a long entry. The target on that trade could be anywhere from 118 to 120.

KO – Boring, I know. I’m watching 50.50 for a long entry, tight 25 cent stop, target a breakout of 51.50 to blue sky. Same general trade on PEP off the 139 level.

FinancialsJPM is hitting the top of the range, as are the smaller regional banks represented by the KRE. If the UUP and TLT both bounce, then banks could roll over for nice short plays. I’m not excited about any short in this market, but if the situation sets up perfectly, it’s worth a play. On the other side of this, I’m watching C on any big dip for a long play. Would like to see it reach 40-41 for a try.

Casinos – I’ve had these on the last few writeups and missed the long trade on Thursday with the huge gap up. I knew it was coming, I just didn’t want to take the risk of getting hit with a lockdown surprise. The better play was to enter on any lockdown overreaction. Keep an eye on these for a pullback.

Homebuilders – I had this as a short pick last week and it remains a short play. If the TLT is going to keep falling and pushing rates higher, homebuilders will eventually suffer. This latest pullback from all time highs might just be the beginning.

ChemicalsDD and DOW both approaching highs for breakouts. Could probably throw in HUN and LYB into this same trade setup. Worth a shot if the whole group shows enough demand to execute the breakout. If one or two lag, then I wouldn’t take the trade in any.

EMR – Long 70, stop 69, target 72 breakout.

BSX – Long off 37, 40 target, 36.50 stop.

CME – long off 163, target 171, stop 161.

OMC – Nice consolidation pattern with a spring and retest should lead to a test of the top of the range at 57 and a possible breakout. Enter as close to 51 as possible, use a 50 stop.

KSS – Nice setup for the breakout traders out there at the 24 level. If this one consolidates sideways around 24 for a few days and creates some structure to play safely off of, I might give it a try.

 

Again, sorry for rehashing much of last week’s writeup, but things just haven’t changed much with this tight consolidation range. It’s probably going to be another very boring rangebound week, but this is also where surprises can happen, so have a plan for the surprise.

I’m so looking forward to all the political crap being over. I can’t believe how people have let themselves be consumed by this shitshow. Time to move on people. If your guy wins, don’t gloat; if your guy loses, don’t complain. Just quietly move on and let’s get back to normal life without politics.

 

 

 

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

The XLE closed a little lower than where it started the week, but the price action was very encouraging. It seems like the sector is getting close to finding some solid demand and turning up for a trend back to the mid to upper 30’s. There’s a big level down at 29.75 and Thursday’s gap down open tested that level and buyers drove it straight back to close at the highs around 31. This 29.75-31.25 level is building and there are buyers accumulating here, and while I don’t think we have reached the absolute bottom yet for energy, the final shakeout could be coming soon. As for the SPY, it was also positive with another run at the all time highs. The retest of the 342.50 breakout point on Thursday was huge and I think that probably sets the stage for price to break the 359 level and then complete the journey to the 380-400 level somewhere around election time. But in the end, there’s probably an election results rally into December and then the whole thing comes down. It’s been a great run, but everything eventually ends. But don’t look at it as an end, just consider it a reset for the next great bull run.

 

SPY – The technicals are still healthy. Price retested the 342.50 breakout level as it should have and bounced nicely. I’ve seen a lot of “double top” predictions, but I just don’t think that’s happening. It’s possible that price might test the 342.50 level early on Monday, but then I think price recovers and makes a run at 354, 359 and then on to the final target. I would get concerned if 342.50 failed on the next test, as that might suggest to more traders that a double top is indeed in and encourage shorts to get active. The other important points this week for the SPY will be 349.50 and 354. Ideally, I’d like to see price test the 342.50 level before lunch Monday, then turn sharply and reclaim Friday’s 347 close in the afternoon, with a Monday close in the 347-349 area. That would likely setup a big gap up over 349 for Tuesday and then a run at 354 on Wednesday, followed by an attack of the all time highs later in the week. If for some reason the SPY did fail early in the week, 331 and 320 remain important levels on the downside.

 

QQQ – Many people still see tech as a pure risk-on asset, but I think there’s a big group of players who use tech as a safe haven to park big money when things get a little uncertain. The QQQ showed some relative strength and never dropped down far enough to retest the 281 breakout point. If the SPY comes down and retests 342.50, then the QQQ might make a run down to the 281-283 area, and that would probably make for a great entry long into the election. If things get uncertain around the election, money will flow to the mega cap tech stocks. If 281 fails, the next level down is 273, then the 260-265 area. It’s likely QQQ takes out the 304 highs this week but I have no idea where the final top will be, however it could be much higher than everyone thinks due to big money chasing safety, which then encourages retail to FOMO chase.

 

IWM – The small caps are the most important sector this coming week. They have lagged the SPY and QQQ and still haven’t broken to new all time highs like the SPY and QQQ did. If the IWM can break the 164 level, that likely leads to a test of 170 for a possible breakout above 173. If price takes out 164, look for energy to follow and simultaneously break above the 31.25 level. The breakout area retest around 159 on Thursday was very clean and sharp, and unlike the SPY and QQQ, the Friday pullback in IWM didn’t give back much of the Thursday gains. The 160-161 area will be important Monday morning. While it could drop and retest 159, it would be a positive signal if 160-161 would hold, which would likely lead to a quick run at 164.

 

On the other hand, the IWM is probably the most dangerous place to be long if the overall market turns down. It has run about 16% percent in the last month alone and could easily give back 50% of that gain if things turn. A 50% pullback takes it down to about 153. As I wrote last week, when I finally get short the market, the IWM is probably the vehicle I’ll use to do it. The danger this week is if 164 gets clearly rejected. If that happens, you have to get out of the way of small caps and energy, because both could come down hard. Keep the stops tight on these. If I decide to try a short on the 164 failure, my stop easily goes in the 165-166 area.

 

UUP, GLD, TLT, USD/CAD – This is going to be an important week for the dollar. The UUP broke out from around the 25.25 area in late September and then pulled back to 25.10 as a retest. The retest held and the UUP jumped back above the 25.25 area to close the week at 25.29. It feels like the dollar might make a run at the 25.35 area and then make a move back toward the recent highs. If it does, that’s probably going to knock the USO down. The USO has made several runs at the important 29.25-29.50 area over the last couple weeks and has made lower highs on each test. If the UUP starts another run up, the USO likely drops down to test the 27.75 area and then the 26-26.50 area. As a sidenote, you can use the real WTI and DXY prices, I simply use UUP and USO because it’s easy on IB to track current prices in one place.

 

As the UUP turned back up, the falling wedge breakout that the gold bugs were watching failed and went flat. If the UUP continues upward, look for GLD to take out 177. If the dollar really strengthens ahead of the election, the GLD might not find demand until the 170 area. I took a long in the USD/CAD pair this week at 1.3102 and that turned out to be a good trade. I’m kind of regretting not cutting it up around 1.3260, but if the dollar does strengthen, I think this pair can make a run back to 1.34, and if it does that should signal a fall in USO. On the downside, the clear stop on USD/CAD is 1.3100, so if price drops I’m probably cutting the trade breakeven. A break below 1.3100 would probably correspond to USO breaking above the 29.25 mark.

 

In summary, energy stocks need a UUP down, USD/CAD down, GLD up, IWM up, XLF up macro to succeed this week. If the dollar doesn’t cooperate, things could get ugly for oil.

 

Big Picture Energy

In the larger scheme, the XLE has trended down from 39 on August 11 to hit a primary low around 29.75 on September 24. Since September 24, price has mostly been locked in a $1.50 range from 29.75 to 31.25. It did test below on October 1-2, but that auction failed quickly and returned to the 29.75-31.25 range. So what we have is a big downtrend which ended in late September and has turned into a sideways range. The question now is whether this current price range is an accumulation (which leads to a reversal and trend upward) or a distribution (which leads to more downside). I want to say it is an accumulation leading to an uptrend, but the problem here is that big downtrends usually need big consolidations to reverse. The move from 39 to 29.75 was a pretty big move and I don’t think that is going to be resolved and reversed with such a short consolidation. It’s possible, but not really probable. Unfortunately, that points to this latest range being a distribution. If so, there’s a big downside washout coming for the final lows.

 

As I’ve written for the last few weeks, I don’t think we’ve seen the final lows in energy. There still needs to be that final high volume capitulation to wash out the remaining holders and drive energy stock prices to levels where they can be accumulated by larger players for a longer term, low risk play. The sector isn’t going to turn with just a few funds picking up a handful of energy names. The only thing that is going to turn this sector in the bigger picture is a clear washout that removes much of the downside risk. With all that’s occurred over the last couple years, it’s fairly clear an oil price spike will materialize in the next year or two. New exploration has almost stopped and most projects have been cancelled. Demand has been crushed by Covid. However, even with all the Capex cuts and project cancellations and the dropping demand, oil price has managed to stay right around 40, which isn’t a bad price for oil given all that’s happening in the world right now. Over the next year, supply will probably hold steady while Capex and projects continue to remain stalled, however demand WILL come back. We are going to see a tipping point where demand recovers much faster than supply and that’s the root of the coming price spike.

 

There’s also the issue of inflation. If inflation kicks in like the FED wants, that’s going to hit energy prices, and will probably hit about the time demand returns. The key for larger players is how far out is the spike and how much risk are they going to have to take if they accumulate energy names now. They need the washout for lower entry prices and less opportunity cost lost until the spike actually happens. XLE at 30 isn’t a great deal for larger players, but XLE 20-25 would probably encourage them to accept the risk and holding time needed to take advantage of the coming oil price spike. Right now prices aren’t attractive enough to justify larger money passing up other sectors to tie up money in a longer term energy play. The sector needs that capitulation to draw in the larger players.

 

Majors – The action around XOM 34 and CVX 71 was encouraging. There’s clear demand at those levels, however there’s also clear supply up near 36 and 76. I think CVX is setting up for the better long trade if price comes down to the 70-71 level this week. I’ll still take the XOM trade around 33.75, but the stop needed on XOM is larger than the stop needed on CVX. I’ll get concerned about XOM if it takes out 33 and CVX if it takes out 70. I took a position in BP at 15.97, but I’m really starting to worry about that stock. There just doesn’t seem to be a bottom in that one. At least RDSA showed a higher low this past week, but BP just keeps falling. I probably should have waited to enter BP and will dump it at breakeven if 16 gets taken out this week. Right now my opinion of the majors best to worst is CVX, XOM, RDSA and then BP.

 

E&P – While that COP/CXO trade might be good for the sector, these mergers are really killing my pool of tradable energy names. CXO was one of my favorites and now it’s gone. In order to trade short term, I need price range and stock prices at least above $20. Right now there are only a handful of tradable names left and it’s shrinking quickly. I’m really only left with COP, EOG, PXD and HES. I may add FANG to my list to replace CXO, but I don’t really like the company. At some point I might be forced to add the second tier names to my short term trading list, but that gets expensive in commissions since I’m on a per share basis.

 

My primary E&P play this week is going to be COP long around 32. I think the final deal might get announced on Monday and if there’s any reaction to the downside I’m going to use that as an entry. I’ll also be watching 35.50 for a long play in EOG and 86 for a long play in PXD. My second favorite play this week is going to be a long in HES down near the 37 area. There’s very clear support to place a stop around 36.25 in exchange for the chance to make a run back up toward 42.

 

Refiners – This is still my best opportunity in energy and I’m looking to get big money in on the refiners on the next dip. PSX remains the favorite under 50. Also watching 39 in VLO, 27.75 in MPC and 19 in HFC. It could be a rough winter for product demand, but I think demand explodes in the spring. One way or another, this country will move on from Covid after the winter. You can only cage people for so long and at some point people will accept the fear and get back to life. And if there’s a vaccine, then spring will explode with travel and fuel demand. Opportunity occurs when things look the worst and for the refiners that’s probably now.

 

Natural Gas E&P – Still nothing here. The only play I’d consider is a breakout of 20 in COG, and even that trade isn’t very attractive because there just isn’t much reward in it. EQT just continues to grind and chop sideways. Last week’s pick of GDP did break 10 and got as high as 11.30, but then failed. There just aren’t any decent setups in this subsector.

 

ServicesSLB had earnings on Friday and the market didn’t react very well with SLB finishing the day down about 9% at 14.97. I was tempted to step in and try to pick a bottom on this one, but passed on it until I see earnings from HAL on Monday morning. If HAL reports similar, there’s probably more downside coming in services. The risk is that HAL reports worse because it’s more North America focused rather than international like SLBNOV and HP are still lagging near the March lows. One positive was the Friday rig report which showed a jump of 13 rigs, but even that was somewhat misleading because about half those were vertical wells rather than horizontal. At least it’s headed up and not down.

 

Trading Plan for the Week – Bottom line for the XLE is that it needs to hold 29.75 on any downside test. I will be putting on a short term long trade at 29.75 if the structure is good and I have a concrete placement for my stop. The key on this trade is having a tight stop. If 29.75 fails, there’s nothing down to 28 so the risk needs to be 29.40 or so. If we get the Monday pullback test, I’ll also be watching XOM, CVX, COP and PSX as my top four short term long plays for bounces. I’d also really like to take a shot long on any IWM pullback early Monday. I think there’s a good chance it breaks out above 164 and I’d like to find a way to ride that to 170.

 

If the XLE and IWM trades fail or if things just head straight down on Monday, I’ll step aside and see where the bottom is. I’d also have no problem starting a longer term scale in long on XLE if we test the 28.20 lows. There are so many different possibilities this week between long term and short term trades. I’m really trying to be patient for a longer term opportunity, but I’m having a difficult time passing up all the short term opportunities for small bounce plays. If the market looks really weak on Monday, I’ll probably stop short term trading and start focusing on where to get into some longer term plays. Also, if the XLE gaps up Monday I’ll probably just watch and see what happens at that 31.25-31.50 area. There’s going to be a test there at some point, but I think there’s a good chance the next test will be a false breakout, so be careful with that.

 

One thing I notice is that my weekly run through the S&P 500 charts showed a high number of stocks that are setup for short plays. That could have just been the way the week ended, but worth keeping in mind. Other non-energy stocks that might offer some opportunity:

 

Casinos – These have been on my radar for months, but they just haven’t set up properly yet. I’m watching 20.50 in MGM, 43 in LVS and 70 in WYNN. Every time I get close to pulling the trigger on these, the Covid lockdown talks starts to intensify. I don’t want to play these and then get hit with Vegas closing again. The best opportunity is to just wait and see if it happens and then take advantage of the overreaction in travel stocks for the play.

 

Homebuilders (ITB)- This group might finally be hitting the wall on this latest run. Watch the 57 area on ITB. The charts for each of the individual names all look like they could be about to reverse. I wouldn’t short them, but if you are long it might be time to ring the register and cash out.

 

Trucking – Some big reversals on Friday in this sector. Probably not time to short, but like homebuilders be cautious of the group on the long side.

 

V – Another short term bounce play off the 198-200 area back to 208. Tight $1-2 stop.

AAPL – Short term bounce play long off of 118 back to 126, same $1-2 stop.

MSFT – Short term bounce play long off of 216 back to 225, $2-3 stop.

CMCSA – Still watching for this one to break the 47.50 level to new highs.

CSX – Watching for an 81 breakout to blue sky above. Same for NSC 223.

FCX – Breakout of 17.50, target 20.
NUE breakout of 50, target 56.

JPM – Play long off of 100, 98.50 stop, 110 target.

NEM – Short off of 64, stop at 65, 59 target. Watch the UUP and GLD for confirmation on this one.

OMC – Long on a low volume pullback to 50, 47 stop, 57 target.

 

As you can probably tell, I’m kind of in no man’s land on energy right now. I feel like there’s some positive things occurring under the surface, but I also fear there’s a final washout that’s needed. I’m really on the fence right now and very cautious. I’ll probably play smaller positions this week and favor standing aside in order to have plenty of dry powder if we do get that washout. Being nimble is probably best right now, especially with the wildcard election approaching. Good luck this week.