Energy Equities Outlook and Trading Plan for December 2-6

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Energy Equities Outlook and Trading Plan for November 25-29

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

Energy Equities Outlook and Trading Plan for November 11-15

It was a decent week for the E&P’s with the XOP adding 90 cents from last week’s close. The action on Friday was encouraging and I think there may be some room to run this week. Trading on Thursday and Friday was very calm and felt like the demand just pulled back to see what kind of sellers might show up, however the sellers just never showed up. There isn’t much supply over the market right now, which could lead to a nice run toward the 24.50+ area this week.

 

The regular indicator stocks are all running. CVX closed near 121 and XOM reached 73. COP held that 57 level and closed even higher at 59.17. The service stocks closed near the highs with SLB finishing at 36.34 and HAL ending at 21.28. Even the refiners continued to run with PSX and VLO finishing near the highs for the week. The generals are leading and the rest of the sector should follow.

 

It’s been a long time since I’ve started a week feeling this good about the energy sector, but things seem to be turning positive in the short term. The SPY will have to keep making new highs, but if it does energy should be in pretty good shape for the next week or two. The real test for energy will come when the SPY makes that first pullback under 300, but who knows how long that could be from now.

 

Trading Plan for the Week: It’s a very short writeup this week, as there’s really only one play. The play this week is to find a safe place and just get long the XOP. You want to find some pullback Monday morning that has a defined, concrete stop and take your chances for a big run. It might take a couple of tries or a multiple entry scale in to get that initial position, but the reward could be worth a few small losses. The overall market is running and you just don’t fight that. Shorting energy right now just isn’t an option, however it could become an option if price climbs to that 25 area. Fast money should continue to look for quick gains in beaten down sectors. I don’t plan on doing much daytrading in the energy sector this week. The best approach here is to take a position on Monday morning and just let it run for the week.

 

The pivot for the week is still 22.68. As long as price can hold that level, there’s an opportunity for a big run. If 22.68 breaks, the next level is 22.20, which is the 8 day moving average. Those should hold. If they break, the first significant level on the downside is that old 21.55 point, which has been the center of the fair value range for the last few months. If it pulls back toward 21.55, I’ll be trying another long trade there, and I’ll probably be doing it with very large size.

 

The only thing that would make me change this plan is if the SPY has a clearly defined reversal and starts a pullback. Energy isn’t going to run if the overall market falls. I’d watch 307.80 and 306 as the first warning signs of a pullback.

 

I’ve moved almost all of my daytrading to the IWM and KRE. Those two have just been trending too strongly to ignore. I’m looking for daytrades on the long side for IWM this week and I think there’s a very good chance that it makes an attempt to break out from that 161 area. Last week it consolidated at the top of the range, which created an attractive buildup area for a breakout try. KRE is trading very similarly. If the small caps can break to the upside, that would confirm all the other new highs in SPY, DIA and QQQ.

 

One other play I’m watching this week is GDX. It’s sitting right on the bottom of the range that began back in early September. If it dips back under 26, I’ll be starting a long position. I’m thinking that the dip below the range should force the larger money to show their hand. They will either step in with big demand around 26 and form a spring or else it will fall sharply. This isn’t a trade where you plunge in, it’s a situation where you let the drop happen and then watch for a retest of the low that holds on light volume. Let it drop under 26, bounce back near 26.25 and then look for a spot on the next drop back to 26 and hope that it holds there.

 

Sorry for the short writeup today, but I’m recovering from that terrible Alabama loss. I don’t think one bottle of wine is going to get the job done today. Looks like a two bottle day. Enjoy the rest of the weekend!

 

 

Energy Equities Outlook and Trading Plan for November 4-8

The XOP closed the week at 21.85, which was just one penny higher than where it closed the prior week. In the bigger picture, it went nowhere. The high of the prior week (Oct 21-25) was 21.98 and price tried to escape that range this week, but just didn’t have enough demand. It also got squarely rejected at the 50 day moving average which sits at 21.99. I think that’s another sign that what we are seeing is fast money in the sector rather than longer term money. It’s just stuck in this 20.37-22.68 range while the SPY keeps reaching new highs. E&P’s really should have seen more demand this week, but it’s pretty clear that the bigger money still isn’t interested. That can change quickly though.

 

The week started on a positive note as we gapped out of the prior week’s range on Monday morning and even gave it a second run on Tuesday before failing. Once the rejection was clear, the rout to the downside was on, pushing price all the way down to 20.71 on Thursday’s open. Friday was a relief rally and a fairly strong day as the SPY was just ripping and there were some bargain hunters in energy who were probably waiting for the XOM and CVX earnings reports to clear their risk. The problem for energy was that it couldn’t even regain the highs set on Monday and Tuesday in this bull market. The run on Friday seemed more like faster money just looking for something cheap that they could drive in a full throttle bull SPY run. The key for next week is to see if that Friday momentum continues or if it gets rejected again between last week’s highs and the top of the range at 22.68.

 

The real key here for the longer term players is what happens in energy when SPY makes that first pullback. It’s easy to make a quick play on energy when the market is running, but when it pulls back, energy might be the first thing that gets thrown overboard in the selling rush. I still think the sector needs an absolute meltdown washout to clear the slate and get shares in the hands of longer term holders, if there are still any of those brave souls out there. As long as fast money controls the sector, we will continue to see this whippy range of short term trades.

 

In individual stocks, the usual suspects still didn’t show much life last week. CVX was a laggard on Friday, finishing just six cents in the green. Had XLE and energy been out of favor on Friday, there’s no telling how far down Chevron might have been on those earnings. It easily broke that 115 level, but did manage to crawl back above it on a day when the XLE finished up +2.3%. The sector was running, but Chevron wasn’t. My other favorite indicator stock, COP, barely managed to close over that important 57 level, clearing it by a mere 15 cents. That’s not a great momentum sign. See if the biggest E&P can hang onto that 57 mark this week. XOM did look good and it’s going to try that important 70 level this week. The two majors are both going to have to break out if the sector is going to make any run.

 

One thing that is really starting to become a concern with the XOP is the weighting of the refiners contained in the index. As of Friday’s close, refiners held the top six weightings in the XOP. Throw in CVI and the total weighting of all refiners in the ETF is about 19%. I can’t remember the refiners ever being this heavily weighted in the index in the past. Those refiners are a big reason why the XOP isn’t much, much lower. It’s great when refiners are running up, but keep an eye out if they reverse, as it could take the XOP down quickly since they are so heavily weighted. It’s a difficult situation when 20% of the thing you think you are trading (E&P’s) isn’t really what you are trading. Just be aware.

 

This week’s trading plan: I’m expecting the E&P’s to make a run toward the the top of the range around 22.68, especially if the SPY keeps on melting up. Bargain hunters and fast money will continue to look for out of favor sectors where they can make quick gains. The only problem with fast money is that they can leave just as quickly as they show up. For this sector to truly start to recover, it needs the shares in the hands of longer term players who will not dump them back on the market at the first sign of trouble. We can only trade the situation we have, not the one we wish we had, so I’m looking for that fast money to hit the sector for some gains next week.

 

The first two points of interest for the week are the 50 day moving average at 21.99 and last week’s high at 22.32. The area between those two points is where I’ll be judging the momentum and volume to determine whether I want to put on a short trade at 22.68 or let it break and retest from above for a long breakout trade. I really don’t know what’s going to happen, but the only thing you can do is have a plan for each situation at 22.68.

 

If the sector fails in that 21.99-22.32 area, then the first point of interest on the downside is 21.55. That’s been a longstanding fair value area and now the 8 day moving average also sits close by at 21.59. If the momentum and volume are low, I’d probably try a long trade off of 21.55 for a short term (probably intraday) bounce play. If 21.55 fails, then it’s probably back to last week’s lows of 20.72 or lower, possibly much lower. If that happens, then I’ll just stay on the sidelines until the market shows some defined reversal sign, which might take awhile.

 

I usually have some feeling before the week starts for which way the XOP will go, but this is one of those weeks where I really just don’t have a feeling one way or the other. I can make a solid case for both directions and that usually isn’t a recipe for a good trading week. Honestly, the last few weeks have been pretty bad in energy for me. I can’t seem to get anything to set up correctly, as the market just whips around in this tight range. There just hasn’t been enough opportunity. With the market running like it is, I’ll probably be trading IWM and KRE most of the week, with XOP getting left on the back burner. Sometimes you just have to go where the clearer opportunity is, and right now that’s in the small caps and financials which appear ready to break out for a big run.

 

Sorry for such a depressing writeup this week, but energy really isn’t tradable for me in this tight range. I figured this was the way October and most of November would go, but I was really hoping it would turn out differently. I’ll probably be a little more quiet on Twitter until energy can finally break out of this 20.37-22.68 range and start a clear trend, but I’ll still be watching in the background. Good luck this week and keep those stops tight just in case this market makes that much needed pullback.

 

 

 

Energy Equities Outlook and Trading Plan for October 28 – November 1

Energy stocks finally showed some life this week by starting Monday on the lows and finishing Friday on the highs. It was a nice trending week that could continue toward the top of the range around 22.68. Another decision will have to be made if price reaches that point. The key to the run was the overall market creeping right to new all time highs and dragging everything with it. Some OPEC supply cut headlines and a nice EIA number also helped things. A new ATH for the overall market will be necessary to keep energy moving up. If the market fails, energy probably heads right back down to the lows around 20.37.

 

I’m still not sold on this latest energy run. For the last few weeks, I’ve been posting that I think we stay in this August range for October and probably part of November, and that has pretty much been the case. The real concern I have with this market is that we just haven’t gotten that final washout that we need to clear the supply and move everything to the hands of longer term holders. I think what we are seeing right now is just shorter term traders looking at an out of favor sector and trying to manipulate some year end gains. The overall market is at an all time high and energy just looks cheap, therefore it’s a target for fast money. The true picture will be revealed when the overall market turns down for the first time after it breaks that 304 level. How does energy react when the fast money heads for the exit? That first market pullback could produce the much needed final washout and capitulation.

 

The big event this week is the FED meeting and announcement on Wednesday. We sit at all time highs with the FED due to cut again. Seems like we were just here at the last meeting and cut. I’m concerned that Powell does cut, but that he telegraphs that this might be the end of the cutting cycle, or at least close to it. If the market senses any hawkish view, that could top things out for awhile. It’s likely one of those buy the rumor, sell the news events. I won’t be in any trades after lunch on FED meeting day.

 

One stock that is still bothering me is COP. It failed again at 57 and just seems to be lagging this energy run. Conoco will release earnings on Tuesday morning, so that could be a big piece of information for the E&P’s. Also, the big two, XOM and CVX, report earnings before the bell on Friday. That’s another event where I’ll be playing it safe and moving to the sidelines. If either of them negatively surprise, it could take the entire sector down.

 

This week’s trading plan: I’m going to post a trading plan for some swing trades, but most of my trading is going to shift back to daytrading for the next few weeks. There just haven’t been enough trades on the swing level, and the ones that have been there I’ve mostly missed. While the big trades are nice, it’s the daytrading grind that produces consistent cash. Last week was a great trending week to daytrade, but I was focused too much on the bigger picture and just didn’t catch the smaller moves like I normally do. I’ve been focused too much on the wrong timeframe, so it’s time to get that straightened out. I’ll still Twitter post on the swing trade timeframe, but most of my actual trading will be on a lower level, which I don’t post.

 

This week I’m watching three points for swing trades. The first trade is an early week pullback to the 21.55 level. The XOP broke out of that range that it has been in since October 2, but I think it probably pulls back to test that range on Monday or Tuesday. When it does, the key will be the volume on the pullback. If the volume is light, I’ll probably give it a trade on the long side to bounce off of 21.55 and then hopefully have price take a shot at 22.68. The first resistance on the trade is the 50 day moving average at 22.03 (which is likely what stopped Friday’s run). If it can clear the 50ma and Friday’s high, I think demand will pile in and drive it toward the top of the range at 22.68. If it reaches that point, a new trade plan will have to be made. If playing this trade alone, the stop is last week’s VWAP around 21.25.

 

The second trade is a long trade in the 21.10 area. This can stand as a trade by itself or it can be a combo trade with the trade above. If trade one above fails, there is a second chance to get long at the intersection of the 8 and 20 day moving averages at 21.10-21.15. There is even the option of scaling in at 21.55 long with about half size and then scaling in the second half of the trade if it slides all the way back to 21.10. There were several bounces off that 21.10 level last week, so there should be good demand there. There is also another level below that at 20.95 that I would use as the stop for the entire trade. The profit target on trade is still the 22.68 level. If it takes out 20.95, there’s a good chance it heads for the bottom of the range at 20.37.

 

The third trade is a short at 22.68. If we come in Monday and this thing gaps up big or we see a big opening drive that reaches the top of the range, I’d definitely be willing to take a shot short. There are a couple problems with this trade, it’s countertrend and it has no real risk control stop level. It’s a very difficult trade and there must be some type of intraday structure to work off of, because there isn’t really any macro structure above 22.68 to play off of. I’d also take a look at this trade on Wednesday afternoon on the release of the FED decision. If we get a spike on that, everything could top out and start down. I’d be really tight on this one though, because this thing could really hurt you if it breaks out and just keeps going. There must be a very risk controlled structure to play off of to take this trade. The profit target on the trade is a pullback to 21.55, with the chance that it falls all the way to the bottom of the range at 20.37. The FED Wednesday and/or the XOM/CVX earnings on Friday are the things that could produce the 20.37 move.

 

Two other trades that are possibilities: A breakout long trade at 22.68 and a long trade on any washout under 20.37. I still have no desire to short any breakdown under 20.37. I don’t think the chances are very big of either of those moves happening this week. We probably continue to stay in this August range between 20.37 and 22.68 well into November. It would be a surprise to me to see it get outside that range with any type of strong initiative move, but there are some big drivers out there this week with EIA, FED and XOM/CVX earnings, so it is possible. However, responsive trades will likely continue to be the play for the next few weeks.

 

I’m not sure if anyone is really interested, but I’m going to try and get up a post this week describing how I daytrade and the structure that I watch during the day. That might help clear up some of my Twitter posts. This blog is really just a place to journal my trading thoughts and notes for my own use and organization, but if it helps anyone else out there, then that’s a good thing. It’s fascinating to go back a few weeks on the chart and then go back and read what I was thinking at the time to see how it matches up against the chart.  It makes it really easy to see how and why I was wrong and how to respond to the same setup next time it happens on the chart. It’s definitely a habit that I’d recommend to all traders. Good luck this week and be safe around the EIA number, the FED decision and the XOM/CVX earnings.

 

Energy Equities Outlook and Trading Plan for October 21-25

It was a fairly boring week for the E&P’s and XOP, but that rangebound boredom could be leading to more exciting things on the horizon. It felt like there was some heavy accumulation going on all week at the bottom of this latest range and that someone wanted to establish a big position. The buying continued until about lunch on Friday, and then the buyer just stopped and price predictably fell sharply when the buying pressure was removed. There never was any heavy selling or pickup in volume at the top of the range, just a pullback of buying, as if whoever was buying wasn’t yet ready to break it out of the consolidation range. Those conditions are usually signs that someone is accumulating for a meaningful move up in the future.

 

Much of my trading is based on Wyckoff formations and his four cycles of market structure. Positions are accumulated, marked up, distributed and then marked down. It is very possible that we are in the beginning of an accumulation at all time lows in XOP.  The buyers will continue to work the market for their new positions, but at some point you can be sure that they will explore the bottom of the range and put in a spring structure to shake out the weak longs and pick up all those stops under the market. That could be what we see this week. I’ve been writing that we could also get a complete washout of this sector, possibly down in the 17-19 range. It really depends on how many stops are down there, how many weak holders there are, as well as how many regular sellers (tax loss anyone?) are going to show as price takes out lows. The action on the next dip will provide some great clues about what we should expect for the next several weeks.

 

I think we probably see the XOP take out the lows this week and at least test that 20.30 area, but it’s also possible that this thing could way overshoot if sellers (especially tax loss and new shorts) really hit the market hard.  The action in the SPY will also be important this week. Do we put in a top or are we looking at a big run into Christmas? The key on the next XOP dip is volume. I will be much more eager to buy if the volume is really light with low volatility on the way down. If the XOP breaks the lows on big volume with wide ranging candles, I’m probably going to be very cautious entering my trade. I’m normally a short term trader, but I also have an account for longer term trades, and right now my larger goal is to try and catch a washout in energy for that longer term account. I know it’s coming, the trick is the timing. The better the trade is timed, the larger position I can take. I know it doesn’t seem like much, but there is a huge difference in return by catching this thing at 17 rather than 19.

 

The key to getting this XOP move right is to have a plan. I see people arguing all the time about which trading systems work and which don’t. I’m a believer that they ALL work, even the really crazy ones like astrology. The trading system doesn’t matter. What does matter is that you have some consistent way of viewing the market that you fully understand. If you have a way of viewing the market and creating a plan for what you think the market will do under your trading system, then you also know when the market isn’t agreeing with your system. And when you know that, you know which way the market is really going. Now, follow that market direction. The key isn’t the trading system, the key is having a consistent way of measuring the market so that you know which way price is going. A trading system isn’t a “predictor”, it’s a way to measure reactions, and that’s what ultimately provides you with market direction.

 

For me, my plan here is a basic Wyckoff accumulation pattern. Some people probably think my method is useless or wrong, but it doesn’t matter. What matters is that under my plan this market should dip down on low volume to the point where it grabs all the stops under the market, tests the sellers’ strength and then evolves into a markup after the spring is put in. The key here is that I’m NOT using my system to ‘predict’, but instead I’m using my system to ‘measure’ the reaction of the market. If the reaction is consistent with my plan, then I have a good idea where the market is going and trade accordingly. If the action goes opposite my plan, then I also know which way the market is going and I can trade accordingly. So many people get confused into thinking that a trading system is a predictor rather than a measurer. Sorry for getting off on a tangent, back to this week’s plan LOL.

 

Trading Plan for the Week: This week’s plan is very simple and it doesn’t involve any daytrading like last week’s plan did. Sometimes the environment just isn’t right for daytrading and this week might be one of those environments. I’m looking for a test of that 20.30 area and I want to gauge the market reaction there for a long trade and a larger move up toward 24. When the market moves to the 20.30 area, it has to make a decision. Do the buyers show their hand and make a big effort to support the market or do new high volume sellers come out of the woodwork to cause an overreaction to the downside and a possible washout or capitulation? If the volume is high on the down move, I’ll stay on the sidelines and let it fall as far as possible before scaling in. If the volume is light and it turns into a clear stop hunt, then I’ll start scaling in after the 20.30 test. Like I said, the point isn’t to ‘predict’, it’s to ‘react’. This week’s plan is for a long trade, the only question is where the entry takes place. I have no desire to short the market this week. While the odds of a down move might be high, the risk/reward on a short trade is horrible. Just because a directional move has a high chance of occurring, that doesn’t always mean it’s a good trade. It’s the payout odds, in combination with the directional move odds, that matter.

 

The open on Monday will set the stage for this week’s action. If the XOP gaps down big and then reclaims last week’s range, that’s a good sign for the bulls. If we open Monday and the first move is up for a test of 21, then I’ll probably back off and be really cautious. I haven’t seen any events this weekend that would cause a gap down, but the market wants that level and what better way to grab stops than to do it with an opening gap to panic the market. Give the Monday open at least 30 minutes to settle out before getting involved.

 

Individual Stocks: CVX is still having a battle at that 115 level, closing the week at 114.74. It looked like it had a chance to recover, but it hit a wall at the 50% retracement level of that big 7 day down move from 125 to 110. XOM continues to struggle in the 68 range and had a big rejection right on the 50 day moving average last week. If the generals aren’t going to lead, then this sector isn’t going anywhere. COP was my other big watch. The largest E&P went right to that 57 level and failed again. EOG and OXY look horrible as they continue to make new lows. Even the Permian darlings of PXD, CXO and FANG are all moving toward lows.

 

I wish I had two trades back from last week’s plan. The first was COG. I had a feeling the natural gas stocks might show some bounce, and they did. I had a 17.25 entry picked out for COG, but it dropped to 17.28 and then it got away from me. The second trade was the VLO long at 86.50. That one gapped past my entry and ran as high as 91.66. I was thinking there was about 10 points of profit potential in it and it has already moved half that, with more gains likely. I wouldn’t chase it here though.

The service names held up well, even with the lackluster earnings report from SLB. We get HAL earnings on Monday. I’m looking to pickup some HAL if the earnings report causes any kind of overreaction to the downside.

 

One name that has my eye this week is MTDR. That whole PE/JAG deal really seemed to set Matador off on a spike lower. I’m not sure what the thinking is here, maybe the buyout premium is being removed after seeing that sad JAG deal. It was near 20 after the SA attacks, it’s 12.50 now, and I think that’s an overreaction. I’m definitely interested in this one and will be looking to start a position if it gets caught up in any sector washout. I’m also still watching PE, but not as high on it as I once was. I think they really added some complexity and uncertainty to the picture with the JAG deal. I was looking for PE to test that 13-14 range, and I’ve still got some buy orders down there.

 

I’ll probably be a little less active this week while I sit and wait for the test of the lows. I DO NOT want to be early on this trade. The difference between a 17-18 entry and a 20 entry is HUGE, both in possible position size and percentage of profit potential on the trade. Most of my daytrading has been IWM and KRE lately, with XOP kind of being a wait and see for a swing trade setup to form. Be patient with energy stocks this week and don’t get caught in a washout.

 

 

Energy Equities Outlook and Trading Plan for October 14-18

Last week’s XOP action went about as expected with price staying within that 20.50-22.68 range. There wasn’t enough force or volume to auction outside that fair value range and this coming week could be more of the same. Price stayed in this range for the entire month of August and we may be looking at the same pattern for the rest of October and possibly some of November.

 

I think the most disappointing thing for me last week was that the XOP couldn’t even get past the midpoint of the range, even with SPY so close to all time highs. We had FED news (more “not QE”), good China news and even had more geopolitical issues with a tanker being hit by missiles, yet the E&P’s barely moved off of all time lows. The concern is that if we are having this difficult of a time struggling off the bottom with the overall market nearing all time highs, then what happens to energy when the overall market finally rolls over and pulls back?

 

This week the XOP is going to have to at least try to break above that 21.55 midpoint and make a run at the top of the range. If it fails to get past the midpoint, then we could get that move into the 17-19 range. There could be big supply in the 21.55-22.68 top half of the range and even more supply sitting just above the range in the 22.75 area. The SPY will be key this week. I don’t think the XOP can take out the 22.68 level without the SPY making new all time highs. In addition, the SPY will need to stay above all time highs for the XOP to have any shot at staying above this 20.50-22.68 range.

 

That Friday daily candle on SPY was a huge warning sign for the bulls, but I think price makes an effort to take out the all time highs this week. Watch that 298.74 spot, there will be a lot of bears playing short off that point. If the market takes it out, there’s not much to stop it ahead of ATH. There is a huge amount of liquidity sitting just over the market and they should eventually go get those stops. Most of that liquidity above the market is buy orders of players who are short.  If the market really is long here and looking for a move up, those orders will ignite a rally. If the market is looking to get short, those orders are the ideal place to enter. Either way, that level is a magnet that probably draws price to it this week. If the market gets there, it will provide a big piece of information for the rest of the month. My opinion is that the market runs and gets those stops and then reverses, putting in a big upthrust before turning down for a pullback into the 280 range. I won’t be shorting it though, as it could just as easily spike to the upside and blow the shorts out. There’s really just no good way to control risk on a short up here.

 

Looking at related markets, the IWM failed again at that 151 level and got rejected right at the 200 day moving average on Friday. It also gave up the 50 day moving average on Friday, two signals that things might not be so good with the smallcaps. The TLT had a nice pullback to the .618 retracement level and may be getting ready to turn upward again. GLD is also sitting on some support and could be getting ready for another move up. TLT and GLD have been moving inversely to SPY, so watch to see if those two start moving up, which could be a signal that SPY might be getting ready to turn down again.

 

CVX was an important clue this past week for energy and will continue to be my main watch for clues on the overall sector. It managed to reclaim that 115 level, closing at 116.17. It must stay above 115 for the sector to have any chance at moving up and out of the current range. COP was another clue, as it tested that 57 level, but failed. It will have to take that out and maintain it for the sector to move up. The services stocks SLB and HAL are still sitting right on the bottom and will have to get some kind of bounce to help the sector. Refiners MPC, PSX and VLO are looking good. I didn’t take that VLO 86.50 long trade, as it gapped right past my entry point on Friday. I’d like to have a second chance on that one.

 

One sector that kind of has my eye right now is the group of natural gas stocks, specifically COG. There hasn’t been a signal for a defined turning point yet, but I’m feeling like these could be ready for a move up. I’m considering an entry on COG this week using 17 as a stop. I’d like to get an entry close to 17.25 on it.  MR is another favorite, but very risky. I’d like to see that one move down under 3 for a scale in.  EQT, AR and RRC are also possibilities, but I like the quality name in COG.

 

This week’s trading plan – I posted the current XOP chart in the Twitter thread with this week’s trading plan. (That chart is also over on the right side of this page in the Twitter sidebar). I know it looks a little confusing, but it’s basically just a diagram of the points where I will be trading. It’s really just the same 20.50, 21.55 and 22.68 points from last week, but there are so many more options for trades this coming week.

 

Option 1: XOP opens the week at 21.55 (A) and makes a move down to test the bottom of the range at 20.50 (C). That’s a long for me in that circle C depending on how much volume there is on the move down. I’d like to ride that trade back up to the center circle of the range at 21.55 (D) and then evaluate to see if it might break through or turn back down to take out the lower range.

Option 2: XOP opens the week at 21.55 (A) and makes a run at the top of the range at 22.68 (B), fails and retraces back down to the center of the range at 21.55 (D). At that point it has to make a decision, either 21.55 holds for a bounce and run at the top of the range OR 21.55 fails and it falls back to the bottom of the range at 20.50. If you follow the white lines on the chart, those are the paths I’m watching.

Option 3: After one of the above two trades happens, I’ll then be looking to get involved back at the center point at 21.55 (D). The trade decision there will depend how price was rejected at the top (B) or bottom (C) of the range and the resulting momentum and volume on that reaction.

 

The circles on the chart represent the only places where I want to enter. I don’t want to trade anywhere outside those decision points because anything outside those points is going to be random chop. I’m once again looking for price to remain inside the range this week, just as it did last week. The trades at the circles on the extremes will be breakout failures for price to fall back into the range. If price does find enough force to clearly break outside the 20.50-22.68 range, there will always be a second chance to get on that ride when price retests the range. Just like last week, I’m not looking to short any break to the downside, I’d much rather let it collapse and then put on some longs in the 17-19 range. If price is clearly strong enough to break out the top of the range at (B), it will usually fade back down and test that 22.68 range top for a long entry. That long trade depends on the volume of the 22.68 retest.

 

This week should be full of opportunity, just so many ways that this market could go within a very defined structure. That structure makes risk control much easier and the profit targets are much more defined as well. Those things make the risk:reward on each trade easy to work with. It’s a beautiful sunny day here, and it’s time for the Sunday usual. Hope everyone has a great trading week!

 

Energy Equities Outlook and Trading Plan for October 7-11

It was another disappointing week in energy, as the XOP moved all the way across the August range to touch the lows around 20.50. It did manage to hold, but the bounce was very weak and failed right at the middle of the range around 21.55. It spent much of Friday under 21, and probably would have closed much lower had the SPY not had such a big run to close the week. I don’t have much confidence in energy for the rest of the month of October. I still think this group takes out the lows and completes a final washout to put in a bottom for this latest down cycle. That washout probably takes the XOP somewhere down into the 17-19 range in the next month or so, especially if the SPY tops out in this 298-303 range for a third failure at new all time highs.

 

I don’t think this sector turns until there is some real pain (even more than usual) and some type of capitulation event on extreme volume. The larger money just hasn’t been lured into the sector at theses prices, as I think they just don’t see value… yet. Looking back, it is easy to see now that the spike to 26 on the geopolitical issues was completely wrong. It was totally ignored, and I think that is a sign that a capitulation event is on the way. The real problem here is the relationship between XOP and SPY. There’s a chance that a capitulation in energy coincides with the overall market finally turning down for a big pullback. In that situation, we probably get the dreaded “L” type pattern for XOP and an accumulation range that lasts for quite awhile. If the SPY can hold in and move to new all time highs, we could get lucky with a “V” shaped pattern in energy.

 

I really don’t want to see an “L” shaped pattern. The XOP is almost impossible to daytrade in the lower 20’s since it really has no intraday range at all. Trying to trade it down in the teens would probably force me to abandon it and trade the XLE. Most individual stocks have fallen so far that they don’t have enough tradable range either. I’m on a per share commission structure with Interactive Brokers and every time XOP drops in price, that requires more shares to take the desired dollar amount position, and it’s dropped to the level where buying the amount of shares I want is getting really expensive. Not to mention that it is now so thick that trying to use limit orders on the bid or ask has been difficult and many orders aren’t getting filled, which then forces me to pay the spread to get a position. Not sure how much longer I can daytrade this down here with these extra costs.

 

The 50-52 range for WTI will be big this week. I get the feeling that some type of intervention or support from OPEC could occur at any time. If that 50 level cracks, be aware that they could step in, which is a real danger if you are playing short for a break to the downside. There’s a lot of room to fall, as WTI dropped all the way to 42.50 in December. The E&P’s are trading way below their December mark when oil was 42.50 and I’m really not sure what would happen if we again dropped to that 42.50 level. The only real positive I see is that this 50-52 area would be a perfect place to put in a bottom. If 50 did break and it turned into a quick stop hunt and reclaim of 50, then that’s a clear sign of big demand under the market and we could get a sharp move back up. Any drop under 50 this week will provide some great information.

 

The big name from last week was CVX. That 114-115 level was a big one, and it broke easily with CVX closing at 113.85. This pattern in CVX is much like the pattern of WTI above. The real clue here is if this move under 114-115 turns into a stop hunt and reclaim. If CVX can reclaim the 115 level, it could make a sharp move back toward 124, especially if the SPY moves back to ATH. I’m watching for a very light volume pullback early in the week to maybe the 111-112 area. If it bounces there on light volume and takes out 115, then it can run. If the volume is high and/or it fails again at 115, then it is probably looking at 107.50 for the week. The key here is the volume on the retest of last week’s low area. The other name I was watching last week was COP at 57. It completely failed and finished at 53.50. That could be a clue that CVX has no shot at reclaiming 115.

 

Looking at other markets for clues, the most important one is probably the small caps, which represent the domestic economy and consumer. IWM held the 145 area and has been in a tight range of 145-160 since the start of the year. The test for IWM is 151. If it takes that out, it could run back to the top of the range, but if 151 fails, then 145 probably fails too. There’s a huge gap under 145. The other clue is XRT. Retail and energy are both consumer dependent sectors. Those two charts have been moving together for months, but have started diverging lately. Retail has become a little stronger (or has XOP become that much weaker?) and may be signalling that the consumer is holding in with continued spending, which is also very good for oil.

 

This week’s trading plan: There’s a defined range playing out in XOP between 20.50 and 22.68. I’ve posted the chart a few times on Twitter, and the movement has been fairly dependable. I’ll post the updated chart again in the same Twitter thread as this week’s trading plan. The three main points to play off of are 20.50, 21.55 and 22.68. Any trade should be around one of those points. I don’t want to play anywhere else in the middle of that range, it’s either the two extremes or the exact center. I prefer the two extremes.

 

If the market starts next week off with a test of 20.50, then I’ll probably give it a play long for a bounce back into the range, likely back to the middle at 21.55. The 20.50-22.68 area is fair value and it will probably take a good bit of force to auction it very far away from this fair value. Keep an eye on the volume of any auction testing the 20.50 area. If the volume is light, then a long play back into the range is likely correct. If the volume is heavy, then we could be looking at an initiative move away from fair value and the start of a trend toward some other area of fair value lower.

 

If the market starts the week with a move back to the middle of the range at 21.55, there are two trade options: either play it short for a move back toward the bottom of the range at 20.50 OR play it long for a break of 21.55 and a move to the top of the range at 22.68. I have no idea what happens at 21.55, but that isn’t really the point. These trades are just math and odds on payout versus risk. I’m just looking for some place I can risk maybe 25 cents and get a $1 move. I’m not predicting which way the market will go (as I really don’t know) I’m just looking for spots where I can get a bet down with 3:1 odds. This type of range is a great place to do that.

 

The next trade I’m looking for is up at 22.68. It’s basically a mirror of the same trade I’m looking for down at 20.50. I’m just looking for fair value to draw price back into the range on a very light volume auction test outside of 22.68. I’m simply looking for a failed breakout. If the volume is light, then it probably falls back into the range and returns to the 21.55 center point. If the volume is heavy, then it could be an initiative move toward some new area of fair value higher.

 

In summary, I’m trading with an angle for price to stay within the 20.50-22.68 range. I’m looking for failed breakouts at the extremes and price to return back to the middle. Price stayed within this same range for over a month in August and I think there is a good chance that it could stay within this range for another month extending throughout October.

 

If we do get a breakout at either extreme, then there is usually a second chance to get in on that when price makes one last attempt to get back into the range and fails, at which point the volume will pick up and it will move sharply away from the existing range. For me, I don’t have much interest in playing a breakdown under 20.50 for a short. My preference on that move is to just let it fall and hope it really collapses down to 17-19 and then step in for some longer term long plays. I don’t see much chance of XOP breaking 22.68 to the upside, but if it happens, there’s probably plenty of time to get in for that ride when it pulls back to test the 22.68 point from above.

 

The point here is you just have to have a plan and know how to attack the price range. Either play for price to stay within the range, or play for the breakout. Anyone who doesn’t have these two plans separated ahead of time will probably panic in the excitement of the move and choose the wrong option. Know what you are looking for and know what you are going to do BEFORE it happens.

 

As for individual names, I’m still watching EOG as my favorite play. If the XOP does have a washout, EOG is going to be my primary target. I actually like all the Permian names as well: CXO, FANG, PXD, PE and MTDR. Parsley is probably my favorite choice of the group. I’m also watching SLB near 30 in the services subsector. One other interesting play is VLO at the 86.50 level. It has been probing that level for several months and if WTI does take a dive, the refiners could get a spike on decreased input costs. I think there could be $10 worth of move in VLO.

 

It’s 65 degrees and cloudy here, looks like it might rain, but that’s not stopping a trip to drink some wine and listen to some live music! Hope the rest of your weekend is great. Good luck this week, and definitely have a plan of attack going in.

 

 

 

Energy Outlook and Trading Plan for September 30 – October 4

It’s time to get very concerned about the future of E&P stocks. There has been non-stop selling every day for the last two weeks. Who is doing all this selling way down here AND right into the face of incredible geopolitical issues? Pull up an XOP chart and we’re at all time lows on it. Why sell or short here? What do they know? I thought we might get some type of bounce in energy this past week, but we got nothing and closed almost at the lows of the week. If last week’s total dismissal of geopolitical risk was a loud signal that energy stocks are sick, then this past week really confirmed that in a big way. I’m getting more bearish on energy each day and I really think there is a big drop coming, something possibly in the 17-19 range on XOP. I’m not sure of the timeframe, but I think it could happen within the next six weeks. I see absolutely no reason to get long in energy for any trade that might last longer than a couple days. There are some great smaller waves to trade, but the tide is still down for longer term investors.

 

I think the key factor for energy right now is the slowing economy and recession risk (on the horizon), and the steep drop in demand that could result from those conditions. The supply is still there, even with the geopolitical events, and E&P’s can flip the switch at any time to increase production. We saw another handful of rigs cut this past week, but the DUC’s are still out there. I saw a great chart the other day and I wish I would have saved it, but it showed the 2015 drop of about 50% in rig count, but total production was only down slightly. As technology advances and the backlog of DUC’s grows, production really has less and less to do with actual rig counts.  There are so many things that are different these days in energy. These companies have a completely different set of drivers than they did in the past.  These things put a real cap on price. Unfortunately, there is no switch they can flip to increase demand and I think that’s how the market is positioning now.

 

Gasoline prices saw a spike up over the last two weeks, but that wasn’t demand driven, it was panic driven. One thing that I’m sure the government is keeping an eye on is how rising gas prices caused by non-demand factors will contribute to the slowing economy. I think there is likely a hidden agenda for the government to take the course of action that will keep energy prices low, which doesn’t help the future for E&P stocks.

 

As for the overall market, I looked through charts in every sector for an hour and almost everything is setup to start a move down. I can only speak for myself, but I’m starting to get burned out on all this headline risk and all the Tweet risk just spiking the market in all directions. I can only guess how big money is feeling about this. The market can only take so many surprise events until traders give up and start to go risk off. I could see this market tanking as traders are just tired of getting blindsided every day, especially in October, which isn’t a great month anyway. Traders could pull in and protect the gains for the year. There was some talk in the last month about rotation to less favored sectors as a way to make some quick year end gains, but those trades really fizzled out quickly. There could have been way more supply in those areas than big money expected and the potential for gains was a lot smaller than they expected.

 

I’m watching the 280 area in SPY. I think we could be looking at a move to that level in October and possibly 270 on an overreaction or unknown event occurring. I don’t think the market is ready to evolve into a bear market, but a healthy pullback could be coming. Small cap companies (IWM) clearly rejected the 160 level again and they never even got close to making new highs like the SPY did, which is an important negative divergence. The QQQ also had a negative divergence with SPY, as tech failed to take out the August highs on this latest move up. Technology, especially software, is showing cracks. So many of these funds and ETF’s are just stacked with tech that any move down there will have an outsized effect on the market.

 

If you look at all the E&P charts, they show the exact same pattern. Almost everything spiked two weeks ago and have since moved straight down every day with many sitting near the August lows. All geopolitical gains have been given back. I’m looking for the whole group to move back down and test August lows sometime in October. I think there is a good chance that those lows break and we finally get that high volume capitulation that has eluded us so far.

 

This week’s trading plan: I think there is a bounce coming. I also thought that last week, so I was wrong. The important spot for me this week is once again that 22.68 level. Price really tried to get back above it on Friday, but just didn’t have the demand. If price can open Monday and break and hold that 22.68 level, I think there is an opportunity for a quick long trade back toward the 24 level. Just don’t get caught chasing with FOMO. If the entry is missed, just let it go because the move up could be met with supply very quickly at any time. The trade can use 22 as a stop, maybe even last week’s low of 22.23 if you want to size up and use a smaller stop. If the market takes a shot at 22.68 and fails, then things will probably get ugly for the bulls.

 

On the downside, I’m watching 21.55. Remembering way back, that was the level where OPEC stepped in and tried to support the oil market in August. Price reacted off that level several times throughout the month and I think there will be some memory there on the way down. I’m not really interested in shorting the XOP this week because the headline danger is just too great and risk is difficult to control with that. If the 21.55 level breaks, then it’s probably going to be a quick drop back to the August lows around 20.50. If I had to put odds on which way the XOP goes next week, I’d probably say it’s a 70% chance it ends the week down and about a 30% chance it ends the week positive.

 

If no quick long play develops on Monday, I’m probably going to move to the sideline in energy for the rest of the week. The IWM and KRE are providing a much better trading environment right now, so I’ll be trading there. I have no problem with simply waiting things out in energy to see if we get that severe drop. My larger goal is to get some money into energy with a long term outlook. If we capitulate down to the 17-19 level, I’d love to put some money to work there for a longer term play.

 

There are a couple of individual names that are starting to get attractive on the next dip down. I like PE and really gave some thought to taking a shot in the upper 16’s on Friday for a quick swing long, but the overall market just talked me out of it. If PE drops to the lower 16’s, I’ll start scaling in long. I also like EOG near 70, FANG near 82 and HAL near 17.25. One stock that I would avoid is NBL. Their Leviathan production facilities and transport facilities near Israel are vulnerable to an attack if terrorists want to strike something American owned to send a signal.

 

The most important stock to watch this week is CVX.  It broke the 50 day moving average on Thursday and then gave up the 200 day moving average on Friday. That’s where the larger money has been hiding out in energy and it looked shaky this week.  Sometimes that 50/200 combo can be the first warning that the longer term money is on their way out and could possibly stampede for the door. I’m watching the 114-115 area for a signal on which way the sector might be going. If  Chevron breaks below that, I expect that the rest of the sector will follow. XOM is the weaker major and it has clearly been rejected at the 200 day moving average a couple times this summer. COP is another one of the big money favorites at a pivotal point. That 57 area has been tested a few times, so keep an eye on how it handles the level, especially if it confirms any CVX move down. Also, XLE turned right at the 200 day moving average on the gap up two weeks ago and gave up the 50 day on Friday. The 200 ma has been a very dependable signal for XLE over the last couple years.

 

In summary, the only play for me in energy this week is a very quick long play if 22.68 holds. I’m not interested in shorting. If the long play doesn’t develop, I’ll be trading something else until things settle out in energy. I just don’t like the sector right now and getting blindsided almost every day hasn’t been fun or productive. I’d rather trade something easier. I think there is a big move down coming, just have to be patient enough to let it happen and then profit from it. Good luck this week and keep those stops tight.

 

Energy Outlook and Trading Plan for September 23-27

What an interesting week, I didn’t realize that it was possible for so many people to be so wrong over a single event. The mass media said it was a historical “world changing” event of terrorism and destruction that would dramatically change the energy sector and inject a huge “permanent risk premium” into the industry forever and ever.

And we gave it all up and closed as if the event never happened at all…

How did so many people get it so wrong? Are they just early (but still very, very wrong)? And how are those same people still beating the same dead horse a week later after the market has clearly told them that their opinion is wrong? I have no doubt those guys are waking up today on Sunday morning and checking Twitter for another headline, hoping. Not saying that they can’t be right if they stay solvent and hold on long enough, but as things exist NOW, the market is saying they are presently wrong. There’s a difference between your opinion of a situation and the market’s opinion of a situation. And the market is ALWAYS right.

 

I had last week’s trading plan pegged almost perfectly. I was looking for 26-27 on the news for a great short opportunity, and that’s exactly what we got. Unfortunately, I didn’t trade it very well and got greedy on my entry. I had planned on starting a scale at 26, but I got caught up in the media hype about how huge this event was and I pulled the plan and decided to wait for the overreaction and Tuesday gap up to 27, which didn’t happen. I made the classic mistake of letting someone else talk me out of my plan. It’s one of the worst mistakes you can make in trading. Always stick to your own view and NEVER let an outside influence cause you to do something outside the plan.

 

I love Twitter, it has gotten me through many boring trading days, but this week it was pure poison. At this point, I think Twitter may not be in the best interest of my trading. It’s entertainment, a distraction, nothing more. This entertaining distraction cost me a great trade this week and that just can’t happen again. I think the members of energy Twitter don’t realize what a closed loop microcosm of a system we live in on this platform. It becomes an echo chamber of so called ‘experts’, very few of which actually trade real money. Most of these people don’t realize the difference between real world events and the market’s perception of those events. When you live in this loop daily, you start to think energy Twitter IS the market, well it isn’t. There’s a whole world and market out there and this week clearly showed that neither of them cared one bit about the ‘world changing’ events in out little loop. It all comes back to the fact that if you want to trade and not become part of the herd, then you have to think for yourself. I slipped and didn’t do that, and it cost me.

 

So having made that mistake, where do we go from here? Common sense would say that the market has spoken and the message delivered was clearly that E&P stocks are still sick and broken. As I wrote last in last week’s plan, the shale companies just don’t move based on the factors that used to move them. Geopolitical premium isn’t the game anymore, things have changed and shale has it’s own set of unique drivers, many of which aren’t oil price related. I’m sure there will be follow up headlines and we will see more spikes, but the bigger picture seems to be saying that while these little waves up may happen periodically, the larger tide is still down. I don’t know how far down the bottom is from here, but I think it may be further down than many people are expecting. The only thing that pulls energy out of this decline is a China deal, more attacks that are exponentially more destructive or an all out war. And even if those do happen, they may not overcome the larger negative of an approaching recession and falling energy demand. This, or course, is all just my opinion, but this past week was about as clear of a signal as the market could have given that the sector is still not ready to turn. Maybe that changes, maybe it doesn’t, all you can trade on is what is happening NOW and what the market is telling you NOW. Doing anything else is just wishing and guessing.

 

One other point about oil price, this latest spike up was a golden opportunity for E&P’s to put on some great hedges and I’m sure many did. The problem with those hedges is that it allows them to keep ramping up production with price protection. More oil supply isn’t what price needs right now and this hedge opportunity may lead to a supply related price cap in oil. I know the rig count dropped big, but it’s the total production you want to keep an eye on. All those DUC’s are out there just waiting to be completed.

 

This week’s trading plan: I know after reading all the above that you probably expect me to say short the hell out of everything energy related, but the early part of the week may actually offer some quick and attractive long trades. The biggest point of interest for me this week is the ~22.68 area. The XOP formed a nice little base for the month of August which probed that area several times before breaking through and it should drop down and retest that area. Will there still be demand willing to defend that area? I don’t know, but it definitely offers a nice risk/reward proposition to find out. If it fails, you will probably know it by any dip under 22, so the risk is about 75 cents. If it does hit bottom around ~22.68, then I think we make at least one attempt to get back into last week’s range somewhere in the 24-24.50 area, which is about $1.75 worth of profit, so the payoff on the trade is about 2.3:1.

 

But let me throw one conspiracy theory out there first. What if the August base was caused by big money who had decent information that some type of attack was possibly on the horizon at some point? That month long base accumulated enough stock to produce about a $2 run up in price, we instead got $3.50. Was the continuous decline last week all those August accumulators slowly taking profits?? If it wasn’t them taking profits, then who could have possibly been doing all that selling directly into the face of  incredible geopolitical risk?? Just a little something to think about.

 

There are also related markets that are offering energy clues. I wrote about the XRT and IWM approaching important levels last week. The XRT completely rolled over from 44 down under 42. That’s a measure of retail and consumer spending. That’s one of the best recession measures out there. The other economic health measure is the index of small domestic companies represented by the IWM. It was sitting right at a breakout point at ~159, but it also faded all week down toward 155. Neither of these recession linked items made any effort at all to break out. Keep an eye on those two this week and see if they make any attempt to break out or if they simply continue to fade with energy.

 

If there isn’t an XOP pullback and/or the long trade doesn’t materialize, then I will be sitting on the sidelines evaluating the next run up and planning another short trade. XOP has already dropped about 10% from the 26 top and I don’t see much reason to be short down in the 23.50 area, as the risk/reward is terrible. One headline could completely blow you out of the water and the reward on the trade is minimal. Taking a short at 23.50 probably exposes you to $2 of risk with less than $1 of reward – not good odds at all and not a bet worth taking. There should be a clear signal on the next approach and test of 26. It would be a great risk/reward spot for a trade, but the better play might be to let it break through and test the 27-28 area up around the 200 day moving average (which is also a decent liquidity gap from May and the two low points in February and March). 26 and 27.50 will probably both be good spots to put on a short.

 

One other idea on a short up in the 26-28 range, all the existing shorts over the last couple of months got cleared out last week. There probably isn’t anyone short energy right now after the clear trendline break which was followed by the geopolitical gap up. It’s very doubtful that shorts rode that situation out by holding. Their stops were probably all triggered, which was a big part of the gap up. Eventually, all those shorts will return to the sector, which likely caps out any profit potential on the long side. The last couple of weeks used up a lot of buying power with shorts covering their positions. That’s a great deal of buying gone and a great deal of angry shorts ready to do it all again.

 

The Twitter crowd will continue to beat the same dead horse this week, so be careful. If the market shows any signs of moving up, their chatter will get louder as they become more convinced that their opinion was right all along and that they were just “early”. There’s a good chance they get proven wrong a second time. But as always, this is a market of irrational humans we are dealing with, so anything can happen, from 28 to 20 on the XOP. At this point, nothing would really surprise me. Good luck this week and remember that stops are your best friend.