Weekly Energy Equities Review, Market Outlook and Trading Plan for May 26-29

It was supposed to be a volatile week, but it turned into a real snoozefest with very little trading opportunity. I felt good about the SPY move from 279 to the 296-300 area, but the flatline there was really bizarre. At this point, it’s difficult to determine who is in control of this market, but I’ve got a pretty good line on the remaining price paths and they should all offer good trades. The important thing now is to avoid getting locked into a prediction about which way this market should go. Let it tell you which way it’s going and then follow it.

 

I guess the easiest way to write things up this week is to start with the captain obvious statement that the SPY is going to either break up or down out of this 278-298 trading range. The only thing I feel certain about is that the final move out of this range is going to be a really big one. But first, let’s back up to last week’s analysis and try to figure out why it didn’t play out to the end. The plan last week was for the market to take out 287 and move to the top of the range in the 296-300 area where the range was supposed to end with an upthrust pattern at 296-300 consisting of all buyers getting filled and larger players using that liquidity to get short for the next leg down, except we never got the leg down. The buyers and sellers are still fighting it out as price remains trapped in the 296-300 upthrust area. SPY made no serious effort to break to the upside and also no effort to move back to the middle of the range at 287. So the real question is this:  Why is price still sitting trapped at the top of the range?

 

If we know why price is still sitting there, then we can make a good odds probability estimate about the next move. There are a few options why it might still be there. The first (and easiest) explanation is that the upthrust pattern is simply taking a very long time to complete. The market could be very balanced with a large number of people who are buying thinking price is going up and an equally large number of short orders looking to establish for the next leg down. Maybe the bears are looking for more shares to short than the bulls are willing to take, and so they wait and keep on filling the bucket? The longer the range, the larger the breakout. So one possibility is that last week’s plan was correct and the next leg down is coming, however it’s just taking forever to fill the large bearish orders and therefore taking longer to play out than expected.

 

The second option is that this entire range since April is a re-accumulation rather than a distribution. It’s my opinion that it is a distribution, but the patterns often look very similar. I could be wrong about this being a distribution. If I am wrong and this is instead a re-accumulation, then last week’s action makes some sense. In an accumulation, the buyers use the range to absorb every share they can get their hands on to establish a position for the next leg up. The buyers may have soaked up every share lower in the range and are now sitting at the top of the range trying to get every last share they can before the breakout and next leg up. If this is the case, then this range likely breaks to the upside soon for a large move up to new all time highs.

 

The thing that makes me think this is not an accumulation is the move from 279 straight to 298. If someone wanted to build a very large long position, then why move price that fast? Why not sit and accumulate more in that 20 point range, especially toward the lower side? Also, why accumulate all this stock just under 300 for a move that might go just another 30-40 points, which is only about 10%? The easy accumulation was off the bottom where longs made about a 30% return already. Trying another accumulation up here is just a lot of downside risk being assumed at 300 for such a small future reward on a large accumulated position. Someone wanted the price at the top of the range quickly and it’s not because they wanted to buy a big amount of stock there for a small run up. I think they pushed it there because they wanted to unload, which would be distribution, not accumulation. But maybe there just weren’t any shares available lower and things just got unbalanced quickly, resulting in the flash move from the bottom of the range directly to the top of the range at high speed. It’s possible, but not likely, only time will tell.

 

The last option is that maybe this 278-298 area is simply fair value and we are destined to sit in this range for a few months. That could explain why the volume was light and the movement was minimal last week. There really isn’t that much supply overhead, but there isn’t that much demand underneath either. Basically, everyone sold in May and walked away and we have reached normal slow summer action. In that case, the market likely continues to move sideways for several weeks with little tradable action. The range just continues to build for an even bigger breakout toward the end of the summer or early fall. Maybe the threat of the second wave of virus cases has put a top in this market here around 300.

 

In summary, we are looking at one of three choices: 1) a developing distribution range and upthrust pattern which is in the process of completing for the next leg down, 2) an accumulation range that is in the process of completing for a leg up, or 3) a dead market stuck in a range for the summer. Most of the above is larger timeframe theoretical opinion, but each choice does have technical tradable opportunities which I’ll cover later in the trading plan section of the writeup.

 

Energy XLE XOP XOM CVX WTI

Just as the SPY continues its range, energy stocks are also grinding sideways creating their own range. The XLE remains in this 35.50-39.50 area which started back around April 28. The ETF added about 6.8% this week, but 5.7% of that gain was the opening price gap up on Monday morning. Price stayed in a $2 range the rest of the week with very limited trading opportunities. I know I haven’t Tweeted much about energy this week, but there just hasn’t been much to say. There have been a few moves in the first hour, but almost every day flatlined after the first hour offering nothing. The positive news is that price is accumulating right at the top of the range, which suggests it might be getting ready for a breakout into the gap to 42. It’s probably going to follow SPY this coming week, so let the overall market lead before playing a breakout.

 

Technically, 38 seems to be good demand in XLE. Price tested that area early in the week on Monday/Tuesday and then again at the end of the week on Friday morning. It held solidly on every test. I’ll be watching 37.69-38.00 this week for another test. If that area fails, then price probably goes right back into the 36-37 range that has been in play during this larger range. On the upside, the 39.00-39.50 area was tested several times throughout the week and remains the spot to watch for the breakout.

 

XOM finally had a better week than CVX. It managed to increase about 6.2%, while CVX only added about 1%. About 5.6% of the weekly gain in XOM was from the Monday morning opening gap, as it mostly traded sideways after the Monday open. Both majors are still stuck solidly within about a 10% trading range. XOM has been rotating 42 to 46, while CVX is rotating 87 to 95. At this point, it’s impossible to determine which way these are going to break. I’ll be watching the lower boundaries of both ranges this week.

 

Energy stocks can’t blame their lack of upward movement on oil prices. The stocks diverged from the commodity this week with WTI opening the week around 30 and grinding upward almost 10%, while XLE was only up about 1% from the Monday morning open. The gains for the week in the XLE consisted almost entirely of the Monday morning opening gap up of ~5%. If you assume that oil prices and the overall market should be moving in the same direction, then maybe WTI is predicting a breakout for SPY?

 

The refiners are once again on the brink of breaking out. My favorite of this group is VLO. It managed to push just above the top of the range at 67 and then closed the week with a strong day on Friday ending at 65.68. I’ll be watching this one for another break above 67. MPC and PSX are showing almost the same exact pattern and also present trade possibilities.

 

The services names could present some opportunity this week. HAL and BKR have already broken out, but SLB has an excellent pattern for a trade this week.  I’m watching the 18.50-18.70 area for a possible entry long to get back into that March 9 gap up to 24. The rig count just keeps dropping, but the services names are managing to trade sideways through it. It’s possible that all the service names have bottomed well before the rig count. Speaking of rig count, one name that I’ve been watching for a trade is HP. It has been in a very well defined range since the March 9 collapse. There’s an area at 15.75 that can be used as a concrete stop, so I’m looking for an entry as close to that as possible in hope that the rig count bottoms out and things start moving in the opposite direction. An entry around 16.75 could provide a good spot to try and capture a breakout from 20 with minimal risk.

 

Trading Plan for the Week – The market is closed on Monday, so it’s only a four day trading week. I figure Tuesday is going to be a very difficult day to trade as not everyone will return to the market this first week of summer. If we are looking at low volume this week, then I’ll probably start the week on the sideline and again start watching that 296-300 area to see if there is any sign of a range break. I just don’t see much point in getting involved while we are in this range. Same for the XLE 38-39.50 range, it just isn’t worth getting chopped up all week in a directionless market. Some weeks just don’t offer any trading opportunity, it happens.

 

The one SPY move I do not want to see is a huge gap up open on Tuesday. If I see it, I’m moving to the sideline. I was looking for a big gap up and failure last week and this week presents the same setup. If the gap up happens, there’s no reason to chase it. Just let the market go and wait for the pullback to retest the 296-300 breakout area from above. These huge gap ups at the top of a range are where most breakout traders get trapped, and as I discussed above this could very much still be an upthrust pattern leading to a leg down. If it gaps up, don’t chase it.

 

So let’s assume we start the week with a little move down in SPY to the lows of last week. If that move causes XLE to open below the 38 area, my first trade is going to be a long when price reclaims Friday’s lows at 37.69 for a ride back to the 38.50 area. If price fails to get back into Friday’s range, then we could be looking at a move to close last week’s opening Monday gap from 36. I’m not interested in trying to short that move. If SPY opens the week with a gap up, then I’ll be on the sideline until XLE manages to break 39.50. There’s just no reason to play within last week’s consolidation, it’s just going to chop you up.

 

As for SPY itself, it’s really the same trade outlook. If it tests last week’s lows I’ll be looking to get long with a fairly tight stop. If it looks like it’s going to fail to reclaim last week’s range, then I’ll stand aside. I don’t want to be short this week in a low volume market, because you can get trapped quickly in that kind of environment.

 

I discussed the SLB and VLO trades above. I’ll be looking for breakouts from both of those. The key on these two trades is the need for some volume on the breakout, otherwise the breakouts probably fail.

 

I really think this week is going to be a wasted one with very little opportunity in energy. In the meantime, I’m working on a daytrading system for the XLV this week. The XLV could also setup for a nice longer term play. On a longer term basis, I’m looking to establish a long position with a stop around 98.75 for a run back to 102 and a possible breakout. I like this sector for the next six months. I think this virus situation has made people realize how important healthcare is and how much work we have to do to bring our system up to better standards. There will be a  lot of money thrown at the healthcare sector over the next couple of years and there should be some great trading opportunities in the sector.

 

I also still like the financial sector and I think there are some good setups there this week. If the SPY is going to breakout, then the XLF must lead the way. There are a handful of financials that are sitting right at the top of their ranges and seem ready for a breakout, especially if the SPY cooperates.  My favorite trade in financials this week is WFC. That bank is tied a bit to the mortgage industry and has been hit a little harder than the other major banks. It seems like the housing industry could be looking up, as the ITB has been green lately and looks to be heading back to the February highs. The XLRE could also be ready for a move higher. I’m planning to get long with a stop just below 23.92. That move last week really looks like it could be a retest of the spring formed in the prior week. If it is, and it holds, then WFC could get back in the accumulation range and make a move back to 30. It’s a huge opportunity as you could probably risk 25-50 cents for a 5-6 dollar return.

 

If the financials do break to the upside this week, then you want to shift focus to the GDX for a short play. The miners were weak with 4 out of the last 5 days being solidly red. The financials and miners continue to move inversely, so watch them both for clues.

 

The casino stocks have been a great trade so far. I’m still long MGM from 13.13 and have been in and out of PENN a few times. PENN is the strongest of the group and I don’t see any reason why it can’t hit 40. I want to find an entry into LVS and WYNN this week. LVS probably has the better pattern with an ascending move from 35 to 50. If they start the week with any type of move down, then I’ll be looking to get long LVS around 45 and WYNN around 75.

 

The last trade I’m watching this week is IWM. I’m playing for a breakout of the 135 level for a run to the 141-142 area.

 

It’s important not to get impatient this week. This is considered the first week of summer trading by many and after all the volatility lately this could be one of the slowest summers ever as everyone just takes some time off to see how the real world settles out. Don’t force the action this week. I’m working on the XLV daytrading system in the background this week and will be glad to just stand aside during a choppy, low volume first week of summer. Good luck this week and be patient.

 

Weekly Energy Equities Review, Market Outlook and Trading Plan for May 18-22

The week ahead could be the most volatile environment since we hit the bottom back on March 23. I posted on Twitter early last week that the market is setting up for a run at 296-300 and it continues to look like that’s where we are headed. Many will think that this move is bullish, but it’s probably the last thing you want to see if you are a bull. It’s likely an upthrust pattern which is usually the last move in a distribution and leads into a big leg down. I don’t think that leg down will take out the lows, but it could go pretty deep. As you guys know, I’ve been bullish lately and I think the bottom is in, but the bottom is still a process, not a single point. That process continues this week.

 

So what likely happens this week? The SPY had a great run off the March 23 bottom, but this range that started back on April 20 could be a distribution created by the buyers who stepped in down at that level. They bought a lot of stock down under 240 and could be distributing that stock and booking their profits. It’s starting to look like a classic Wyckoff distribution pattern. The problem here for traders is that sometimes a distribution pattern can be mistaken for a re-accumulation pattern. There are two choices here, either this market is going to distribute and then take a hard leg down OR this is a re-accumulation and these shares are being absorbed by large names for the next leg up. I’ve been bullish, but I think what we are seeing here is a distribution which leads to a move down within a higher timeframe accumulation pattern.

 

So just imagine this situation, you are a large fund and you bought the lows down around SPY 220-230. You have a huge position and a matching huge profit, on paper, which you want to cash out because you can clearly see that the economy is horrible and things aren’t going to snap back to normal. We’re approaching 100,000 dead, 30 million people out of work and the consumer is scared. You are probably up 25-30% on all your positions. What do you do? You want to sell. That’s the distribution part of this pattern. You can’t dump them all at once or you kill the price, so it has to be done slowly within a range. And after you sell all those longs in that distribution range because you think the economy is bad and the FED is running out of options, what do you want to do? Of course you want to get short. Where do you find the most liquidity to get short at the best price? You find that liquidity in the 296-300 area.

 

What’s so special about the 296-300 area? I posted to watch the 287 area this week because that’s the fair value area (or point of control) for this distribution range which started back on April 20. It’s basically the middle of the range. We closed almost right on it Friday. The high of this range is roughly 295 and the low is around 279. If your timeline is like mine, the bears are everywhere and they are eager to short this market. Most of them have been building large short positions in this latest range and have put their stops just over the top of the range in that 296-300 area. That’s where the liquidity is. If you wanted a big short position at the very best price, all you have to do is drive price to 296, activate those stops (buy orders) and get short on them at the top of the range. In addition to all the buy orders from the current shorts, there will also be a huge group of bullish traders who will be buying the breakout. If you want to build an even bigger short position, you sell to those breakout traders. Once the shorts have covered and every last breakout trader has bought, then what happens? Straight down we go because there’s absolutely no demand left to support the market. In addition, the larger players will start selling even more to pressure the market to move in their favor.

 

It sounds like an easy trade, right? But, sometimes when you think you see a distribution forming, what you are really seeing is a re-accumulation. That’s the trick here on this current market range. The key this week will be determining whether this latest range is a distribution or a re-accumulation. Either way, the telling action will be up at 296-300. If we are looking at a re-accumulation, then the market will breakout from 296 and make a strong run. At some point, the sellers will hit, because as I said before, there are still guys holding big paper profits. If we break 296 and run, eventually the market will pullback and test that breakout point. That’s the decision point for this market. If the pullback holds, then that confirms the re-accumulation pattern and off we go on the next leg to new all time highs. If 296 fails, then that confirms the distribution pattern.

 

There’s definitely a good trade at 296-300 for both sides of the market. There could also be plenty of news to get it up there with the next coronavirus stimulus package of three trillion set to pass this week. The liquidity just keeps on flowing and the market loves it. I’m probably going to be taking the short position when the 296-300 area fails. In the bigger picture, there are three levels that I’m watching on the downside for SPY: 266, 257 and 248. However, if this market looks exceptionally strong and it looks like the pullback to the breakout point is going to hold, then I have no problem trying a long trade with a tight stop. No matter which way the market goes, we are at a big pivot point, so whichever trade you decide to take, you definitely have to hold your stops. The move off this pivot could be very large and you don’t want to get stubborn and pull your stops. Don’t be scared to give it a play, but definitely protect yourself.

 

Overall Market SPY IWM XLF

I’ve covered larger timeframe for SPY above, but on the lower technical level, I’m watching 287 Monday on the upside. If it gaps up above 287, then I’ll want to put on a long trade if it drifts back to test Friday’s close. On the downside, I’m watching 279 and 276.37. If the SPY fails at 287 and starts down, I’m probably not going to be trading the long side at either of those downside points. A failure to run up to the top of the range near 295 would be a huge sign of weakness and I don’t think last week’s low of 276.37 would hold. If that 276.37 level breaks, that opens up 266.

 

I still think the IWM is the more important index to watch. It reflects the smaller domestic companies in the United States and it much more closely monitors the consumer. The IWM is in worse shape than SPY. While the 287 point is important for SPY, 125 is the equivalent important spot for IWM. It closed 125.13 on Friday, which was right on the VWAP for the week. If 125 fails on Monday, that opens up huge downside for IWM, probably down to the 114-116 area. If it can gap up open on Monday and drift back down to 125, then I’d be willing to give it a try long there with a tight stop. I’ll be watching 129 and 133 if the week is bullish.

 

As I wrote in last week’s article, the financials are probably the most important group to watch. They totally failed last week and I read somewhere that they have declined to only 10% of the S&P500 composition. I was looking at trading JPM in the 90-91 area, but it failed and reached a low around 82 on Thursday. If the SPY is going to recover, the financials must make a big reversal this week. Watch the 21.50 point on XLF. If it can get back above that, then this market has as chance.

 

The GDX keeps moving inversely to the financials. It had a great week closing at 36.57 for about a 5% gain. It still has room to the 40-41 area. If the financials keep moving down, then keep trading GDX to the long side.

 

Energy XLE XOP XOM CVX WTI

The XLE is working on its own range between 35.25 and 39. The range started back on April 27 and has a fair value of about 37. Price tested 37 on Friday and failed, closing down near 36. Trading the XLE this week will depend a lot on what the SPY does. Much like the SPY, I think there are two trades available this week. The first one is a run to the top of the range around 39 for a reversal and leg down. The other is a breakout of 39, retest of the breakout point from above and subsequent leg up. While the XLE does follow SPY fairly closely, I think the IWM is the one to watch to determine which trade to take in XLE. At this point, I really doubt the XLE is going to be able to take out 39, there just doesn’t seem to be enough demand.

 

Technically, I’ll be watching the 36.75-37 area on Monday. If it can break that level, it might make a run at the top of the range before running into supply around 38. On the downside, the first level to watch is 35.50 and then last week’s low of 34.30. If last week’s low breaks and the SPY also fails, price could drop to the 31-32 area where I’d really consider starting a longer term position.

 

XOM and CVX both broke their uptrends this week, with XOM again being the weaker of the two. If you go back to their January highs before the virus event started, CVX has has run right to the 61.8% retracement level of that decline while XOM has only managed to barely clip the 38.2% retracement level. I would imagine there are a lot of long/short pairs out there. I don’t see any event that is going to force anyone out of that trade. I’m watching 86, 82 and 79 on the downside for CVX. For XOM, I’m watching the 39-40 area and 36.

 

There’s an interesting trade developing in BP at the 21.25 area. If it gaps down this week, I’ll be looking to get long on a reclaim of 21.25 for a run back to 24. The trade can easily be stopped out for less than 50 cents worth of risk and the reward could be $2.50+ for a nice 5:1 return. This is a risky trade because BP and RDSA usually move in tandem and RDSA has already broken this support area, so BP could follow. Always let these reclaim trades confirm before you enter. Do not try to outguess the market with an early entry.

 

If we do get a big SPY pullback, I’m going to be watching 37.50 and 34.50 in COP. This is the one I’d like to grab in the longer term account. I’ll probably divide the money into four quarters and start a scale in long around 36 and add at 33 and 31. If it breaks 30, I’ll throw the last quarter in on any capitulation move.

 

I’m also starting to get interested in the service names, specifically SLB. I’m watching for a long trade in the 15-15.25 area this week. If it offers an entry close to 15, then it can probably be stopped at 14.75 with a possible return of 17.75. That’s a huge return of 11:1 and definitely worth a play. If I miss the trade and lose 25 cents at 15, then I’ll probably try the same trade again at 14 for another 25 cent risk. Another service name that’s starting to look like a good trade is HP. The rig count just keeps dropping, but HP has leveled out in the 16-21 range and could be worth a look on the long side if it dips into the 15 area. There’s a nice consolidation going on and if price dips out of the bottom of that consolidation for a nice spring pattern, it would definitely be worth a try.

 

I was just starting to get excited about the natural gas names again, but they seem to be starting another leg down. COG dropped about 11% this week and EQT lost about 8%. RRC and AR were even bigger losers, both dropping about 20%. This group was the main reason XOP dropped about 11% this week while the XLE was only down about 7%. I discussed last week about maybe getting involved again with XOP, but after seeing the action in the natural gas names this week, that plan is probably off the table. I’ll move XOP to the back burner for awhile longer.

 

The refiners were another group that really disappointed last week. I had some long trades scoped out, but never got an entry on any of them as the group just collapsed. VLO lost about 11% for the week and MPC wasn’t much better losing about 8%. HFC is a name that might be worth a look for a quick trade. There’s good demand in the 25-25.50 area and it could probably be stopped with 50 cents. The trade also sets up nicely in the 22-23 area if the downward momentum is high this week. I’m watching 52-53 in VLO and 28-29 in MPC.

 

Trading Plan for the Week – I think we get a move up this week. I’m playing everything off of SPY 287. If price gets above 287, I’ll be playing on the long side for all my trades. If SPY drops below 287 and stalls out, then I’ll probably head to the sidelines to see how it looks around 279. I’m not comfortable shorting anything while SPY is in this 279-287 range. If things go as I expect, SPY should easily take out 287 and then make a run at the 296-300 area where I’ll definitely be interested in getting short.

 

For the XLE, 37 is the area to watch. If price takes that level out, I’ll be looking to trade the long side in energy. Last week’s VWAP is 36.95, the eight day moving average is 37.05 and Friday’s high is 36.89. And we still have that long standing 36-37 range in play, so there is a lot of confluence around 37. My plan here really depends on where we open Monday. If we gap down, I’ll probably get interested in a long play near Friday’s low of 34.30 with a fairly tight stop. If we gap up, I’ll watch 37 and if price can take that out I’ll try to get long and use all that confluence around 37 as my stop. If the SPY runs toward the highs as I expect, then XLE should also make a run at the highs around 39. I can probably get a 50 cent stop around 36.50 and a possible gain of $2.00 on the run to 39, for something around 3:1 on the trade.

 

The MGM position I took last week is looking pretty good so far. I managed to get about 3/4 of the money in with an average price of 13.13. It closed at 13.85 on Friday, so at least it’s green. I had planned on putting in the last quarter of the position under 11, but MGM bottomed out at 11.77. I’m not sure that this one is out of the woods yet, so I’ll hold that last quarter to see if it can pull back one more time to get the rest of the money in. I’m watching PENN this week for an entry in the 16 area. This stock is extremely strong. There was a secondary offering of about 16 million shares at 18, which was about 15% of the existing float, and the market soaked it up no problem. I’d love another chance at this one in the 14-16 range, but it would probably take a big SPY correction to pull it down that far. It’s possible though.

 

If the financials manage to reverse and start upward there could be two trades available on this move. First, I’m watching JPM for another drop into the 83-84 area for a long attempt. I’d look to get it as close to 83 as possible and set the stop at 82 with a profit target of 90. The second trade is a GDX short. If the financials recover, then gold could take a dip, especially if the SPY does truly breakout from 296. My whole trading plan has been based on a reversal up at 296, but if I’m wrong and this market does breakout and head for new highs, the financials will follow and GDX should pullback hard. There’s a fairly defined spot around 37 to give the short trade a try, but it might require finding some intraday structure which will develop this week. You could also put the same short trade on in NEM around 68-69.

 

On a personal note, I got my coronavirus antibody test back and it was negative, wife’s was the same. Between the two of us, we traveled to Las Vegas for a week, Chicago, Dallas, Charlotte, Phoenix and Washington DC and somehow never came in contact with the virus. That’s a lot of germ contact, so it kind of makes me wonder how widespread this really is and how contagious it really is. We will probably never get the true facts. If you want to get tested, here’s the writeup on the procedure we went through, it’s really quick and easy and worth the money to know if you have previously been exposed.

 

Good luck this week. It’s going to be a week where being nimble is very important. Be flexible and most importantly use stops and hold to your risk management. The move off this pivot could be huge, so protect yourself. If the week is really busy, I’ll probably be off Twitter during regular market hours.

 

 

 

 

Trading Plan for Tuesday, May 12

What a strange Monday. I was looking for energy stocks to test the recent highs, but they just didn’t show any life at all. The SPY was also concerning and could be trying to form a double top in the 294-295 area. Financials were also weak Monday and they are sending a signal that a market pullback could be coming. I’m cautious of a Tuesday turn here at these highs.

 

Trading Plan for Tuesday – I’m expecting a green morning from the SPY, but I’m cautious on a turn after lunch. If the SPY starts the day on Tuesday like it did on Monday, then I’ll probably pass on most of the trades listed below. The trades below need a flat to slightly positive SPY on the open.

 

I was looking for an XLE test of 39.09 Monday, yet we topped out at 38.63 on the opening bar. XLE closed 38.10. I had a long trade planned for 38.20, and took it, but it got stopped out at 38. The points to watch Tuesday on XLE are 37.74 and 37.00 on the downside and the 38.63-38.92 area on the upside. My initial plan for Tuesday is a long attempt off of 37.74. The ideal setup would be a gap down open below 37.74 and an entry on the 37.75 reclaim. If things look strong, I’d add to the position when it reclaims Monday’s 37.92 low. Put the stop at 37.65.

 

XOM consolidated sideways and is still just inside the larger consolidation pennant being formed over the last 9 days. It opened Monday within a couple cents of Friday’s highs, but couldn’t take them out and closed the day at 45.73. I’m watching the 45.50 area for a long attempt if the SPY is strong. If SPY is weak, then I’ll probably let that trade go. There should be good support for XOM in the 45.50-45 area.

 

CVX was weak all day. I had a trade planned for a long at 95, but CVX opened at 94.21 and never showed enough strength to attempt the long trade. I’m watching the 92.50-92.75 area Tuesday.  The uptrend could be in danger if price breaks 92, but I’m not interested in shorting CVX.

 

COP is probably going to be my big trade for Tuesday. It continues to consolidate right at the highs and is now close enough to the 41.75 stop area to size the trade up large. It has spent the last three days consolidating between 41.75 and 43.25. The ideal trade would be a gap down open below 41.75 and a reclaim entry at Monday’s 42.08 low. Put the stop just below Tuesday’s early low prior to the reclaim.

 

I also still like the two trades on the refiners that I posted Sunday. I’m actually leaning more toward MPC for Tuesday. I’ll be looking for an entry in the 32-32.50 area with a stop around 31.75. I’ll probably give it 75 cents worth of room to work since this one can run a good ways if it gets going to the upside.

 

I’ve also still got JPM on the radar. I want to try this one again, but I really need to see some SPY and XLF strength premarket to attempt it. If SPY or XLF are red, then I’ll probably pass it up. I’ll be looking to get in 89.50-90 and put the stop a bit below Monday’s lows.

 

The last planned trade for Tuesday day is a scale in long on MGM. I’ve divided my money on this one in four parts and I’m going to start the first scale in at 14.50. I’ll likely put a quarter in every 75 cents down to 12.25.

 

Good luck tomorrow and be cautious if the market shows the possibility of a reversal after lunch.

Weekly Energy Equities Review, Market Outlook and Trading Plan for May 11-15

The bulls keep running and the bears just keep beating their heads against the wall. My Twitter timeline just gets angrier each day as the bears continue screaming about how the real world fundamentals don’t match up with the stock market gains. They complain about how it’s all rigged and that the FED controls everything, and they are right. Yet they still refuse to truly accept the very things they are screaming about and get on the right side of the market and pick up all that free money. Eventually their complaining and whining could be proven correct, but they are giving up a lot of easy money for that intellectual ego boost. Trading is often a choice: Do you want to be right or do you want to make money?

 

Overall Market SPY IWM XLF

I love intellectual pursuits as much as the next guy, and I agree with much of what these bears are saying, but you have to trade the market you are given. Will all this manipulation and money printing lead to a deadly crash at some point? Probably. Everyone dies eventually. These bears are living their financial life in continuous fear of things that might happen. I see all these guys shorting and I wonder what exactly they are hoping to achieve by shorting SPY. Are they looking for a 10% crash? 15%? How many of those moves have we had over the last 12 years? Maybe one or two per year, if that. Say you wait for months and months to finally get your crash and you make 15%, so what? You just missed a 5% gain in five days this week if you would have just got on the right side of the market. These guys are betting on something that rarely ever happens and even if they are correct and time it perfectly, you really don’t even make that much when it finally does happen. Markets will go down at some point and I’m sure the trade is going to feel really good to the ego, but you will never make a consistent living trading like that. Find another area to get your intellectual kicks and ego gratification, because the market isn’t that area.

 

SPY started off the week testing the prior week’s range and rejected a move below that range on Monday morning and it continued to run to the upper boundary of the prior range by Friday, closing ~293. The high on this bounce is 294.88 and we should test that high water mark right out of the gate on Monday. This is one of those weeks where I really don’t have much of a feel for what might happen. My gut says the upward momentum continues, but I have to think a pullback might be coming, and it would be healthy. The important level on the downside will probably be last week’s VWAP around 287. If price can hold that on a pullback, then we should get another leg up. If 287 breaks, that likely opens it up to 278-280. Remember, we are going to get that pullback eventually and the bears will be taking victory laps, but don’t be so quick to short it thinking this is the “big one”. Pullbacks are healthy and clear the way for the next leg up. Be patient, let the pullback happen and find a safe place to ride the next leg up. Those bears shorting into the pullback are the fuel that will propel the market upward.

 

IWM had an even better week than SPY and managed to put up about a 9% gain from top to bottom this week. The most impressive part of that move was the multiple tests of the 125 area, which held solidly. It should take a look at the ~137 high this week and I wouldn’t be surprised to see a big gap up Monday morning. If markets are strong again this week, I could see IWM reaching the 141-144 level. If things turn downward, keep an eye on 127.75 and then the 125 level. The uptrend would be in danger if price takes out 122.50.

 

XLF was concerning this week. If the SPY is going to keep the momentum to the upside, the financials must get in gear and start moving up. The XLF basically closed the week right where it opened on Monday morning and was down about 2% for the week overall. I took a trade long in JPM at 91, but it fizzled out and really didn’t amount to much. I’ll be watching the 90-91 level again this week for another attempt at that trade. My second favorite financial is AXP. It’s coiling sideways and seems ready for a big breakout and I’ll probably be trading it as well this week. If financials break to the downside, I’ll start getting really cautious on the SPY uptrend.

 

GDX predicted that the financials might have been weak since it didn’t sell off as XLF moved up. GDX moved up steadily this past week as financials went nowhere. If the financials do break to the upside, then I’d get cautious on this GDX trend upward. The two groups will probably continue to move inverse of each other as the FED does its thing.

 

LQD and HYG had another week of moves that were hard to decipher and weren’t really tradable at all. LQD moved steadily down all week while the HYG moved steadily upward. I’m sure there is something I’m missing on these, but they just don’t seem to be moving in any logical pattern. The TLT added even more confusion with the big gap down on the open Wednesday, a big rip up after the FED and then a big gap down and selloff on Friday. I don’t have the required skill to know the underlying details on how these truly trade, but if there was a signal this week, I didn’t see it. To me, it just looks like a bunch of crosscurrents with multiple interpretations.

 

In summary, so many people make this market game more complicated than it really is. At the end of the day, there are only two variables: “X” (the amount of money) chasing “Y” (the amount of shares). All the things that the bears keep throwing around are merely inputs to calculate the value of X. There are multiple negative inputs for X right now, but the FED has cancelled them ALL out by increasing the value of X directly (printing dollars). While things like bad earnings reports or bad job numbers may make the amount of X (money) willing to chase Y (shares, constant) smaller, the FED just adds the lost value right back, plus some. And if the FED doesn’t do it through printing, then they can accomplish it through TINA. You can have all the negative inputs you want in the real world which may lower X, but if the FED chooses to manipulate the value of X higher, then stocks will continue to go up. Stop worrying about all the inputs to X, they are all just noise, and simply realize that X will keep growing because the FED is going to make sure of it.

 

Energy XLE XOM CVX WTI

I’ve been watching the pennant shaped consolidation that has been forming in XLE over the last eight days and it finally broke to the upside on Friday. The SPY and IWM breaking upward at the same time definitely helped. It would have been a better breakout if the volume would have been higher and price could have taken out the week’s highs, but it was still pretty good. The volume on the day was only about 25 million and about a third of that was in the last hour. The only concern I have is that it happened in the final couple hours on a Friday afternoon. I guess we will find out Monday if the breakout is real. If price can take out the 39.08 high, then it could work its way further into the gap from 42 that formed on March 9. If it fails at 39, then it will likely move down and test that 36-37 range which is becoming good support.

 

The important points to watch on Monday for XLE will be 38.25 (Friday’s VWAP), 37.75 (Friday’s low) and 37.00 (Last week’s VWAP). If those three points break, then we are probably looking at a pullback for the rest of the week, which wouldn’t be a terrible thing. The XLE is up almost 67% off the March lows and probably needs to pullback to around 31 to get rid of any sellers blocking the path.

 

XOM had a great day with a big gap up and grinding all day move which took it back above 46. I’ve been a little worried about XOM over the last couple of weeks, but it looks like it at least wants to test the 47-48 range again. It should find good demand at 44 next week if we get a pullback. The next levels down are 42.50 and 39. CVX was again the stronger major this week and managed to close at a new high at 95.50, which broke the 95 level which was tested a couple times over the last two weeks. If CVX can pullback and test 95 early Monday, then it could make a move toward 100, which is amazing considering the March low was ~50. The downside support for CVX comes in around 92.50 and 90.

 

WTI made most of its move on Monday and Tuesday and then went flat for the remainder of the week. It was nice to see it go up for a change. I’m expecting more sideways movement this week for WTI. I hardly ever trade oil, but if it dropped back to 20 I’d have to consider giving it a try on the long side there. The first pullback in oil over the next few weeks is going to tell us a lot.

 

One old friend that I haven’t mentioned in weeks could be returning to my trading screen, and that’s XOP. It’s still heavily weighted toward natural gas names and refiners, but the weighting may level out soon. As the oil E&P’s continue to rise while the natural gas names trade sideways, the portion of the ETF representing oil E&P’s is growing. At some point, the oil names may once again start rising to the top of the XOP holdings in weighting percentage. Also, now that the natural gas names have had a chance to consolidate their big move up, both oil and natural gas E&P’s could be getting ready to move up together, which would probably make XOP a rocket. As a daytrader, I need price range during the day and the XOP at 54.00+ definitely provides that needed daytrading range. This thing would be a daytrader’s dream if it got back above 75. While I don’t think it truly represents the sector, it does make for a preferred daytrading vehicle with decent correlation to the sector.

 

The technicals on XOP are very well defined. There’s solid demand at 50 and supply at 55.50. That kind of defined trading range provides some great trading setups. There seems to be a point of control developing around 52, so I’ll be watching that area on Monday. Surprisingly, XOP has already closed that March 9 gap. If I can get in sync with the natural gas names and refiners, I’ll start posting some trading setups on XOP.

 

The service names made good moves this week with SLB, HAL, BKR and NOV all moving close to their highs of this seven week rally. If these stocks take out the highs and get into that March 9 gap, there could be some great trades on the long side. I’m probably not buying the actual breakout, but I’ll definitely be watching for that first pullback to test the breakout point from above.

 

The refiners continue to be a bit of a tease. I really thought they would be the first group to break to new highs, but they seem to be stalling out on this rally. VLO, PSX and MPC all had big days on Friday, so let’s see if they can breakout this week. My opinion on the refiners is a little different from the services names, as I’d be willing to give the refiners a long attempt on the breakout. Once these names start moving, they rarely give you a second chance. HFC and PBF didn’t look quite as good as the others, but I really like that 9.00 area in PBF to try a long if it pulls back.

 

I’ve been avoiding the natural gas names over the last several weeks after they had that big run off the bottom, but now that they have had the chance to consolidate for awhile, they might be worth a shot. I’m still not crazy about the group, but there is a solid level in COG and EQT which allows for long trades with a very fixed risk. I’m not interested in RRC, AR or SWN. These natural gas names will not be high on my list next week, but at least they are on the list again.

 

Hopefully you guys stayed away from the shipping and tankers last week. That group got hit hard as the early buyers started to head for the door. FRO and NAT were both down 20%+ high to low. Like I said in last week’s writeup, you don’t want to be the guy cashing the early buyers out and left holding the bag. Continue to avoid the shipping sector.

 

The other group I warned about last week also got hit pretty hard, including WLL, OAS, CPE, XOG and CDEV. I think they all finished red for the week. Daytraders got ahold of these last week and they are now bailing out. Most daytrading rooms don’t hit groups consecutively, so it could be awhile before they return. The slowest daytraders who got left holding the bag will probably continue to dump these names, as reality sets in that they were late to the daytrading party. These things are trash, continue to avoid them.

 

This Week’s Trading Plan – I’m a little cautious this week that the market may finally make that much needed pullback, but I’m going to keep trading the upward trend until it shows me otherwise. I’ve got two plans for XLE. If the market gaps up, I’ll be watching to see how price handles the 39 area. Price will either consolidate around there for a few bars and then take off to the upside or it will find big supply up there and get quickly rejected. I have no desire to short XLE, so that only leaves a long trade on the table. Technically, I’d like to see an open around 39 and then have price fade back to Friday’s high around 38.80 for a test and possibly entry. Once price holds Friday’s high and then takes out 39.08, I can then size up on the trade and see how far it can run. If price fails up at 39.08 on that run, then it has to be stopped out around 38.50. Do not get stubborn if that high fails because it could come down very quickly on an obvious failure.

 

The more difficult trade would be a gap down open on Monday. Price broke from the 38.20 area, so that’s the point I’d be looking at if the initial move Monday is down. Get long 38.20 and put the stop just under Friday’s low of 37.74. If that trade fails, then I’m back to the sideline because obviously the sector is weak or some type of news has occurred. I’d then start watching 37 to see how it handles last week’s VWAP before I got involved again.

 

My next trade is CVX. I’m looking for a flat open Monday and then for price to drift back down and test the 95 area. If it looks like it’s going to hold on a lower timeframe, then get long and use 94 as the stop. If CVX is strong, it could hit 100 this week, so the trade offers a solid 5:1 payoff.

 

I’m also looking for a similar trade in COP. It has tested the 43.25-43.50 area five times over the last couple weeks and could be getting ready to break out. It’s a more difficult trade than CVX because it’s going to require a larger stop. It’s probably going to require a 41.75 stop, so you have to get a really good entry to make the reward worthwhile. I’ll probably take the CVX trade instead, but if CVX has already gapped out then I’ll look immediately to COP. I’d also throw PXD into this same trade setup.

 

The last energy trade plan is in MPC and VLO. The setup in both stocks is very similar, with VLO being the preferred choice. I’m looking for a flat open on Monday and then just try to get the best entry possible, preferably something around 65.50. I’m strictly looking for a quick breakout and run. I’ll give the entry about a dollar to work and then I’d probably be out. This is a very loose trade and the plan just doesn’t have much structure to it. Bottom line is that I just want to get in as safely as possible and hope it just rips to the upside. If the move isn’t there, then just get out.

 

I’m still watching JPM and would like to give it another long play this week in the 90-91 area. Put a stop on it around 89.50. I’m also watching WFC in the financial sector. It has made an attractive Wyckoff accumulation pattern and I’ll be watching to see if last week’s action was a spring. If the financials show any strength, I’ll be looking to get long around 25.50-25.75 with a stop under last week’s low. Ideally, I’d like to see it gap down open Monday and enter on a reclaim of Friday’s 25.23 low and put the stop below 25. The only other financial that I’m interested in is MA. It’s not totally a financial, but does move with the group. I’m looking for a break of the 283-285 area for a long attempt. Use 282 as the stop.

 

MGM is still on the radar, but I’d like to see it pullback somewhere in the 14-14.50 area for a long attempt. This is more of a longer term trade and a scale in approach. I had my eye on PENN, but that one kind of got away from me after earnings. I’d be willing to give it a try under 15, but I doubt it pulls back that far.

 

That’s really all I have for Monday. I expect that I’ll have a lot more information after Monday’s action and a much better trade plan for Tuesday. It should be a green week, but all these crying bears will eventually get their pullback so size positions appropriately and use stops. That one winning trade the bears have been waiting months for will eventually come, but for the bulls it will just end up being a small stopped out loser. And then we move on to the next day.

 

 

Coronavirus Antibody Test Details and Procedure

I figured it would easier to write up all the details here rather than trying to post them in a Twitter thread. The antibody testing process was simple and there’s really no excuse not to do it. If there’s one way to get rid of fear, it’s with facts. You have to take care of your own health and body, nobody else is going to do it for you.

 

Ok, so to start off, the test is through Quest Diagnostics. My wife did the online part, so I hope I’m relaying this correctly. Go to QuestDiagnostics.com and search for the Covid-19 antibody test. The test is $119.00. Add it to your cart. The next step is to schedule an appointment at the nearest Quest Diagnostics office. You do this through the website right after you add your test to the cart. There are appointment times 15 minutes apart. One weird thing though, we wanted to schedule our tests back to back, but the website would only let us schedule one test at a time. So you have to log back in and create a second Quest account for your spouse. By the time we logged back in, the next appointment was 60 minutes later, so our tests were an hour apart. Be ready to create that second account immediately if you want two tests close in time to each other, or a better solution probably would have been for each of us to do it separately at the same time.

 

This Covid-19 test requires a doctor’s recommendation. The way Quest gets around this is by charging you a $10 fee to have one of their doctors write the recommendation. It’s added at the same time you pay for the test. Yeah, I thought that was kind of sketchy too, but they don’t give you a choice. We put the test and doctor’s rec on the American Express (total $129), but there was an option to submit it through an insurance plan. I wasn’t interested in spending the time it probably would have taken to do that.

 

After you finish the above, Quest sends an email confirmation with a QSR barcode (the little block puzzle looking square thing). You click and confirm your account, then set up your Quest account page where you will return in the future to read your test results. It’s pretty quick and easy.

 

So test day rolls around. You don’t have to be fasting (like many other blood tests require). We showed up about 10 minutes before first appointment (remember, we were scheduled an hour apart) and to sign in you just scan the QSR barcode thing they sent in the confirmation email. It signs you in automatically, so no paperwork or any contact with anyone. Masks and six feet apart pretty strictly enforced. They didn’t have any masks, but they did have gloves and plenty of sanitizer available. We sat down and my wife was immediately called. Surprisingly the next person was called and then about 5 minutes later they called me. Come to find out, they schedule the appointments 15 minutes apart, but they will take you back to the blood draw whenever you show up. The actual procedure was just like any other blood draw. A small vial (smaller than most regular draws for things like physicals) taken out of the arm. Once that was done, we were out the door. We didn’t have to sign out or do any paperwork after the test, everything was already completed in that initial purchase transaction. They said it takes a few days to get the results, so check the website to see when the results show up.

 

This was so easy, everyone should do it. I know the price is kind of high, but the peace of mind is worth it. And if you happen to show up as positive, then maybe some of the stress and anxiety is relieved. I know if mine comes back positive, I’m headed out into the world for some cheap travel LOL. Good luck and if you have questions about anything that I didn’t cover, post the question on Twitter and I’ll  answer there.

Weekly Energy Equities Review, Market Outlook and Trading Plan for May 4-8

Sometimes the market offers very clear signals and is easy to evaluate. It doesn’t require any fancy software or genius technical indicators. It doesn’t require knowing the key insiders or having million dollar fundamental research. All you have to do is look at what the majority is doing and saying, and then realize they are usually wrong. They aren’t always wrong, but they are normally wrong just enough of the time to provide an edge. I think we are in one of those situations right now. Almost 100% of my Twitter timeline is traders trying to call a top and pointing out how horrible the economy is and how it’s all just a FED bubble, just as they have been doing for the last 11 years. Nothing has changed with them. Those guys have been trending wrong for 11 years and the odds say they are probably wrong this time as well. Trends don’t just apply to charts, they apply to people too. Trade the trend.

 

The financial world just can’t seem to accept the fact that the stock market isn’t what it used to be, and they simply won’t change their thought process to acknowledge the change. It’s not that the fundamentals don’t matter, because they do, it’s just that they don’t matter right now. At some point, maybe this market will move back to trading on economic numbers, job numbers, earnings reports, oil prices, etc., but currently none of that matters. Right now, the only thing that matters is the guy behind the curtain. He’s running the show and he’s NOT going to fail. He’s got unlimited ammunition. He’s not concerned with details and he’s not concerned about the future. His only concern is immediate survival. All options are on the table when your only concern is immediate survival. And you don’t fight against someone who has been backed into a corner and is fighting for their life.

 

I posted my position on the SPY last week and I’m sticking with that position until the market sends me a signal that I’m wrong. We have reached a bottom. The question now, as it was with calling the energy bottom, is what does this particular bottoming process look like? I don’t think of a bottom in the market as a single price point, it’s more of a process. The bottom in the SPY could very well take the common shape of a typical sideways Wyckoff Re-Accumulation pattern. If it does take that shape, the real key will be distinguishing an accumulation from a distribution over the next few months. I posted about a distribution leading to a bear market back in January when we were in that parabolic buying climax that started in October 2019. The coronavirus event interrupted that natural pattern, but it could have accelerated it as well. A bear market is usually a slow exchange of stock from weak to strong hands, however the virus event may have hyper-accelerated that transfer to the degree that a bear market may not be necessary to effect the complete transfer and begin the next bull phase. The only thing that might be required for the next big bull run will be a sideways accumulation over the next few months to soak up the last remaining shares that weren’t transferred in the 35% panic drop in March. Only time will tell and all we can do is watch the developing pattern to see if it becomes an accumulation or distribution.

 

As for the actual virus itself, the market doesn’t care anymore. The market has moved on, and as traders we should do likewise. It’s like I posted on Twitter when this whole virus thing started, once the unknown becomes known, the fear then disappears. It isn’t the virus that people are actually scared of, they are scared of the unknown. People have voluntarily accepted the flu and the 60,000 deaths that come every year. Now, as you can see lately with all the protests and people getting back to life, people have learned the true facts about coronavirus and they will accept the 60,000 deaths that come with it. It’s all a matter of knowing the facts so you can decide if you want to accept the risk. Now that the coronavirus true facts are coming out, people are showing that they are more than ready to accept the risks, and therefore life goes on. The market knows this, which is why we are on day 32 of an uptrend that has taken us almost 33% to the upside. Don’t get stuck in the past. Respect the virus, but don’t become paralyzed by it in life or in trading.

 

Overall Market SPY IWM XLF GDX

The SPY had a good technical week and ran right to the 61.8% retracement level from the February breakdown point. It was due for a pullback at that level and we saw that begin on Friday. Now we have to see how far back it retraces (if it retraces) to determine the underlying market strength. By reacting right at the 61.8% level, the market is telling you that it wants to follow that pattern. The logical thing to do is continue using those same retracement levels on this pullback. Those levels suggest that the SPY should be headed for the 248-255 area on this pullback. If the market is truly strong, then the pullback could stop around 264-266. The volume on the move will also be important. SPY needs to see lower volume on this retracement than it had on the March pullback from the 300 level. The major points of interest this week for SPY will be 288 and 295 on the upside, while 281.50 and 272 are important on the downside.

 

The IWM also had an impressive week as it managed to grind past the 50% level and top out almost exactly between the 50 and 61.8 levels. The reversal was a bit disappointing, but it did manage to close above that 125 breakout point, which was roughly the 38% retracement level. It also stayed above the prior week’s range. The uptrend off the bottom is still intact, but could be in danger if price gets much below 120. It was nice to see the IWM outperform the SPY for once. Important points of interest this week will be 123 and the 115-117 area on the downside, while 130, 133 and 137 mark the upside.

 

The financials were my best trades last week and the sector strength was extremely helpful in allowing the SPY to hit highs. The XLF broke out from about 21.50 and had a big run Monday through Wednesday, but reversed and pulled back to ~22 on Thursday/Friday. The 21 level is going to be important this week for XLF. If it can hold that level, then the SPY will likely hold up as well. JPM is still making a very defined upward sloping consolidation pattern and the next move toward 100 will be telling. I’d also keep an eye on the 42-43 level for C. I like AXP in the financial sector as well. The entire sector is still consolidating and the overall market will likely follow the breakout direction of this sector.

 

I’m still watching the GDX. As I posted last week, the miners should have pulled back when the financials surged higher, but they didn’t. That’s a signal that the breakout in financials might be suspect. GDX did breakdown a little, but just as the financials drifted back down to their breakout point, the GDX drifted back up to its breakout point to close the week. Keep an eye on 34 on the upside and 31 on the downside, as a break in either direction will be an important market signal.

 

The most disturbing move of the week was the HYG collapse on Friday. It managed to hold the week’s low, but not by much. The action was very strange with two very strong runs on Wednesday and Thursday, but a total collapse on Friday. There was no flow or logic at all to the action. The 77-78 range will be important this week. LQD also had a breakdown late Thursday afternoon and a sharp gap down Friday. The interesting move was Thursday when the HYG was ripping higher, yet the LQD was going in the opposite direction. When things are being manipulated behind the scenes, there is no logical pattern. I guess you could say the illogical moves are the clue that indicates the manipulation. The FED is involved in these, so using technicals is difficult.

 

Energy XLE XOM CVX WTI

The energy sector followed last week’s writeup fairly closely. The SPY broke to the upside and pulled the XLE out of that 36-37 range top and into the March 6 gap area. The exploration into the gap topped out around 39, but did reach 40.50 premarket on Thursday. The gap from March 6 did not close. I see the move outside the range as a sign of strength in the bottoming process, but a failure in the shorter term for the sector. Friday’s close back inside the prior week’s range at 35.79 also points to a short term failure. As I’ve stated for several weeks, energy stocks have likely bottomed, but that bottom is probably going to be a Wyckoff accumulation range for a few months and not a “V” shaped bottom. The XLE went up and tested the top of the range and now looks poised to drop back down into the range and consolidate for awhile longer. There is solid demand around 34 and there should be a major demand area near 31. I don’t see XLE dropping too far below the 28-30 area during this SPY pullback. If it does, I’ll definitely be a buyer.

 

XOM and CVX both had earnings on Friday and XOM got hit much harder than CVX. Exxon finished the day down about 7%, while Chevron finished the day down only about 2.7%. I think the most important thing for most investors was the freeze of the XOM dividend. I can only imagine the results if they would have cut the dividend like RDSA did. Speaking of Shell, it is down 18% since reporting earnings and the dividend cut. There’s a large group of investors that hold these stocks only for the dividend yield. These companies will even borrow the money to pay these dividends, which shows how worried they are about that group of investors fleeing the stocks. I personally think borrowing to pay a dividend is one of the worst mistakes management can make, but I guess they feel like the alternative is worse.

 

As for the technicals, XOM and CVX both perfectly closed that March 6 gap before pulling back. It is curious that they were able to run these stocks to that point exactly on earnings release. The trend in both is still up, but that could change this week. XOM seems to have solid demand around 42.50 and 39, while CVX shows demand at 87 and 80. I expect that both will test an area in between those levels this week. I’m interested in getting back in XOM if it dips back to that 38-39 level. I’m interested in CVX in the 78-80 level. I’d like to see both of these stocks dip under those bottom levels of demand and then reclaim the level to start another leg up. If those levels break, then I would either avoid both and/or stop out any positions taken at 38-39 and 78-80.

 

WTI had a pretty good uptrend this past week and closed near 20, but I don’t think there’s much more room to the upside. It was a nice bounce after all the negative oil price confusion, but I think it was probably just a standard relief rally. The only way this continues upward to the 25 area is if the SPY breaks to the upside again and passes 300. There could also be another divergence between oil and energy stocks this week. I wouldn’t be surprised to see oil continue to rise while energy stocks pull back. I removed USO from my screen last week. That ETF has totally lost track of the actual commodity. There were a lot of inexperienced traders who were very angry last week when oil had its big run while USO went nowhere. Can’t blame anyone but yourself if you trade these things without understanding how they actually work. Avoid USO and all the 3x ETFs.

 

The most surprising group in energy was the refiners. This group has been a great indicator for the sector and all signs were pointing up last week. I posted that most of the refiners were showing rising wedges, but all of those patterns broke sharply to the upside, which is just another signal that energy stocks have likely bottomed. The refiners could be setting up for some nice long trades as price comes back down to retest the upside breakout points. MPC gets interesting in the 26-27 range.

 

The services names are a mixed bag. I like the action in HAL, but the action in SLB is disappointing. BKR is closer to the HAL type positive action, yet NOV is following SLB.  I’m not interested in playing around in any of these service stocks right now. I still like SLB as my recommended stock for the group, but the action there just hasn’t been that good and I think it can probably be picked up down under 15 for the next run up. The ideal trade there would be a long on any break under 14.

 

I still don’t like the natural gas names and think they are probably nearing the end of their run. Much like the service names, these natural gas E&P’s are also a mixed group. COG and EQT seem to be topping out, yet the smaller names like RRC, SWN and AR are still moving up. I’m avoiding the group, they are just too expensive.

 

COP is still my top choice for the E&P’s. It had a huge run this week going from lows near 35 to almost 44. That’s a 25% run in three days. There’s an interesting spot around 37.25 where I might take a shot long this week with a very tight stop. EOG has been my second choice, but I haven’t been impressed with the action there. This third wave up seems to be weaker than the two prior moves and it’s running out of steam. I still like it, but I’m cautious. The Permian names seem to be the shale winners so far. CXO, PXD, FANG, PE and MTDR have all had nice runs with very few pullbacks. Every retracement meets strong buying. Definitely keep an eye on the next retracements that coincide with any SPY pullback. The only one in the group that I would stay away from is MTDR. A couple of daytrading rooms pumped up the small cap and it could pull back harder than the rest as inexperienced traders panic. That could also be a great opportunity if they overreact.

 

I still don’t like OXY and I’m avoiding it for now. The pattern could be tempting down in the 10-11 area, but I think there’s just so much debt and so much internal struggle going on there that any trade could get hit with a monster gap down at any time. It just isn’t worth the risk. I think traders have missed some good trades in E&P’s that have significant natural gas exposure, including HES, XEC and NBL. If you want to see a chart with every pullback getting bought hard, look at XEC. I probably wouldn’t buy them at these prices, but waiting for a real pullback could keep you out of them. It’s a tough decision on these kind of charts.

 

One thing that I’m seeing that will end badly is a mass of inexperienced traders playing around in things like OAS, WLL, CPE, CDEV, DNR, XOG, etc. There’s no excuse to buy any of this trash. CPE did 54 million shares on Friday, while OAS did 51 million. This kind of action is simply penny stock daytraders scalping, however I think many inexperienced traders will get left holding the bag on these bankruptcy lottery tickets. Just say no.

 

I also disagree with the guys recommending shipping stocks and tankers like FRO and NAT. It might have been a great trade a month ago, but it’s gone now. Don’t be the guy that cashes the profitable traders out. These are the worst stock investments of all time. The oil storage hype will eventually calm down and this group will collapse as they always do. Avoid them on the long side.

 

Wish List for a Major Market Pullback

I’m 100% cash in my long term account right now, but I’m probably going to ease back into some energy names (and some non-energy names) if the SPY gets a pullback to the 250 area. These are the names and prices I’m hoping for:

Energy:  XOM 36, CVX 73, SLB 13, COP 31, EOG 35, MPC 23.
Financials: AXP 75, JPM 82, KRE 31
Metals: AA 6, CLF 3.50, FCX 6.50, SCCO 27, XME 16
Consumer Oriented: DIS 90, LVS 37, MGM 11, PENN 10, WYNN 60, TGT 92, SBUX 62, V 150

 

This Week’s Trading Plan – Everything depends on the SPY this week and where it opens Sunday night. My primary goal is to be patient and see how big the pullback is in the overall market and energy. I have no desire to short XLE or any energy stocks this week, there’s just too much underlying strength in this market. The first trade on Monday will probably be a long scalp for XLE to run back into the 36-37 area.  I’m thinking we open down just a little in the 35.50 area, maybe even below Friday’s 35.41 low. The ideal trade would be an open in the 35-35.25 area for a long play when price reclaims the 35.41 Friday low. It could be a quick scalp, but there’s also the chance that it could break past 37 and give last week’s high a look. The trade could probably get away with a stop around 35 if it’s wrong for a decent 3:1 return.

 

If XLE opens up on Monday, then I’m probably on the sideline until it tests last week’s VWAP at 36.90. If it fails there, then I’ll probably stay out of energy for the day. If price manages to take out 36.90, then there should be a good long setup somewhere to see if price can reach last week’s highs around 39. I’d use the 36.90 VWAP as a stop on any long attempt.

 

If for some reason XLE gaps down big on Monday, I’ll just watch and see how far it falls. There’s just not much structure to play off of between 35 and 33.50. There’s a bit of a liquidity gap there from the Monday-Tuesday run which could cause price to fall really quickly. There’s also nothing in that area to use as a concrete stop.

 

While the financials and casinos were great trades last week, the clearest trading setups were in the IWM. Monday and Wednesday were completely one way action days where all you had to do was buy the open and ride the rest of the day. I’m looking for a similar trade this Monday. The 123-125 level was an important breakout point and I believe the IWM will drop down and test 123.29 on Monday for a long trade. An even better setup would be a gap down open around 122.75-123.00 and then a reclaim of 123.29 for a long trade. Enter when price reclaims last week’s range and put the stop just below the lowest price point prior to the reclaim. The target on the trade is 129.50. It’s one of those opportunities for a huge 10:1 trade. It will probably be my largest trade of the week.

 

My next trade watch will be financials. I love the pattern in JPM right now. I’ll be looking to get long in the 90-91 area for another run toward 100. I’d also like to get a pullback in AXP to the 83 area for another long, but I don’t think that one’s going to give me that opportunity this week.

 

I had some great trades in PENN and MGM last week and actually managed to cut those at highs after hours on Wednesday. I was in PENN at 13.60 and sold 19. I was in MGM at 13.60 and sold 17.50. I’m definitely wanting to give those another ride this week. I’m going to start back into MGM and PENN both in the 14.50 area this week. It will probably be a slow scale in because these are two stocks that I’d love to get in big at lower prices if the SPY gets back toward 250. I had planned on the first casino trades to be longer term holds, but getting almost 50% in a few days was just too much to pass up. I’m definitely giving them another run this week, I just don’t want to be too early with too much size. I’m also watching LVS at 43. I also like WYNN, but it’s a tricky one and I don’t feel comfortable with it at this level, but would give it a shot down under 70.

 

One interesting personal thing, I actually signed up to take a coronavirus antibody test on Tuesday morning. I travel a good bit and my wife travels almost weekly, so I figured why not check it to see if we might have been infected. I spent a week in Las Vegas in late February for my wife’s corporate meeting and we were exposed to about a thousand company employees from every corner of the country. I must have shaken hands at least a couple hundred times. I did have a couple days of feeling sluggish after returning from Vegas, but that was also about the time when oil stocks crashed in early March and I was getting up at 3:45 am every day, so who knows. She’s also traveled to Dallas, Chicago, North Carolina, Washington DC and Arizona in February. I’ve heard stories of people being infected and not having symptoms, so I guess it’s possible. I also thought if we both take the test, then the odds of both of us getting a false signal at the same time are probably zero. It will be interesting to see the results. I also signed up for an NIH antibody serum study in Bethesda, but I don’t think that study ever got off the ground. After the antibody studies in California and New York, they quietly let that NIH study fizzle out. Curious. I think they said results take 5-7 days, so I’ll post next week.

 

Also, I apologize for disappearing from Twitter last week. I had too many trades going on and it was just too distracting. I love Twitter on slow weeks, but sometimes it all just gets to be too much. I should be around more this week. Also, even if I’m not around during the day, I do check it before and after market hours and DM’s are always open. Good luck this week.

 

 

 

Weekly Energy Equities Review and Market Outlook for April 27 – May 1

The market is in a very interesting place right now and my view is evolving with the action. I’m almost at the point where I think the bottom is probably in for SPY. As I’ve written the past few weeks, we are already in the bottoming process for XLE and energy stocks. It feels like the overall market is finished with the virus panic and has now turned toward the process of repairing the economy. If the last two months didn’t kill the market, then there’s really not much out there that can. With the cover and disguise of the virus, the FED has also fixed a lot of cracks that have resulted over the years from their bubble blowing policies. Once the economy gets going again, and with the rocket fuel (both past and future) supplied by the FED, the SPY will quickly be on its way to 400. The hope now is that we get one more pullback to the 240-250 area to get the money in for the ride up over the next 18 months. Things change quickly in this game and you have to adjust your thinking as the facts change. It’s always possible that I get it wrong, or that the virus flares up and causes another shutdown, but all we can do is play what we see right now and protect ourselves through position sizing and stops.

 

A month ago, I thought we would take one more look at that 200 level in the SPY, but that’s probably no longer on the table. The disconnect between the real world and the stock market has developed into something that I never imagined. I’ve watched this slowly happen over the last 10 years, but I still held on to the belief that Main Street at least had some effect on the market. After seeing the most recent actions of the FED and government during this crisis, it has become apparent that even the little connection that I thought was there really isn’t there at all. Now that the market is totally disconnected, there’s very little chance that the real world is going to take it down again because we won’t see anything in the real world that even gets close to the event that took it down to 219. What could possibly happen in the real world that would take it down to 180-200? Even if the virus does flare back up, it will only do so in small controllable areas and now we know much more, so the panic factor is gone. The only thing that will take the market back down below 200 would be something created from the inside, either a change in the White House or another type of financial crisis. I don’t really see either of those things happening at this point, and even if the financial crisis part does happen, the FED can still fix that by blaming it on residual virus effects, so they have a free pass for at least the next 6-12 months.

 

Speaking of the FED, the big question for markets is how much more stimulus and QE are coming? I think they still have many tricks up their sleeve. I expect that there will be another round of bailouts and another attempt at fixing some existing cracks from their prior decisions over the last 3 years. I wouldn’t be surprised to see another big jolt to HYG soon. As for Congress, I think we probably get a second round of stimulus checks for individuals, as well as a big infrastructure plan at some point. I feel like there’s also going to be some type of coordinated Congress/FED action to do some kind of program to jumpstart the economy and “get us over the hump”, especially as the election approaches and Trump needs the votes. Still plenty more liquidity to come, but timing it correctly is the issue for us as traders.

 

At this point, you have to trade the market you are given. We have been given a FED controlled and totally disconnected market which grows more disconnected by the day. Trying to trade that kind of market based on economic principles and fundamental principles just doesn’t work. As much as I hate it, and as much as I completely disagree with what the market is doing, you have to play along and not fight it. I really wish we would see 200 again, because I only picked up about 25% of what I wanted around 232, and I’d really like another shot at that one. This isn’t about being right though, this is simply about making money.

 

Overall Market SPY IWM QQQ

So, if we now accept that this market is moving even further away from trading based on real world events and what’s happening on Main Street, then what do we look at? The only thing you can trust at this point is pure price action. Sometimes you just have to accept what is happening and forget about trying to explain why it’s happening. It’s like electricity, just accept it and don’t worry about why it works. It’s pretty clear that the why in this situation is FED and government based, but it’s really impossible to trade off that because none of us knows what’s coming next. The FED itself doesn’t even know what’s coming next. So the only thing that is true and honest at this point is price action. It’s the only truth we have and that’s what you have to trade off of.

 

Monday will be day number 27 in this stock market uptrend. Through all the death, through all the panic, through 26 million unemployed, through thousands of businesses destroyed, price has marched on, day after day, upward and onward. The QQQ is green for the year. The LQD is right back near ATH. The SPY is right back where the great Oct-Feb run started. It’s a critical level for markets and a decision likely comes in the next two weeks on whether we grind to new ATH or if we at least explore a pullback. The points to watch this week will be 287-289 and then the 50 day moving average up near 300. On the downside, keep an eye on 279.50 and then 270-272.

 

For me, the IWM is the more important indicator this week. This instrument is more sensitive to the US domestic economy and provides a much more quality signal for energy. I posted a chart on Friday showing a pennant type consolidation formation which started back on April 6. That consolidation has coiled very tightly and needs a resolution, which we will likely get this week. Price made a small break from the pattern late on Friday, but sometimes it’s difficult to trust moves at the end of the week as many people are simply squaring up positions. See if that little Friday move pulls back to the breakout point and then reverses strong to the upside again, that could be a great trade setup. The 123 and 125 levels are extremely important this week. The 38.2% retracement of the big down move sits at 124. If the IWM can take out 125, then it likely has room to the 133- 135 area, which is the 50% retracement level. On the downside, watch the 119-120 area, which contains the 8 day ma at ~119.50 and last week’s VWAP ~120. There’s also the lower side of the consolidation I posted sitting around 118.50.

 

The most important group this week will be the financials. If the market is going to push higher, the financials must participate. This is even more true with the IWM and KRE. The SPY has been trading in a range near the highs, while the financials have been trading in a range near their lows. One of them is not telling the truth. If the SPY is truly strong and stays green this week, there should be some great trades in JPM, C and BAC. I also like MS and AXP. There are several different volatility levels from the high of JPM to the low of BAC that should satisfy any kind of trader and all of these chart patterns have very tight and defined stops where the reward offered on a trade should be at least 4:1.

 

Last week’s setup for a long trade in GDX worked out well, but I missed it. I was looking for a pullback to 29, but it only managed 29.55 and just never dropped enough to scale in. It closed the week near 34. I’m still watching it, but I’m now waiting on a short trade when it gets overextended. If the SPY continues to show strength and inflation isn’t a problem, then GDX and GLD will lose their attractiveness and the crash will be epic. Keep an eye on the XLF and if it starts to break to the upside, then that’s probably the first clue that GDX is done with its run.

 

Energy XLE XOM CVX WTI

The energy market continues to show massive strength and a total divergence from oil prices. There is almost no doubt now that we have bottomed in energy and are in the process of building a nice base for an upcoming new bull trend. The buying which started April 17 continued right up to the last hour on Friday. We will get a big decision this week in XLE, as price will probably explore the top of the range in the 36-37 level. I really hope it fails and moves back down into the range to build a larger cause, but there’s a really good chance that SPY is going to have a big up week, which will likely pop the XLE out of the top of the range to explore that gap from 42. I have no idea how far price will get into that gap, but I have no desire to chase it anywhere up here at the top of the range. If it breaks out, then that’s fine, I’ll just let it go and put energy on the back burner for awhile and trade something else. Eventually, XLE will come back to test the 36-37 breakout area from above and provide a longer term entry. There’s just not much value in buying a breakout here on XLE, it’s just too expensive. That doesn’t mean that a long trade here can’t work, but for me the cost of taking that trade is just too much. Expensive trades can work, but you don’t give up too much in the long run by passing on those expensive trades and waiting for a better spot.

 

While the 36-37 range is crucial for XLE, the range to watch for the major components is XOM 45-47 and CVX 88-90. Those two have to break out for XLE to go anywhere. The issue here is that I’m expecting SPY to have a big green week and those two are major DOW components. When XOM and CVX (which make up 45% of the XLE) get carried up by the index, the XLE has no choice but to follow along. However, if I’m wrong on the SPY call, then XOM and CVX could stall and hold the XLE down, even if the other components continue to diverge to the upside. If you are bullish long term and want to take shot long on XOM, then I’d enter in the 43-43.25 area and put a stop on it at 41. For CVX longer term, you could probably look for an entry around 86 and put an 83 stop on it. If the breakout happens, then the return on those trades could be 3:1 or more over the next 60 days.

 

As for oil itself, what a total disaster and very cloudy situation. I posted last Saturday to stop using the USO and focus on the actual futures price, which hopefully helped.  Although I’ve never traded USO and I simply use it to monitor oil price, I completely took it off my screen, it’s done. I wish they would get rid of all the 3x ETF’s as well. They are all worthless instruments which have done nothing but prey on the inexperience of retail traders. If traders don’t have enough money to trade the single leverage instruments like XLE or XOP, then they just shouldn’t be trading. Tangent, sorry. I also wrote last week not to get hung up on oil price when watching the energy stocks, and energy did in fact diverge from oil price. It’s almost like the oil fiasco didn’t even exist when you look at what energy stocks did. As for oil, I really don’t know what happens with it this week, but again, I wouldn’t be too concerned with it as oil and energy stocks are likely to keep diverging. My best guess on WTI is that we hover around the $17-20 area for most of the week. However, if the SPY really does have a big week, oil and stocks may reverse roles with stocks pulling oil higher.

 

Trading Plan for the Week – All week I’ve been thinking about putting on a big short in the XLE in the 36-37 area, but I’m not sure about that one now after seeing this week’s price action in the overall market. I’m expecting the SPY to have a big green week, which could pull energy stocks right up and out of the range. The only way I’ll put that short trade on is if the SPY looks weak or if the XLE has some type of news driven gap out of the range on Monday morning. I’m writing on Saturday morning and haven’t seen any news like that yet. If the XLE does gap up to the 38 area on Monday, I’d have no problem shorting that back down to the 36 area to retest the breakout point. All the trade setups below depend on a strong SPY. If the SPY is extremely weak, then all bets are off on the below setups.

 

The most likely course with XLE on Monday is that we open very close to where we closed in the 34.50-35 area. The points of interest on that open would be 34 on the downside and 35 on the upside. If SPY is green, my first play of the week will be a long on any pullback to 34. It’s an easy trade to stop out if it gets below last week’s VWAP ~33.50. If the 34 level holds, then we almost surely take a look at last week’s high of 35.54, so the odds on the trade are about 3:1.

 

If the XLE 33.50 level doesn’t hold, then the next spot for a long trade would be the 31.00- 32.00 area. There should be large demand at 31, so stop it out if that breaks. If for some reason 31 were to break, then I would stop trading the long side and move to looking for short trades. If 31 breaks, then there has likely been some news driven reason why that happened, so it’s hard to plan for that.

 

If for some reason the SPY were to be really weak on Monday, I’ll be looking to short refiners. I posted some charts last week showing rising wedges in almost every refiner. The top side of those wedges held on Friday, but the downside move was coming. My first trade would be a short on PSX at 61.25-61.50 with about a dollar stop. If that wedge breaks to the downside, the reward is likely at least $5, which makes a nice 5:1 trade. I’d try the same trade on VLO at 53.25.

 

If energy opens strong on Monday and doesn’t offer any type of pullback for a long trade, then I’ll likely just move to the sidelines and go back to trading IWM for the day. I’m just not interested in getting involved long at the top edge of the energy range. Breakout trades just aren’t my thing. For IWM, I’m looking for a pullback to the 121-121.50 area for a long attempt. The next level down from that for a long attempt is 120-120.25.

 

Outside of energy, I’m going to be trading the financials. I’m looking to get long AXP around 81 with a fairly tight stop. If the market breaks higher, it should easily move to the 86-88 level. My second choice is JPM where I’ll be looking to get in long around 89 with an 87 stop, looking for a run to the 95-96 level. These trades will only be possible if the SPY stays strong, so avoid them if the overall market looks weak.

 

One other group that I’m watching for a longer term play (30-60 days) are casino stocks including LVS, MGM, WYNN, CZR and PENN. I picked up small positions in PENN and MGM this week both at 13.60 and would like to build these. It’s a hated group right now and it may not fully return to its glory days for awhile, but after seeing the interview that the mayor of Las Vegas did this past week, there’s absolutely no doubt that they are going to open these back up way sooner than most people think. Once the announcement is made to open them back up, the opportunity to buy at decent prices will be gone.

 

So that’s the plan for the week. It should be an interesting week with some big market decisions coming. Don’t get complacent though, when the market does make that decision, the move could be very fast and go much further than expected. I really expect that we will have a big up week, but you just never know with this market. Stay flexible, position size correctly and use stops.  Good luck this week.

 

Weekly Energy Equities Review and Market Outlook for April 20-24

The same question continues to circulate in the energy sector: “Is this the bottom?”  I addressed this in my March 21 post and I think those answers are even more relevant now after seeing Friday’s action. I think we are at the bottom for the energy sector, but I’m not sure if everyone’s definition of “bottom” is the same. For me, the bottom is a process, not a single price point. The lowest price point isn’t what defines the bottom of the market. Also, you have to continue to ask yourself, if we are at the bottom, would I buy it here? Just because a market has reached a bottom, that doesn’t mean the next move is higher.

 

As some of you know, almost all my trading is based on Wyckoff principles in one form or another. I’ve been posting for awhile that we could be looking at an accumulation type range/bottom forming in energy over the next several months. If we are, then we are still very early in the game and likely just moving into phase B of the accumulation. Phase A was the strong downtrend, the preliminary support, the selling climax and then the automatic rally. There’s a good chance that the April 9 high completed the automatic rally which began on March 24. We pulled back from that high this past week, but could give it another quick look next week. If we are in a Phase B, then a move back toward 37-39 will get rejected cleanly and price will move back toward the range fair value, which now sits about 28-30. I think many people are expecting a V shaped price pattern, when what we might actually get is an L shaped consolidation for a few months. Also, even if we are at a market bottom, there’s a good chance that price will make one more low in Phase C before the markup phase starts. If we are in a Phase B, then you want to be buying near the lows of the range, not up here at the top of the range near 37.

 

As for Friday’s action, that was a clear divergence and a screaming signal that the bottom is in for energy stocks. Oil hit lows around 18 while the XLE was up 11%. Signals don’t get much more obvious than that. The trick if you want to buy in for the longer term is to time the next couple of pullbacks correctly and then not get shaken out on the final spring which may come later in July/August. I’ve been saying this for awhile, but before the next uptrend can start, there must be a transfer of a majority of the stock into the hands of longer term holders who will lock it up for years. I think that’s what we were seeing on Friday. If you are a larger fund and your target price for XLE is 60-70 in a couple years, then there is no difference if you buy in at 33 or 36 on any given day, it’s meaningless. Funds were paying up on Friday, but only compared to what we would deem wise as shorter term traders. For them, paying up is just a nuisance and part of acquiring a large position. They will back away from the market soon and let price fall and start the whole process again until they fill their positions. For them, it’s the average price of their transactions over the longer term that matters, not just the price they got on a single day.

 

As the range continues to form, there will be tests of the top of the range to see if buyers pile in or sellers appear. There will also be tests of the lower range boundary to see if new bears appear or if other larger traders step in trying to get a deal. The key is to realize that these tests are going on and then take advantage of them for longer term entries. We just have to be patient and let the range evolve because that’s the way a bottom is formed and completed, which then leads to the next uptrend. The length of this accumulation process is going to be linked to the demand side of the oil supply/demand equation, which in turn is linked to the current virus situation. We saw the Trump plans to open the country on Thursday, and the resulting pop in energy stocks on Friday. The demand side will control for the next couple of months, so focus on that rather than the supply side.

 

Overall Market SPY IWM

I’m not sure what to say about this latest market bounce off the bottom. I theoretically understand why it’s happening, but from a practical common sense point of view I just don’t agree with it. It’s a liquidity driven move created by the actions of the FED, that’s it. You can’t fight it. In this kind of situation, there is no “market” as we have previously known it. It will return one day, but for now all we have is this liquidity pool with no place else to go except stocks. Life outside the stock market is a disaster. 22 million unemployed, thousands of businesses destroyed and a consumer who has been psychologically scarred and may not recover for 6-12 months, or longer. There are two parallel universes occurring, one is real life, the other is a synthetic holding company of 401k’s that can be manipulated at the whim of it’s controller. To trade this, you just have to understand which universe you are trading. At some point though, they will intersect again, and the destruction could be huge.

 

I’ve traded through a couple bear markets and they were long drawn out affairs. This current market move is eight weeks old. Eight weeks is not a bear market, it’s a correction in a bull market. The question from here is whether the correction completes with new highs or if this really is a bear market and this bounce is followed by a move to new lows. I don’t know the answer, but what I do know is that we haven’t confirmed a bear market yet, so you have to keep trading like this is just a correction in a bull market. Let the market tell you whether this is a correction in an existing bull market or the start of a new bear market.

 

Technically, it was a solid week in the SPY, although the volume was a little low. The key is whether this low volume is demand backing away from the market (which can return) or whether the sellers are running out of supply to sell. The SPY closed right near the 50 day moving average (285.82) and could take a shot at the 200 day around 300 later in the week. There’s really just nothing to stop this market. If 22,000,000 unemployed in a total economic shutdown can’t stop it, then what can? I’m watching the 270-275 area on the downside for support. The VWAP off the top on February 20 sits at 270, so that’s the important point to watch to see if the uptrend continues. If 270 breaks, then 262 comes into play. On the upside, I’m watching the 300-305 area, which was the July-September 2019 highs area.

 

The more concerning thing for me is the IWM. It had a terrible week compared to the SPY. The smaller domestic businesses in the United States are struggling. The IWM and XLE are both good measurements of the US consumer, and the IWM is saying that the consumer is in bad shape. That’s not a great signal for future oil/gas demand. The SPY is threatening to take out that 61.8% retracement level from the top, yet the IWM can’t even make it past the 38.2% retracement level. Money is looking for safety in the big caps, especially big cap tech. The component weightings in the SPY and QQQ have become very skewed toward just a handful of stocks. Money is looking for safety in quality, but if that handful of stocks finally crack, the market tanks. Keep an eye on that 125 level for IWM this week to see if it gets rejected again. On the downside, watch 114-116 to see if it breaks down.

 

I posted a few weeks ago that I put 25% of my wife’s 401k cash into the SPY around a 232 average price. If this market makes a move to the 300-310 level, I’ll probably be cashing that out and taking the 35+% gain that was made in just 4-5 weeks. I was expecting that kind of move to take 1-2 YEARS, not weeks. I also don’t think the market has made its final lows yet, so the gamble of taking the profits and waiting for another entry is justified. When you look at the SPY, you really have to ask yourself if many others who bought the dip will start doing the same thing soon. Also, there’s a huge group of older investors who got absolutely shocked by seeing a 35% drop in their net worth in a few short weeks. I’m thinking that those older investors start to lighten up as they make those losses back. Those investors have recouped about 60% of the losses, which isn’t a bad time to move into the safety of cash. Sometimes when you are trying to predict the direction of a market, just look at what your decisions would be if you were in, and also the decisions of other traders/investors. Even though the FED and liquidity controls this market right now, there’s still a large human greed/fear component.

 

Energy XLE XOM CVX WTI

The best place to start this week in energy is WTI itself. What a disaster in the actual commodity. WTI closed near 18 and is showing no signs of bouncing back. As expected, the OPEC cuts had zero effect on the oil market. It was just a dog and pony show of market forced cutbacks. I’m really not sure where the downside is in oil. Last week I posted that I thought the downside was probably about 20 for the week, and I missed it by 10%, not good. I really don’t see oil bouncing much this week and it likely stays in this 17-23 range for awhile. The funny thing about oil is once it hits the bottom, the reversal and bounce is enormous, and very hard to catch. Oil is a tough one to predict and that’s why I don’t trade it. It’s much easier to let oil be my North Star and just follow it a step behind in the actual oil producing companies. I’m having trouble keeping up with the manipulations of USO and the current rolls to second month futures, therefore I’d follow the actual oil futures prices rather than USO. The only good thing this past week was that energy stocks diverged greatly from oil price, so don’t get too hung up on what oil is doing this coming week.

 

The XLE finally gave us a clear signal of a bottom with the divergence from oil prices on Friday. That signal has flashed a few times over the last couple weeks, but none of them brighter than what happened Friday. It’s my opinion that we are going to spend a majority of our time in a range between 24 and 37 for a few months, but that doesn’t mean we can’t get the occasional exploration outside the range. There’s a good chance that the XLE probes the 37-39 area this week just to see what’s outside the range that started back on March 9. There’s also a very small chance that price could actually close that March 9 gap down from 42. I really don’t think that happens, but you have to be aware that those gaps love to close and sometimes act as a magnet on price, and therefore you have to protect yourself against those possible moves if shorting the top of the range.

 

The more likely situation is that XLE conducts a retest of last week’s highs around 37 early in the week and then rolls over and ends the week around 30. There’s really not any big news events expected in energy, so the sector might get dragged along with the SPY. If the SPY peaks and turns down, I don’t see the XLE diverging from that and it should follow SPY down. Same on the upside, if SPY runs to 300-305, then that increases the chances of that 42 gap closing.

 

XOM and CVX both had a good week, with CVX being the stronger of the two. CVX closed right on the 50 day moving average, while XOM still lagged about $3 under the 50 day.  Last week I posted pullbacks on XLE to 29-30, XOM to 39-40 and CVX to 75-77. The biggest miss was CVX and it appears to be the strongest and makes a good long candidate this week. I still like XOM, but the momentum just seems to be stronger with CVX.

 

The services names are still lagging. SLB had earnings on Friday and HAL comes out with earnings Monday. Things were about as expected in the earnings report and SLB managed to put in a solid green day, up about 9%. It was difficult to tell how much of that gain was merely a sector move versus an individual move based on earnings. See if the service names diverge from the E&P’s this week. Also, keep an eye on NOV, it’s setting up for a nice breakout of the $12 level. The chart is setup nicely for a tight stop and an excellent risk/reward on a long trade. BKR is also another nice setup for a breakout long with a stop at 12. If services do break to the upside, my first play would be NOV, then BKR. The two larger players, SLB and HAL, could lag.

 

I posted about the offshore names last week and I did some research into the names, but what a disaster these stocks are. I didn’t find anything that looked attractive. The theory is there that these could do well, but the balance sheets and debt just make them unplayable. If I was forced to buy one, I’d go RIG, but I’d rather not. Sometimes things look good in theory, but in reality they remain trash.

 

The natural gas names COG, EQT, RRC, AR and SWN continued to show nice gains. I have no faith in this group and won’t be chasing at these prices. The cuts made by the oil E&P’s are helping the associated natural gas production, but I don’t see much future in trying to invest in that theme. There’s a good chance that natural gas could reverse at any time, and it usually reverses big. I’m avoiding the natural gas names.

 

As for the E&P names, I really missed a great trade in COP. It pulled back perfectly to the 30.75 VWAP’s off the March 9 and March 18 points. It’s rare when two VWAPs line up like that and I should have taken the trade. I’ve said this so many times before, but energy stocks move so fast that you have to be in prior to the big moves or you miss them completely. COP opened gap up $1 and then moved $2 more in the first 30 minutes. I had no desire to pay $3 over Thursday’s closing price, and therefore I just let it go. There were other stocks in the same situation, but COP was my favorite. Watch the 31 level on any pullback. EOG was another possible long trade, but I was waiting for the 35 level to take a chance, but it never got there and closed ~42 on Friday. There’s really nothing in the E&P space that I’m willing to pay these prices for. The only thing to do is just let them fizzle out on this run and then pullback again. There could still be some run left in them, but the risk/reward is just too expensive for me right now.

 

Trading Plan for the Week – Monday is going to be a difficult day for me to do anything. I think this market likely gaps up, but I’m not interested in chasing that gap up on the long side. I’m also not comfortable shorting after last week’s big run. The plan for me is to sit it out on Monday and see how the XLE acts around the 36 level and the SPY around the 293 level. There will be good signals at those levels for the rest of the week.

 

If the XLE gaps down for some reason, I will be interested in trying some long scalp plays. The first solid demand level is 32.69-32.89 and I’ll probably try an intraday long there. The next levels down are 32.25 and then 30.75-31.25. I’m not interested in trying any short trades above 30.75. If the 30.75 level does break, then there will be plenty of time to get short as it falls. The same long scalp play can be found in XOM around 42 and CVX around 82.50. As I said before, I like the CVX play a little better than XOM.

 

It could be a really slow week trading in energy, but IWM should offer some great daytrades. My biggest trade for the week will probably be a swing short play on IWM around 125. I think the small caps will test last week’s high and fail. It’s a risky trade, but there is a good $1.50 tight stop around 126.50 and the reward could be $10 if the trade is correct. If IWM gaps down Monday, I’ll be looking for a long daytrade scalp off the 119 level.

 

There is also a good trade setting up on GDX around 29. If Monday gaps down, then see if 29 stops the fall. If it does, I’ll scale into a long position with 1/2 a position near that level and then add the other half if GDX can reclaim Friday’s 29.93 close. If it fails to regain Friday’s close, then stop it out around 28.50 and look for another opportunity around the 26.50 area.

 

This is one of those market weeks that could go either way and I don’t really have a long or short bias. I’m probably going to spend most of the week on the sideline letting this market show me where it wants to go from here. Some weeks are just slow. I recently started posting again on Twitter, but the same problem of distraction and emotion just keeps returning for me on that. It all just seems like everyone complaining and trying to tell everyone else what to do and what they should think, and that pretty much goes against everything I am. I’ll probably be scarce on Twitter this week. It’s such a great thing to cure boredom, but it’s also a killer distraction when I should be focusing on other things. Good luck this week and keep an open mind about market direction, don’t get locked into a single direction.

 

 

 

 

 

 

 

 

Weekly Energy Equities Review and Market Outlook for April 13-17

Sometimes the market gives you a second chance, but you only get a short time to make the decision to take that opportunity. As you guys know, I loaded the long term account about a month ago around that last OPEC meeting disaster and before the virus hysteria really kicked in, however I missed it badly. The 1987 type crash in the SPY was something that I was not expecting. My three biggest positions, XLE (about 35% of account), XOP and XOM reached maximum drawdowns of 36%, 40% and 25% respectively. On Thursday, I managed to get out of those at breakeven for XLE, -10% for XOP, and +15% for XOM. The total result on the account was about a 6% loss (caused mostly by small positions SLB, HAL, EOG, PE and MTDR) but I’m back at 100% cash now. It’s always painful to lose, but it could have been worse.

 

I figure I owe you guys an explanation as to why I did what I did Thursday. First of all, when you make a long term trade plan, you should usually stick with it. I really struggled with that rule this time. Had this account decline been only a sector event, I would have easily just let things play out according to plan. The thing that changed my mind and led me to liquidating the trades was the fact that the world is a much different place now compared to when the trades were put on over a month ago, and I don’t think we are going back to that world anytime soon. As you may have figured out by now, my evaluation of the virus situation is completely different from the position of the majority. It’s my opinion that the total shutdown of the economy was a huge mistake. When I put the trades on, I figured the powers in charge would eventually come to their senses and realize this mistake, but they never did. Once that mistake was finally realized by the market, well, you see what happened to markets. Not to go too deep, but we have completely destroyed our economy and forever scarred the consumer over what amounts to about the number of gunshot deaths we incur in a year. I think the severe decline in markets shows that the shutdown approach was indeed a mistake. The market doesn’t trade on death numbers, it trades on economic numbers (and the FED’s response to them). While the death total may have been small, the economic destruction wasn’t. Anyway, the trades were put on with the thinking that the economy would stay open and energy demand would stay sufficient, but that didn’t happen.

 

Once the hysteria began and the decision was made to close almost everything, energy demand fell off a cliff, which made my trades very wrong. Once those trades were proven wrong, the next question is whether they are better off exited with the small loss or held at this point hoping for the best. With our current economic condition, I don’t think energy demand is going to come back to the level needed to make these trades winners. I think we are going to find that the media has so psychologically damaged the consumer that it’s going to be very difficult for this economy to recover. Consumers have been terrorized and they aren’t going to travel and the virus fear will never let them return to pre-virus levels. Schools remain closed and so far 17,000,000 people have lost their jobs, with more losses to come. The ones that are still working are mostly working from home. That’s a lot of cars and planes out of use, which is huge demand destruction. How quickly will this demand return? I think it’s going to take much longer than most people think. The reason for these trades just no longer exists.

 

As for the OPEC supply cuts, I mostly think this was just a dog and pony show with no real meaning. As I write on Saturday morning, Mexico is still holding the deal up, but I think that gets resolved before oil opens. The market made these cuts, not the OPEC members, and they were not voluntary. The fact that Saudi and Russia would absorb the embarrassment of abandoning their positions shows exactly how quickly things collapsed in the world. Everyone finally realized that demand has cratered and nobody was going to buy their oil and that storage space was filling quickly. What else could they do except cut? There’s no way all members will comply, especially if price starts to increase at any decent rate. The cut attributed to the United States was a joke and was merely a market induced cutback. It’s a sad situation when the market itself forces these kinds of historical cuts and probably a good clue of the shape the oil market is really in. I don’t think these cuts help much in the short run, but may extend storage capacity limits for awhile. The demand destruction is just too much. The real question becomes what happens when demand craters further and OPEC has shot its only bullets already? What happens when storage fills? What happens if the demand destruction is greater or lasts longer than anyone expects? Nowhere for price to go but down.

 

Having considered the fundamentals in the energy picture, the next piece of my decision to exit these trades was the condition of the overall market. The SPY fell from about 340 to about 220 and now we have recovered about half of that loss and currently sit around 278. At this point, you have to determine whether this was just the normal bear market relief rally or if the market is headed back to all time highs. I’m currently leaning toward relief rally rather than new highs. I think the FED rocket fuel is the only thing keeping this market alive and once that wears off and people finally get a look at the final economic destruction, we likely head back down toward the lows, in both SPY and XLE. There could be a little more left to run in this bounce, but I’m satisfied with using this 50% retracement, combined with the hype of Thursday’s OPEC decision, to exit.

 

Maybe I’m totally wrong and we head back to all time highs, but the hysteria over the virus isn’t going away. We have really only been at this for about six weeks (seems like six years), and there could be MONTHS left to go before it resolves. We may still be closer to the beginning of the problem rather than the end of it. The market is currently pricing a quick end and subsequent total recovery, but I think that’s a mistake. I’ve traded through both the 2000-2002 and the 2008-2009 bear markets and both times the market WANTED to believe things were quickly going to return to normal, but sometimes they don’t. I think there’s a good chance that this 2020-2021 situation could end up with the same result.

 

After considering the energy fundamentals and the overall market condition, the last piece of my decision was the opportunity cost of holding these positions. The small monetary loss in the account wasn’t the most damaging loss. The real cost was all the deals I missed in other sectors because all my free cash was tied up. If this economy languishes as I expect, energy will be the last thing that comes back. If this market declines again to new lows, do you want to be in the stocks that will make the fastest comeback or in the stocks that will recover last? If I have my choice of buying tech or energy at future new lows, I’m going with tech every time. The decision to exit really hinges on the hope that we are headed back down toward new lows and that the long term account can be reloaded at much better prices. It’s a gamble, but right now I think the odds lean toward the market giving better trades at some point in the future, therefore moving to cash is the correct answer.

 

So, the above was was my thinking on Thursday and the reason for exiting the energy positions. Only time will tell if that decision was right or wrong. There are so many moving pieces right now that none of us have ever experienced. The final question I asked myself was, “Knowing what I know now, would I get long here at 278 and 36?”. The answer was an absolute NO. I may try the trades again, but it won’t be at this level.

 

Overall Market SPY

The above paragraphs mostly covered my fundamental view on the overall market. On the technical side, I think we may be reaching the end of this latest run. SPY reached the 50% retracement level and could be headed toward the 61.8% level. While these levels are mere speculation, there is some psychology behind them. Most rallies end between 50% and 61.8%, and this rally may be no different. There’s a level between 285-290 that has been significant over the last several years and there’s a good chance we are headed there. I’m expecting that the market will make a big decision this week whether this was just a bear market rally or the beginning of a new leg up. I’m leaning toward the market reaching a top this week and then turning down late in the week.

 

One pattern that I’ve found interesting over the years is market action after a three day holiday weekend. It’s amazing how many times sentiment changes over a three day weekend. I’ve never seen any scientific backtesting on this, but it seems that it’s an abnormal amount of times that a reversal will happen after a three day weekend. I’m not sure why this happens. Maybe it is the urgent action and positioning before the three day holiday that causes the unwind of those positions on the next Monday, which in turn leads to more people jumping on that move, which in turn leads to a change in the larger trend. We saw a very large run up ahead of this three day holiday, let’s see if that gets unwound on Monday and lights the fuse to a change in trend back to the downside.

 

The most important watch this week will be LQD and HYG. The FED stepped in with trillions to prop these up. I mentioned LQD last week and if you look at the jump it made on Thursday it is almost back to new all time highs. The move from 134 to 104 and then back to 132 is just amazing. HYG isn’t too far behind going from 88 to 67 and back to about 82 on Thursday. Keep an eye on these to see if they hold the gains. If they start failing again, that’s a bad sign for SPY.

 

Also, keep an eye on IWM. I spend most of my day trading IWM and it’s still lagging the SPY by a good bit. SPY has managed to retrace about 50% of the decline, however IWM has only retraced to the 38.2% level. The small cap domestic companies in that ETF are hurting with the shutdown. The American consumer isn’t shopping and they aren’t travelling, so IWM and XLE both suffer. I’m looking for the IWM to possibly get a pop Monday, but likely pullback the rest of the week.

 

One last thing to watch is GLD and GDX. With all the FED liquidity, these made big moves on Thursday. They might be sending the inflation signal, as well as a signal of a weaker dollar to come, both of which would be good for oil. There’s room for GLD to make it to the 172 level in the coming weeks, so see what happens this week at the 160 level. Price has spent Feb-April trying to break out of that 160 level and will likely take another shot this week. As for GDX, keep an eye on the 31 level to see if it breaks out. If price takes out 31, there is a good chance that it could make a huge run to the 40-42 area. If price pulls back anywhere near the 26-27 level, I’m going to be putting on a long position with about a dollar stop.

 

SPY closed that early March gap around 274, so see if that level can hold on a Monday pullback. If it does, then there’s a good chance price tests the 286-290 area this week. If 274 fails, then price likely heads back to the 260-263 area. If the 260-263 area fails, then price likely tries to close that gap back down to 250.

 

Energy XLE XOM CVX WTI

XLE was in the perfect sweet spot this week with SPY making a huge run and OPEC offering the energy bulls hope. Those two forces combined for a 22% move in XLE. The move was +19% for both XOM and CVX. The XOP was an even bigger winner at almost +30% at the high point from the prior week’s close. On Thursday, the XLE reached a gain of about +60% off the March 18 lows. That’s about double the move in the SPY off its March lows. Now that the big OPEC cut is finalized, it might be time for a breather and some much needed consolidation.

 

Technically, I think there’s a good chance XLE pulls back to the 29-30 area this week, which would be a drop of about 12% from Thursday’s close. That’s a big call, but I think there’s that much hype and rumor priced in already. If the SPY pulls back, we might see the XLE pull back twice as far, just as it did on the way up. At some point, I think people will start to realize the bad shape this economy is in and XLE will suffer a significant move back down. Timing that pullback is difficult though. There’s really just no reason for buying up here in the 35-37 range, as the odds are tilted toward there being more risk than reward. The better option is to monitor the SPY, let some of the air out of the OPEC hype, and see how far XLE pulls back before getting long. If it runs away on the upside, then just let it go, don’t chase.

 

I’m looking for a pullback in XOM to the 39-40 area and a pullback in CVX to the 75-77 area. As for oil itself, I’m really not sure what happens with it. I do think we could see oil price and energy stock prices diverge this week. I could easily see WTI dropping back to test the 20 level again, but I could also make the case that we reclaim 24 and then consolidate in that 24-27 area for the coming week. I don’t see it breaking above 27, but I also don’t see it breaking much below 20 either. It seems a bit stuck in this 20-26 area for awhile, which wouldn’t be a bad thing. If it can settle out around 24-25, then energy stocks could probably hold in well on the pullbacks listed above. If WTI surprises and takes out 20, then energy stocks could find themselves in danger. It’s really a tough week to predict.

 

From here on out, I think it’s going to be really difficult to put money into the smaller oil producers, especially the ones with debt. The US has promised cuts in the OPEC and G20 deals and that’s going to hurt. These cuts were probably market forced, but the fact remains that the debt is still there and the revenue probably isn’t coming back. It’s time to move up the quality ladder and stick with the survivors. If you are a longer term investor, then this is absolutely the only way to go. At some point, there will be an oil price spike. It could take a couple years, but the seeds are being sown now and the only companies that will reap the reward are the ones who can survive for a couple of years. I really think the best approach is a position in the XLE. I’d definitely avoid the XOP, there are just too many companies in that ETF which will likely not survive or merely be zombies if they do. One group that may be helped by these production cuts are the natural gas names such as COG, EOG, RRC, SWN and AR. Over the last few weeks, as the oil E&P names cut production, the associated gas production declined as well, and that’s definitely a support for natural gas prices.

 

I think the group that catches the worst of this whole situation will be the service names. SLB and HAL were the two largest price percentage decliners of the names I bought in the long term account. As many smaller E&P’s go out of business and the larger E&P’s cut production, there’s just no need for services. It’s really going to be painful for the smaller service names and I’m not sure there’s really any chance of acquisitions because the larger service names just don’t need the extra equipment or employees. Also, the major cuts in the XOM/CVX type names have been Permian cuts, so that’s even more pressure on the smaller local service names. The big guys like SLB, HAL, BKR and NOV will survive because of offshore and international work, but the guys focused strictly on North American onshore are probably doomed.

 

One group that might not be getting enough love is the offshore names. I could make a case where the majors might find this current period a good opportunity to start some offshore projects which could be completed right around the time when oil prices spike up a few years from now as a result of all this capex cutting. The services cost on those projects would absolutely be cheap right now with service names likely willing to do the work for cut rates to replace their onshore revenue. If the majors are committed to production cuts and still have money to spend, why not put that capex money into a project that doesn’t produce now but rather completes around the time that the OPEC production cuts are lifted? I haven’t watched offshore names in a long time (only RIG, DO and FTI), but I think it could be time to research what’s going on in that space to find the quality (least bad) names.

 

Trading Plan for April 13-17 – I’m looking for a small pop on Monday as longer term investors absorb the OPEC cuts and all the hype surrounding that which is being blasted this weekend on the news networks. I could see price maybe moving back into the 36-37 range for one test, but I think that test fails miserably. Once the top is in and the supply cut hype wears off, then the reality of the enormous demand destruction will soon set in. If OPEC ever has a “demand increase” meeting rather than a supply cut meeting, then I’m all in on energy, but I doubt they ever find a way to alter demand, and that’s what is really in control here.

 

I cut the 1/4 short position from 36.25 that I was holding on the OPEC pop. Price dropped right into the heart of the Tuesday-Wednesday action and made a good target for a quick 8% gain. So I’m starting fresh on Monday, 100% cash in both the trading and long term accounts. I’m not interested in doing anything in the longer term account this week, it will probably be all short term trading for me.

 

If we get the quick Monday morning pop, I’ll be looking to get short in the 35.50-36.50 range for another go at that trade. If we open down, then I’ll probably just stand aside and see what happens at the 32.25-32.50 level. If things look weak, I’ll probably try a short play there. Trying a long play off that level is probably not a great idea. Not saying it can’t happen, just that if that level breaks, things could move down very quickly, so it’s really hard to control risk there and I’d probably avoid getting involved long around 32.

 

The first good long opportunity will come around the 31 level. I could see XLE making an attempt to bounce at the level where it first gapped and broke out on Tuesday. If 31 can hold, there could be a nice bounce back to the 33 level. Taking a long scalp at 31 also gives a fairly concrete stop of about a dollar to control risk very well. It wouldn’t be a huge trade, but you could likely get 2:1 on the money if it works out. That same trade is likely available for XOM around 40 and CVX around 78.

 

It’s difficult to go much beyond the above plans since the market is just moving with so much volatility. Things should calm for awhile as the FED may be out of the market for a bit and we just sit and watch the virus situation this week. It’s still a dangerous market, so don’t get complacent thinking the volatility is over, because it can change on a dime.

 

Hope everyone is enjoying the three day weekend. This is one of those times where I wish I could have just saved this holiday to spend later. Not really much use for a three day weekend when you have been doing nothing anyway for the last month. Looks like it’s going to be another day sitting on the deck drinking wine rather than heading to the winery. I miss the live music. Enjoy the rest of the weekend and take care of yourselves, keep the mind peaceful.

 

 

 

Weekly Energy Equities Review and Market Outlook for April 6-10

So we are getting a “supply cut”. Everyone has finally figured out they can’t sell the oil and they can’t store the oil, so they are going to “voluntarily” cut supply and make a huge show of it? That’s like having no cash in your checking account and your credit card is maxed out, but you are now going to get responsible and “voluntarily” quit spending. There is nothing voluntary about any of these cuts. The oil industry no longer has a choice to cut, the market is going to make that decision for them. No matter what happens Monday, this dog and pony show isn’t going to make a bit of difference. Everyone is focused on the wrong side of the equation. Oil’s underlying problem isn’t supply, the real issue is demand.

 

 

OPEC – The New FED

We continue to manipulate the oil market rather than letting natural market forces prevail. Much like the FED has done with the stock market, this manipulation by OPEC/Russia/US just keeps the dead weight in the system and leads to harmful inefficiencies. It’s simply Oil QE. All countries should simply let the free market determine price. If shale dies, then it dies. If it was truly contributing in an efficient way, then it wouldn’t find itself surviving only because of market manipulation and endless supply cuts. Right now shale is a parasite living off of inflated prices caused by OPEC/Saudi supply cuts. We saw exactly what the price of oil should be without the market manipulation. A market is a self cleansing mechanism, let the the market do its job.

 

Let’s say we continue to manipulate the market and have supply cuts to keep propping up the price. What happens when they try to reverse those cuts? Remember what happened last year when the FED tried to retract a portion of the QE and rate cuts? Yeah, it crushed the market. What do you think happens the first time OPEC increases production or if they refuse to extend these supply cuts? It will crush price, or at best keep a cap on prices. When the market takes a manipulative course of action, it only leads to the need for more manipulative actions to satisfy everyone and keep the dead weight alive. Why do we keep going down that path? Down cycles are there for a reason and trying to get rid of them just damages the overall system.

 

So do we actually get this supply cut? I doubt it, I think it’s all just a show. It’s a public relations move to shift the blame to the United States and Trump. This was a fight Trump should have stayed out of, yet they baited him into getting involved. They are putting the burden and blame on the US now. Once these talks get going, they are going to ask the US to cut just as much as they each do. The US won’t, talks will break down and both Saudi and Russia will walk away saying,”The US had a chance to fix this, but they chose not to”. And then shale once again looks like the bad guy. I don’t see much way the capitalistic companies of the US (50+ of them) can all coordinate a cut. They have bills to pay and they will continue to pump to pay those bills. There’s also the legal aspects of price fixing and shareholder lawsuits that will get filed when an illegal price fixing scheme turns out to be adverse to shareholders interests. Trump should have just stayed out of this one and let SA and Russia have their fight. Oil’s issue is not a supply problem right now, therefore his involvement is all risk and no reward. There’s just not much to gain here and Trump will end up taking the blame when oil prices collapse and shale is finally crushed.

 

There is one possibility that makes this entire show work, and that’s if this whole negotiation wasn’t over oil. There’s always the possibility that Russia wanted something totally separate from the US and this was their way of getting it. I have no idea what that hidden negotiation may be, but if Russia received something behind the scenes, that would make their change of position more easily understood. Maybe that comes out in time, we’ll see.

 

Let’s say we do get the 10 million bpd cut, is it really going to matter at this point? Probably not. The focus right now is on the wrong side of the equation. Prices aren’t being controlled by supply, they are being controlled by demand (lack of it). As a simplified example, if the world is only using 100 barrels of oil, what difference does it make if you cut supply from 500 barrels to 200 barrels? You still have twice as much oil as you can use and the 100 barrel excess simply goes to storage. Maybe this cut will postpone storage from filling up for a few months, but that’s just kicking the can down the road because it will fill eventually, then what? The current problem is a demand issue caused by the coronavirus, and that’s not going to change anytime soon. Cut all you want, it’s not going to save the day.

 

Also, if we do get the cut next week, I really think oil has already priced in the 10 million bpd cut with this week’s huge jump in oil prices. If these negotiations fall apart or if the cut is anything less than 10 million, price has nowhere to go but down. If these talks fall apart, we likely get a bigger percentage oil drop than we did back on March 9 when the previous meeting ended without a deal. The best case has likely been priced in and there might not be much upside left in the energy sector. Another thing to notice is that the XLE finished the week at about the same level where it was trading when Trump first Tweeted the supply cut. It tried to run, but got rejected twice on Thursday and Friday around that 31.50 level. Oil ripped, but oil stocks didn’t and that’s a pretty clear signal that the sector is still in real trouble, even with a supply cut.

 

If shale does lock itself into a supply cut contract, then what happens when price goes go back up? You really think shale isn’t going to increase production with all that debt to pay back? Some companies out there have no desire to be limited by some agreement with SA/Russia, they are capitalists, and they have responsibilities to shareholders. What happens when price goes up yet a capitalist US company isn’t allowed to increase their capex to take advantage? That’s a clear conflict of interest and they are opening themselves up to shareholder lawsuits. There’s a reason we have antitrust and price fixing laws, and there’s a legal reason why we weren’t previously in OPEC. Slippery slope here. What’s to keep airlines from around the world from all conspiring to fix ticket prices?  I really don’t think people have given the legal aspects of this price fixing agreement enough thought.

 

In summary, I think all this talk of supply cuts is pure show and probably not much of a help even if it does happen in some form. OPEC and Russia are going to laugh the Texas Railroad Circus right out of the room. All we have accomplished is jacking up expectations only to be disappointed again. And while all these negotiations and meetings drag on, those storage tanks keep filling and Putin’s bargaining power keeps growing. Just weeks ago Saudi and Russia put a boot on shale’s throat, and they aren’t just magically going to change their mind and be best friends now. They aren’t stupid and they were not surprised that oil collapsed after their actions, so thinking that they are negotiating because they are in pain is a mistake in our thinking. There’s something going on here, and it’s probably not going to end well for the US. We are being baited into a situation that we should have steered clear of.

 

Overall Market SPY

I’m starting to think people are truly in denial about what’s going on in the economy. It’s like they are all brainwashed that the FED is going to save everyone again. That may happen, but there’s also a chance that this is so large that even the FED can’t save it. There have been 10 million lost jobs in the first couple weeks, and the market just brushed that off. Have we become overly complacent? I understand trading with the FED liquidity rather than against it, but at some point you really have to take a step back and compare what we are seeing now to what’s happened in the past. We were at these market levels a year ago, with ZERO job losses. Are we better off now than we were back then? Will the economy get even worse? Much. I really think we are looking at some kind of delayed reaction here where everyone is currently paralyzed. The trading world is full of young guys who have no experience with bear markets.  I think this gets worse before it gets better. I’m still looking at that 185-200 level. Maybe I’m just wrong, but I don’t think so.

 

You never want to hear anyone say “this time is different”, but does that apply now? We are dealing with people’s primal fear of dying. People can handle losing a house or a job or car. They are much more fearful when it comes to dying. Consumers all came back after dotcom and GFC, but you might not see that this time, at least not immediately. This scare has gone psychologically deeper. Even 9/11 was scary, but that was mostly a “New York” thing for most people. The virus is in their hometowns now, and that’s a different ballgame altogether. The media has really damaged American consumers this time. The social media aspect has also sensationalized things to the point where it’s going to take a long time for consumers to get back to pre-virus levels of activity. While the immediate economic impact is horrible, I think the longer term aspects are going to be much worse, and I don’t think the market is pricing that in yet. The market seems to be pricing a quick end and then a complete snap back in fairly short order. I just don’t see that happening. We have overestimated the death and danger, yet underestimated the economic destruction.

 

It wasn’t a bad week for SPY technically. We closed the previous week at 254 and closed this past week at 248, which isn’t too bad given the downward momentum over the past few weeks. This past week’s VWAP was ~253. Wednesday through Friday stayed in a 6 point range. The 243 level will be a big test next week. If SPY can hold that level, it could bounce and take another shot at that 263 upper boundary. I think it probably fails there, but you never know, there could be a little run left in this thing, especially if we get any good news over the weekend. On the other hand, if 243 fails, there’s not much liquidity down to the 220 area and the fall could be fast. My best guess is we make an attempt at a rally toward the 253-263 area early Monday/Tuesday, but fail and then grind lower the rest of the week.

 

The LQD held 121, but keep an eye on that level next week to see if it breaks down. Also, watch to see if TLT can hold 166. Financials will be the most important group next week and could give the first clue that the market might start another leg down and retest the lows. JPM, C, BAC, WFC, AXP, MS, GS were all weak. They need to show some strength if this market is going to break above 263.

 

Energy XLE

I wrote last Saturday that the XLE was starting to diverge from oil and the SPY, and that a bottom could be on the horizon. That bottom sure looked closer this week as the divergence got even larger. Again, be careful of getting stuck in a confirmation bias if you are short here. There are signs that this market may be turning so you have to start looking for them and accepting them. The XLE closed the previous week at 28.33 and finished this week at 29.83, or about 5.3% higher. This week’s VWAP was 29.33.

 

Thursday’s trade plan worked well with a short above 31 for about a $2 move back down. The same short trade worked again on Friday for another $2 move. I didn’t make any long trades Thursday or Friday. I think any long swing trades chasing that Thursday/Friday rally are very dangerous because there is still a good chance this all falls apart and if it does the XLE could find itself back at the lows very quickly. It’s just one of those situations where the reward on the long side is small and the risk is very large. There’s also the chance that even if we do get a deal that the SPY will take a tumble this week and drag everything down with it anyway. Trading the XLE long while the SPY falls is a losing proposition. I really want to see SPY break above 263 before I put on any longer term energy longs (I’ll still take intraday longs though).

 

The technical picture for XLE is beautiful with a perfect base forming over the last month. There was a nice move down from March 12 to March 19, a bounce from March 19 to March 26, and then a nice smaller base that formed from March 26 to April 3. We have taken three shots at that 31.00 level and all three have failed so far, but at least price has held near that level for another chance at breaking out. The real key for me is that even after we tested that 31 level, we never got any significant pullback greater than 50% of the March 19-26 bounce and there were always buyers in that 27.50 level. If XLE can hold that 27.50 level, it still has a good chance of breaking out. This week will be an important test of the 31-31.50 area and if it can break that barrier, there is room to the 34-36 level.

 

If the 31.50 level fails again, then watch 27.50. If 27.50 fails then there is a good chance that we continue to form a Wyckoff accumulation pattern that I mentioned last week. Before I knew that OPEC/Russia had decided to come back to the table this week, I really thought that we would continue forming this accumulation range for the next couple of months, and we still might. I also mentioned last week that if this is an accumulation range then the 26-27 area would start becoming a fair value price magnet. We tested that area on the open Monday morning and twice Wednesday afternoon. Keep an eye on that area in the coming weeks. If that 26-27 area does fail, it’s not the end of the world, it just means that the consolidation continues and we likely take another look at the bottom of the range around 23-24. Honestly, I’d rather see us build a larger consolidation range over the next couple of months rather than break out here on OPEC news. I think this market needs some time to base out and get the shares into the right hands. A breakout now puts those shares in the fast money hands and that’s not the best thing for creating a longer term trend. I’d rather see this market sit dead on the bottom for awhile and the longer term funds soak up shares and lock them up for years.

 

As for oil itself, the USO put in a 50% up move this week. I don’t think I’ve ever seen a percentage move that big in USO. The question now is have we priced in the best case scenario for oil? I don’t think there is much upside left. WTI should start running into big supply in the 30-33 range. It closed ~29 on Friday. If the supply cut talks break down, then it’s probably right back to 20 and possibly 15. As I said earlier, oil doesn’t have a supply problem, it has a demand problem. Oil prices moving up 50% because of supply events just doesn’t make sense. I’d be much more willing to think the 50% move up was real if it was based on a demand event. Bottom line, I don’t think this move up in oil holds, even if we do get a supply cut, because supply isn’t the problem, demand is.

 

Individual Energy Names

There are some absolutely beautiful charts out there right now. There are two sets of charts, ones that are close to breaking out and ones that are forming a base. The breakout charts include EOG, CVX, XOM, COP, PXD, CXO, HAL which are basically the larger XLE components. The basing charts include the second tier stocks like APA, BKR, CLR, HES, HP, NOV, MRO, XEC. The key this week is to watch the breakout set of stocks to see if they actually have enough buying strength to breakout. If they do, then immediately turn to the list of basing stocks and see if you can establish some low risk positions to see if they follow. Sticking only with the breakout stocks is always a safe option too, but sometimes it’s hard to establish a low risk position on things that have already broken out on high momentum. If the breakout fails, then you could be taking a big loss on those. At least with the basing stocks, you can usually find a lower risk entry. Some combination of both groups could be a good way to go.

 

One thing that has really been working this week is to watch BP, RDSA and TOT. I’ve been up at 3:50 am all week and those three stocks have been perfect in their signal for which way US energy stocks were going to go. There were some early divergences between BP, RDSA, TOT and XOM/CVX, but the former group was always the correct group. If BP/RDSA/TOT were green and XOM/CVX were red, it paid to buy XOM/CVX. It doesn’t always work so easily, but this past week it has been perfect.

 

Trading Plan for the Week – Monday is going to be a crazy day with a  possible OPEC meeting. I’m writing on Saturday morning, so I’m not sure what news will come out the rest of the weekend, but for now, I’m going to assume that the meeting is on. I think we may get a big gap up on Monday morning, and if we do I’ll probably be looking to monitor that for awhile and then take a short position if I can find a safe way to control risk. If XLE does anything crazy like gapping anywhere near 33, I’m definitely in short. If we open close to Friday’s close, then I’m probably moving to the sidelines and let the meeting happen and then look for a trade. If things fall apart over the weekend or if we gap down Monday, then I think there will be an opportunity for some intraday trades on the long side Monday because the headlines will probably be heavy all day. I really don’t have my eye on any certain prices, because the magnitude of the moves on Monday could be anything.

 

But let’s just assume it’s a fairly calm day. On the upside I’m looking at the 31-31.50 area to see what kind of supply is there. On the downside, I’m watching 29-29.25 to see if there is still solid demand under there from Thursday/Friday. My best guess is we open right in the 30-30.25 area if the day is calm, and there’s really nothing there that I want to trade. I’m not getting involved unless we reach one of the outer extremes, either 31-31.5 or 29-29.25.

Quick Edit: Just checked all my news sites one last time before hitting send and it looks like there is a possibility that the OPEC meeting might be shifted to April 9. Not sure if this is true. If it is true, then look for XLE to likely gap down. This whole negotiation thing is a delaying tactic while those tanks fill, and then the power dynamic shifts dramatically.

 

This is one of those weekends where it is really hard to make a plan since there are so many moving parts. I’ll probably wait until Sunday night or early Monday before I make a concrete plan. I’ll try to post again early Monday morning.

 

So that’s where I stand in energy this week. I’ve really tried to stay off social media again this week and that has helped keep my mind peaceful. I’d definitely recommend a social media break if you are finding yourself stressed or distracted by the nonstop virus hype. You guys know my thoughts on that whole virus matter, but I would like to put the following out there for you guys. It isn’t personal opinion or venting, I think it’s something that many people are overlooking. Please give it a quick read.

 

Coronavirus Prevention

While all this quarantining is an immediate and temporary fix, there is something you can do to fight the virus. Strengthen your lungs and heart by getting in shape and dropping the excess weight.  Quarantine might stop this first round, but you can bet the virus will be back this fall, deadlier than ever. You will get this virus as some point, everyone will. You have time to prepare. Most people will sit around and wait for daddy Trump and the government to save them, but don’t be one of those people, be responsible for your own health. I’m not saying exercise is going to save you, what I’m saying is that if your lungs and heart can’t handle the 35 minutes that it takes to run a 5k, then the virus is probably going to hit you very hard. Look, I know some people are just heavy, I’ve been there. I weighed about 240 about five years ago and I’m only 5’10. I couldn’t breath at night trying to sleep and I sure couldn’t breath after walking a few flights of stairs.  Even the regular flu would knock me down for weeks and made me think I was going to die. I’d hate to see what coronavirus would have done to me in the shape I was in. Just get out there for 35 minutes and put in a 5k every day, that’s all it takes.