Weekly Energy Equities Review, Market Outlook and Trading Plan for May 3-7

Another very short writeup this week. Some months are just packed with too much stuff to do and this is one of them. High school graduation activities have taken up the last few weekends and probably the next couple as well. Just wanted to get a few things down on paper so I could look back on what I was thinking this week.

 

This is such a strange market. Technical analysis is not really working that well lately. Almost everything I look at suggests the market should be topping out and getting a much needed correction. However, there just seems to be this odd force behind the market that is extremely difficult to read with traditional methods. I don’t use indicators, but I actually took a look at a few this morning and they aren’t working either. There are divergences on almost every chart and indicator levels all suggest a reversal and correction, but the market just keeps on running. At some point, you just have to trash all that stuff and try to read the flow and structure as best you can without it. That’s where I’m at right now with this market.

 

I’ve written over the last couple of months that I’m looking for one final blowoff top, especially in the IWM, however it really hasn’t come close to happening. The IWM is sitting right in that 226-234 area and showing no intention of making a parabolic run at 250. SPY and QQQ are pushing right up against new ATH but just can’t seem to get that final push up to establish a blowoff top either. Just as the market needs that final capitulation selling climax to form a solid bottom, it’s my opinion that the market also needs that same buying climax action to form a solid top. We just don’t have that yet. If this market turns down without that buying climax, that’s probably a good clue that there’s more upside left after the dip.

 

SPY – Thursday’s action produced what candlestick chartists call a “hanging man” pattern and Friday’s action put in a confirmation of that pattern. The concept behind it is that when the market is at highs and the buyers pullback, the bottom falls out because there’s no support under the market, kind of like a gallows I guess. It suggests that the total buying is being done by just a few in number. When those few buyers pulled orders on Thursday, the market showed no support and it fell quickly. When those buyers returned, the market shot right back up quickly. It basically shows that the buying is concentrated in just a few forces that for whatever reason don’t want this market to fall. Someone is holding it up, but when they pull their orders, there’s nobody else willing to buy. The point to watch early this week in the SPY is 416.30. If that level breaks, there could be a quick move to 410-411. If that area breaks, the correction could be on.

 

QQQ – Tech showed the same action as SPY on Thursday, but it wasn’t as defined. However, it did show the same confirmation on Friday. Watch the 334 area this week for support. If that breaks, there’s really nothing to stop the fall down to 314-315. On the upside, the 342-343 area is the point to watch. Like I said earlier, I’m looking for one final blowoff and if tech can take out 343 the euphoric top could be coming.

 

IWM – This is the concerning market for me right now. That head and shoulders type pattern continues to evolve and the action on Thursday and Friday was a clear right shoulder. The 226-227 area has been a huge level over the last few months and it failed completely on Friday. Can the bulls mount one final push to take out 234 and get that parabolic blowoff top or has IWM simply run out of steam and headed for a correction? The levels in IWM are cloudy. There’s an area around 221-222 that needs to hold early in the week. There’s another level below that at 215 that absolutely must hold, otherwise price is probably headed for that neckline of the larger head and shoulders pattern around 207. If 207 were to somehow break, there’s nothing to stop a fall down to 170-175. This  market seems to be hanging by a thread and risk management has to be the primary concern this week. Protect yourself.

 

TLT – The TLT got the pullback that I was looking for in last week’s writeup, but it found solid support around 137. If that’s big demand, then the TLT could be getting ready to make a major trend change to the upside, which might be a negative signal for the equity markets. Money could be about to flow from stocks to bonds in a big way. Watch the 140-141 level this week to see if the TLT can establish the start of an uptrend.

 

GLD – Gold continued to move in tandem with TLT. It pulled back most of the week, but found solid support in the same area as the lows in December and mid-February. Watch the 168-169 level to see if GLD can breakout and establish an uptrend with TLT. If traders start moving into gold, that could be a further sign that money might be starting to look for some safety. GLD hasn’t been that safe haven lately, but if some panic shows up, gold could live up to its old reputation as a safe store of value.

 

UUP – The dollar seems to have found a bottom with Friday’s price action. If the dollar starts an uptrend, that could be a negative signal for oil. Much like GLD, if there starts to be a bit of panic in the market do traders move into the safety of the dollar?

 

In summary, we could be seeing the beginning of a move into bonds, gold and the dollar with a move out of stocks. If that happens, there’s also a good chance that traders move out of risk on categories like oil. There’s a possibility that we get a dip this week, but as always, the question is whether it’s a buyable dip or the start of a larger correction. I think this time it could truly be a correction that might last a little longer than the normal “dip”.

 

Energy, USO, XLE, XOP

Having said all the above, you can see I’m a bit negative biased on the overall market for the coming week. However, that doesn’t translate to energy. I think a dip in the overall market could provide a golden opportunity to get into XLE at a great price for a solid risk/reward trade. If I’m wrong on the trade, then all you can do is just tip your cap to the bears, take the defined loss and move on. The market only offers a limited number of opportunities so you can’t skip the good ones.

 

So what’s a good entry for XLE? The first level I’m going to be watching is the 48-48.50 area. I posted the Wyckoff accumulation chart on Friday showing a pullback to the last point of supply, which is around 48. That would be a perfectly normal occurrence if this is truly a Wyckoff accumulation. It’s one of the prime entry points for any Wyckoff trader. I’m willing to start in long there, but it will probably be for a bit smaller position than usual.

 

Then next entry point that I’m watching is the 46.50-47.50 area. If the last point of supply fails on the Wyckoff pattern, there’s the possibility that the larger players are going for one final shakeout to establish their long positions for the next run up. There should be a ton of stops in the 46 area in XLE. I wouldn’t be surprised to see them take the market there for an easy stop hunt accumulation before taking it back up toward 50. The key here is to size the long trade at 48-48.50 small enough to where you leave yourself enough room to add to the position near this 46 shakeout point. I’d probably start the entry around 46.50-47. The total scale in long should give you an average price of around 47.50 for the trade, which provides a great risk reward.

 

If the trade is wrong, you can probably stop it around 45. The risk on the trade is about 2.50 and the reward is a potential move back to that 54-55 level for about 7 points of profit. It’s nearly 3:1 on the trade as a whole. I’m willing to take those odds every time. And like I said, if the trade fails at 45, just take the loss and wait for it to hit a bottom somewhere in the low 40’s and give the long trade another shot there. I’m absolutely willing to try the long trade again around 42 for what would be incredible odds for a run back to 54-55.

 

As for the USO itself, the obvious pattern is a double top. However, it’s really just a similar pattern to what’s going on in SPY and QQQ. You either get a cup and handle type formation here and a parabolic run higher or it corrects. There’s really not much in between. Watch the 44.50 area for a test early in the week. Oil should move with stocks, so keep an eye out for any divergence between the two.

 

That’s really all I have for this week, but I may put together a wish list later today if I have time. If this market does take a big dip, it’s important to know what you want to do ahead of time and which targets you want to hit since most corrections have snapped back very quickly over the last year. My primary watch is 48-48.50 in XLE for the scale in long play, and then the 46.50-47.50 area for completion of the position. I’ve also still got the IWM short play up at 250 on the radar, but I don’t think it gets that move this week. I’m also still watching a small cap play in WTTR. I’d like to see it get closer to 4 to start in long, but I may enter sooner depending on the action in XLE early in the week.

 

Like I said above, this is one of those weeks where you really have to play it by ear because technical analysis hasn’t been effective lately. I’ve only got a few moves this week and my primary concern is risk management and avoiding getting caught in any market correction. I know the correction is coming, and it could be a large one. I’m willing to let some profit go in favor of capital preservation. Always keep the powder dry for the bigger opportunity. Good luck this week and definitely make protection your primary focus.

 

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Energy, XLE, XOP, USO

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

It was another week of rangebound trading for most energy names. I wasn’t going to write an article this week because there really wasn’t any significant movement or tradable setups to talk about. But after thinking about it, maybe that lack of movement IS the reason to write this week. The overall market continues to make new highs and almost every sector is participating. Everyone is making easy money these days, except energy investors. And that itself might be a big problem.

 

Back in November, many funds poured into energy. I’m not sure how they justified the investment over other sectors. Perhaps it was simply the fact that energy was so beaten down that it had to go up. The sector was so far below the pandemic start level of February 21, 2020 that the risk was worth the reward. And the sector is STILL well below that pandemic start by about 10%. The real question in energy right now is this: How much longer are these funds going to tolerate zero growth or return in energy when they could be deploying that money elsewhere for much higher returns? How much patience do these big holders have right now? At what point do they finally throw in the towel, take their profits and dump these energy names in favor of better plays?

 

I’m not saying that this is going to happen, but it’s something you really have to consider if you continue to try and play this sector on the long side. There’s also the additional problem of what happens in energy if this insane SPY meltup tops out and corrects, because eventually it will. I tried to point this out a couple months ago, but energy is a lagging sector. No matter how much people have called it an outperformer over the last 6 months, it just isn’t. If you go back to the pandemic start, most energy names are still well below that level. In the bigger picture, energy is a laggard in this market. And if the overall market does correct, you know which sectors will crash first? The weaker lagging ones. Sell weakness, buy strength. I’ve even seen many of the Twitter crowd justifying their energy plays on the basis that they are so lagging that surely energy has to catch up. That was their entire trade thesis. It did work for awhile, energy had a nice run. But will that logic work again at this point in the overall market cycle? The odds seem to be against it.

 

And again, I’m not saying we are looking at the sector collapsing. In fact, with the current market insanity, we could wake up Monday and energy could gap up and make a run at that 54-55 level in the next couple weeks. This market is manic right now and it continues to run on pure emotion and easy money. Believe me, I’d like to see energy make another run through 55 myself because trading has been absolutely horrible in the sector over the last 5-6 weeks. But trading is a game of odds, and the odds seem to suggest that the sector is weaker than the overall market and if you play the long side you are probably taking the short end of the odds proposition.

 

So the real question right now in energy is this: How long are the current players going to hold these rangebound positions when there are better opportunities elsewhere? And how quickly will they bail on these rangebound positions if the SPY tops out and corrects? Sell weakness and buy strength.

 

SPY – The SPY has lost all perspective and the emotional meltup is in full effect. Who knows where this stops, but it will stop and the correction could be substantial. I really don’t know how people are pouring their money into the market at a 417 SPY level, but they continue to do so. It really makes no logical sense. Why in the world are people so anxious to buy at these insane prices? I guess that is the rule of any bubble. At some point, this will be a great short, but I don’t think it’s time yet. Things may get even crazier on the meltup.

 

QQQ – Tech managed to propel through the double top situation that I set forth last week, but the action wasn’t as euphoric as expected. But still, new highs are new highs. The meltup in QQQ might march along with the meltup in SPY. As for shorting tech, just don’t do it. If this market does correct, I think there’s a good amount of money just waiting for tech deals. There’s also a lot of money that will move to the perceived safety of megacap tech if the overall market corrects.

 

IWM – The smallcaps are a concern right now. They just aren’t participating in this SPY/QQQ meltup. But remember, they were slow to participate in the move up when SPY and QQQ broke pandemic highs in August. The IWM didn’t manage to break out above pandemic highs until that November 9 vaccine jump day. I’ve been calling for a meltup in IWM toward that 250 level and I think we still get there. The IWM is representing a big head and shoulders pattern right now, but I think this one has a great chance of turning into a continuation pattern rather than a reversal pattern. Watch 226-227 this week for the breakout. When this thing breaks that level, it should push 234 within a few days, and then the meltup to 250 is on. I’ll be waiting at 250 with a whole lot of dry powder ready to get short in a BIG way.

 

TLT – The TLT really tried to make a turn to the upside, but it remains to be seen if this is a larger picture turn or just a dead cat bounce. A downward moving TLT (higher rates) has been an important factor for smallcaps, banks and energy. If that TLT trend reverses and heads up, that’s a negative for KRE and XLE. If I had to guess, I’d say this bond move was a dead cat bounce. There’s really no way that rates should be going down in the bigger picture given the inflation numbers and continuous free money being injected into the system. Keep an eye on the 137 level on the downside and the 141 level on the upside.

 

GLD, GDX, UUP, USO – The UUP has been in a sharp 12 day downtrend, but it  may be hitting demand at this 24.60 level. If the dollar starts to bounce, that’s probably going to be a negative for USO and XLE. If you look at USO and UUP side by side, UUP started a sharp move up on February 25. That move really sent USO into a flat rangebound pattern. That UUP move up topped on March 31 and headed down quickly, yet USO didn’t take advantage or move up on that dollar weakness, but it should have. That’s a clue. If the dollar bounces next week, watch how USO reacts. One more tip, watch USD/CAD for clues. Price really seems like it’s trying to make a bottom in that pair and buyers stepped up to defend this latest drop right in that 1.2450 area, which is exactly where they stepped in back in late February prior to the mid-March lows. It’s a bit of an inverted head and shoulders, so see if price holds that left shoulder, as well as the head down around 1.2375. If that long downtrend in USD/CAD breaks, that’s a big negative for USO.

 

The GLD/UUP correlation is working as expected. The sharp UUP down move that started 12 days ago has sent GLD and GDX moving up the last 12 days off that March low. Keep an eye on GLD this week, as it will also offer some clues on the direction of the dollar, which in turn offers clues on USO. One other correlation to watch is TLT/GLD. As the dollar has weakened over the last 12 days, both the TLT and GLD have moved up in response. GLD and TLT have been moving together since last August and continue to do so. Watch for any divergence between the two.

 

Energy XLE, XOP

Last week’s article was all about the 50 day moving averages in most of the energy names. The XLE made an attempt to get above the 50ma at 48.75, but it failed and closed at 48.40. The XOP made an even worse showing as it only managed to get above the 50ma of 81.17 for a short time on Wednesday before dropping back below on Thursday and Friday, closing well below at 77.51. That’s not a positive development. Three of the four majors (XOM, CVX and BP) managed to hold the 50ma, while RDSA failed.

 

The important thing to notice is that the 50 ma’s began to fail more as you move down in market cap. It’s the reason why the XOP performed worse than the XLE. That could be a sign that the faster trading money is leaving the sector. It’s fun when the small cap energy trash takes the XOP up, but not so much when they start to fail and take the XOP down. The XOP correlates more with the IWM, while XLE correlates better with the SPY. It’s simply a matter of the market cap of the individual components of each ETF. This week will be another battle of the 50 ma for most energy names, as well as a battle between the faster trading money and the longer term investing money.

 

One subsector in energy that I’d probably avoid this week is the service names. SLB, HAL, BKR, NOV and HP are all well below the 50 ma now, and falling. It seems like the service names should be seeing better buying with production moving back toward that 11 million bpd number, but they just can’t seem to get any traction. Is the service name weakness a leading indicator that production may fall in the coming months?

 

Three of the big four refiners also closed below the 50 ma. PSX, VLO and HFC closed below, while MPC barely held about 25 cents above, likely only because of the big gap up Friday morning. I keep seeing Twitter pumping strong gasoline demand, but the refiners just aren’t responding, even with USO topping out a bit.

 

The natural gas names all continue to lag well below the 50 ma. EQT, COG, RRC, AR all closed below the level. However, the UNG did actually try to make a run at the 50ma and I’d watch that this week to see if it can get above or if there’s a clear rejection at the 50ma around 10.05. If it clearly rejects, then that’s just another negative for the sector. But if it can get above, at least there’s some hope.

 

The strongest subsector in energy right now is the pipeline and midstream names. I don’t really follow this portion of the energy sector very closely, so I’m not sure if this is simply a factor of the way they make money with pricing or if traders perceive safety in these names. Whatever the reason, ENB, OKE, KMI and WMB all remain well above their 50ma. It’s probably a significant piece of information if those top out and correct and could point to a correction in the sector as a whole.

 

Trading Plan for the Week – This market has really turned into a daytrading market. I haven’t been doing any swing type trades, especially in this rangebound energy sector. I don’t have much planned for this week either. I need to see some real demand to spring these names off the 50ma’s. I’d be willing to try a few trades on the long side if XLE can take out that 50-51 level, but even then there’s the 54-55 level standing just a couple points away. As you guys know, I’m big on risk/reward with almost all my trades and buying 51 in XLE hoping for a reward of 54-55 just isn’t my approach. There’s just not enough reward in that little 3-4 zone to offset what could happen on the downside if this market tops out and corrects. I really doubt I’ll be doing any swing trades in energy this week.

 

However, a break of 50-51 does leave opportunity for much shorter intraday trades. I think if demand does take out 51, then it might be an easy move back toward that thick supply level at 54-55, so why not ride along on that move? I wouldn’t hold the trades overnight and expose yourself to gap risk, but buying any opening dip and holding for the day might be an excellent play.

 

I’m still watching WTTR for a long play if it breaks down under 4.50. It closed at 4.90 on Friday. I’d like to start a scale in at 4.50 all the way down to 3.50 for an average price on the long trade of somewhere around 4. This is a longer term trade though, not a daytrade or swing trade type play. I’m looking at 2-3 months on this one.

 

If the energy sector remains stuck in this range again this week, my attention will probably turn toward the IWM. I’m willing to take a shot at a 226-227 breakout and a run toward 234. Again though, this is much like the 50-51 to 54-55 XLE situation. The reward isn’t that large compared to the overnight gap risk, so I’ll likely play the IWM move as consecutive daytrades by trying to buy the opening dip each morning this week and holding for an all day run. If I catch half of the total IWM move, I’ll be very happy. Ultimately, I’m expecting a blowoff in the IWM toward the 250 level where I’ll be getting short. But why not jump on for the ride up to that level?

 

That’s really all I have for this week’s trading plan. I expect it’s going to be another very slow week. The first month of this quarter was pretty much a big fat zero for me and now I’m probably playing catch up to make the quarter goal. Patience is difficult sometimes. At least the month wasn’t negative I guess. Always look for the bright side. Good luck this week and stay on top of that risk management, this market can turn on a dime quickly.

 

 

 

Weekly Energy Equities Review, Market Outlook and Trading Plan for April 12-16

Sorry for the lack of articles the past few weeks, but there’s really been nothing to write about. Energy is stuck in this dead zone in the 47-50 range and just hasn’t been tradable at all. I’m hoping for a nice move up this week though and I’ve got a long play on tap for the open on Monday. The key to this week is the 50 ma in almost every energy name, as well as the XLE and XOP. If the energy sector is going to bounce, it should be right here on a test of the 50 ma’s.

 

The real culprit in this dead zone is USO. It has wound into a fairly tight coil this past week and has almost come to a complete standstill. Thursday and Friday were two of the smallest range days in a long time. In fact, there’s a triple inside day formation going on with Thursday being inside Wednesday’s range and Friday being crammed within Thursday’s range. It’s definitely due for a breakout and I think it likely breaks to the upside. Watch 41.69 this week to see if it an break out. On the downside, watch 39.52.

 

A few other things to watch for energy signals are TLT, KRE and USD/CAD. Much like USO, the TLT has been stuck in a fairly tight range, which has also limited KRE to a tight range. KRE and XLE have been moving together for many months, mostly in sync with rising rates. With TLT (and rates) moving into a flat range, so too has XLE and KRE. Watch the breakout direction on TLT this week. If TLT resumes its downtrend, then KRE and XLE should move up. If TLT decides to start moving up, then watch for the banks to possibly roll over, along with XLE/XOP.  The TLT is also the key to this IWM/QQQ rotation that has been going on. As rates go up, tech moves down and small caps have moved up, taking banks and energy with them.

 

I posted a USD/CAD chart last week and was looking for the pair to possibly break out of a long downtrend, however it got rejected on the breakout attempt and rolled over and moved right back into that downtrend, which is a good thing for USO. If UUP continues to weaken, that’s a benefit for USO. Watch the 1.2630 area on USD/CAD on the upside and the 1.2475 area on the downside. One other signal that seems to suggest the dollar may weaken is GLD and GDX. The miners are trying to breakout of a downtrend that started back in August. If GLD and GDX both start moving up sharply, that would suggest that the dollar might resume its downtrend, which would be a big help to oil and other commodities.

 

In summary, if the dollar and bonds weaken, banks, smallcaps and energy should resume their uptrends.

 

SPY – This is the worrisome area of the market right now. It’s pretty much going parabolic with a 7% move in 11 days. This just can’t continue, it’s not healthy at all. Over the last few months, I’ve been writing about a coming blowoff top and it could be coming in the SPY. I read an article this past week which said that more money has piled in stock funds in the past five months than the entire past 12 years combined. Big money exiting the game and leaving retail holding the bag? I just get the feeling that the smart money is (or has already) liquidated holdings and could now be driving the market to a level that would produce a nice juicy profit on the short side. And after the crash, the whole game starts over again. I’m out of everything at this 411 SPY level. I may miss some upside, but this house of cards could be getting ready to fall. My best guess is that it happens sometime in that September/October timeframe.

 

QQQ – The obvious pattern in tech is a double top, but that’s probably just too obvious and too easy to actually be what’s happening. This week will tell a lot about tech as it tries to make new highs above that February peak. If it fails and double tops, that’s going to be a problem. If it breaks upward, then the parabolic move is probably on, along with the same parabolic move in SPY.

 

IWM – The concern here is that the market is trying to form some type of rough head and shoulders pattern. I’m not much for technical patterns, it’s just a good common label to try and describe what I’m seeing. The market ran in February, pulled back and then ran to a new high in March. It’s currently trying to run again, but got rejected in the area of that February left shoulder high. If SPY and QQQ go parabolic, then I’d expect IWM to break that left shoulder high and make a run at the head high around 234. If that right shoulder forms though, the downside watch is at 210 on the neckline area. Again, I don’t put much faith in these canned patterns, it’s just an easy way to describe the chart in words that people seem to understand.

 

I’d really like to see IWM make one more blowoff move up toward 250. That’s where I’d like to take a shot on the short side. I’d also consider a short play in SPY if it blows off to the 430-440 area. Tech is a tough one to short because I think if the overall market does correct, a lot of money will move to the safety of megacap tech. I have no desire to short QQQ.

 

Energy XLE, XOP

I feel like XLE might be getting ready for a little shakeout to the downside and then a move back into an uptrend. I’m watching the 47-47.25 area on Monday to take a shot on the long side for a run back toward that thick 54-55 area. As I said above, watch the USD/CAD and UUP for dollar strength clues. If the dollar weakens, then USO should snap out of this current tight range and move back to the upside. Also watch the TLT. If it starts moving down again, then banks and energy should resume their rotation buying and both move to the upside again.

 

On a technical view, the XLE is sitting right on the 50 day moving average. XOM, CVX, BP and RDSA are right at the 50ma. Watch how the majors respond to any move below that 50 ma this week. The one problem area in energy could be the service names. SLB, HAL, HP and NOV all moved below and closed below their 50 ma’s. It’s the same thing for the refiners with MPC, VLO, PSX and HFC all trying to get below their 50 ma’s. If this market is going to gather some strength and try to bounce, this 50 ma area is the place where it should happen. If all these sector components start to lose the 50 ma’s, then the sector could have another leg down toward the XLE 42-44 area.

 

While the 200 ma is a long way down on most of these names, there is another technical level underneath this market. That level is the VWAP from those late October lows. If there are sellers in energy, they could push it to the average price on this entire uptrend from October. In the XLE, that VWAP is sitting 42.50-43.50. That range is with two VWAPs, one starting at the late October lows and the other starting on the November 9 gap up day. If there’s another leg down in energy, it should find demand in that 42.50-43.50 area. For the XOP, that area of demand should show up in the 67-69 area.

 

Trading Plan for the Week – The last three weeks of trading have been completely dead for me. I have no desire to jump in long at these levels in the SPY and QQQ. Sometimes you just have to let things go and sit back and wait. Patience really is a virtue. As for energy, it’s been even more dead than the rest of the market. This week the plan is to try an XLE long on any shakeout move down toward the 47-47.25 area and 50 ma test on Monday morning. Basically, I just need some signal that the low area around 47 (and the 50 ma) is going to hold. If I see strength under energy, a falling TLT, a falling dollar and a rising KRE and IWM, then I’ll be looking for a defined place to jump in long on XLE. All those things need to align though.

 

I’m still not interested in any individual energy names, but I do have one target that is interesting. I’ve mentioned WTTR a few times in the past and it’s one of the few companies that I’d actually be ok with holding for the longer term. If it makes a move down toward 4.50, I’ll start a scale in long all the way down to 3.50, hoping to end with an average price somewhere around $4.

 

I’m not interested in getting long in any other area of the market right now. In fact, the only trade outside of energy I’m looking for in the next couple weeks is an opportunity to get short on a parabolic blowoff move, hopefully in IWM.

 

Again, sorry for the lack of articles and Twitter posting lately, but I’m just not interested in this market where it is currently sitting. I think it’s incredibly overextended and controlling the downside risk just isn’t possible. When this market decides it’s time to correct, the move will be so fast that you won’t be able to get out. I’d prefer not to get trapped in that situation, so I’m willing to sacrifice some upside in the name of risk control and capital preservation. That’s just how I trade. If you decide to chase here and ride the parabolic move, just don’t get greedy. Make your money, take profits along the way and protect yourself for the coming move down. Good luck this week.

 

Weekly Energy Equities Review, Market Outlook and Trading Plan for March 22-26

The XLE finally got a much needed 10% pullback which left many traders wishing they would have taken profits up at that 54-55 level. I’ve seen a lot of bullish arrogance in energy over the last few weeks. A lot of ‘to the moon’ and ‘$125 oil’ talk, but last week was a reminder that the sector can still bite you if you aren’t careful. It was a good run off the October bottom, but price ran into a brick wall at that 54-55 level on the ten year chart. That level is probably a little thicker than I thought given the pullback so far. Things can’t run straight up forever. The SPY, QQQ and IWM all had rough weeks too. In last week’s article, I discussed how the end of the bull market could be near and this week’s action seemed to support that position. I really thought this market had one more blow off run in it before a major pullback, and it still might, but things looked really soft last week and I wouldn’t be surprised if we got a major pullback soon. If the bulls are going to recover, they need to do it early Monday or this market could be headed down even further this week.

 

Something seems to have changed after the Wednesday FED meeting and speech. I think there’s some feeling that the lows for rates could be in and the FED free money could slow soon. As the economy gains strength, the FED seems to be acknowledging the fact that their job has been done and they may be more willing to let the economy try to stand on its own feet. The TLT will be an important watch this week. If it keeps falling (and rates keep rising) the equity markets might show some concern and roll over into a significant pullback. On the other hand, if the TLT starts to rise, that could produce a bit of a Goldilocks situation and fuel the final blowoff leg in the bull market. I’m still on the sideline and see no good long or short trades. I’ve planned a few longs if we pullback and also a few short setups if we get that final blowoff move, but mostly it’s just a time to sit and wait for the market to give the signal.

 

SPY – The SPY made an attempt to break out just after Wednesday’s FED meeting, but failed and topped out at 398.12. Thursday and Friday followed with big down days on solid volume. Something about the FED meeting made a difference in positioning. Last week’s high/low price range is the marker for this week’s action. Will the SPY make another run at the 398.12 high or the 387.15 lows? Look for price breaking out and establishing beyond one of those extremes, with a continuation in that direction.

 

QQQ – Tech is stuck in a range between 324 and 311 right now and it’s difficult to tell if this is an accumulation or distribution area. The important points for Monday are 311 on the downside and 317 on the upside. If the market breaks 317, that should open another test of 324-325. If price fails up there again, things could get ugly. If the market breaks 311, that immediately opens up 300. The rotation trade from tech to banks/energy is still there, but not quite as strong as it was, it’s getting mature. Keep an eye on the QQQ and IWM correlation.

 

IWM – Small caps are where I think the biggest short opportunity may develop soon. I’d really like to see that final bullish blowoff leg up toward 250 for a big short play, but I’m no longer sure if the market has that kind momentum left in it. Traders are starting to get a little cautious. The 226-227 level remains the area to watch for directional clues. Price broke that level Friday, but then managed to grind back above it to close at 226.91. Watch the Friday low of 222.95 on Monday. If that 223 area breaks, there’s room to 215 and then 205. On the upside, watch 229.50-230.50 early Monday for any reaction there. If there are sellers above the market, that’s probably where they will first show.

 

TLT – There just doesn’t seem to be a bottom in this thing. Price gapped down on Thursday after traders had time to digest the Wednesday FED meeting info, but they did grind it up steadily off the 133.19 low to close at 134.77, which is near where price was at the 2pm Wednesday announcement. I think TLT is the most important market signal for the upcoming week. If TLT continues to fall and rates rise, equity markets might have difficulty, although that falling TLT has been a benefit to KRE and XLE. Watch the 135-136 area on Monday, if price fails there, it could then make another move at last week’s lows which might lead to equities failing.

 

GLD/GDX/UUP – Gold got a big pop off the Wednesday FED meeting info, but then gapped down on Thursday with TLT. As traders grinded TLT back upward, they pushed GLD upward even faster. These two have been moving together since last August and seem to have no intention of diverging. The GDX long trade continues to perform well and topped out around 34.50 before closing at 33.83. I’d need to see 36-37 before saying that the trend has changed from down to up. Right now it could go either way. It’s been a good move in GDX, but the bigger trend since August is still down.

The UUP is probably the second most important watch (after TLT) next week. It has been building a base and could be getting ready to break upward to the 25.40 area. As rates continue to rise, the world chases that yield which will inevitably strengthen the dollar. A strong dollar is a bit of a headwind for GLD and USO, as well as other commodities. As GLD and TLT gapped down on Thursday, UUP gapped up. The immediate moves after Wednesday’s announcement was GLD moving up sharply with the dollar weakening. Watch the GLD/UUP correlation this week and any effect that has on GDX.

 

XLF/KRE – As rates keep rising, so too do the financials. This rotation out of tech and into banks/energy continues to hold, but I’d be cautious with that correlation going forward. That rotation trade is getting very mature. If banks start falling, that’s a good warning signal that energy may also fall further. The KRE also represents a big portion of the IWM, so the TLT/KRE correlation is also good information about which way IWM should be trending.

 

Energy XLE/XOP/USO

In last week’s article, I wrote that it was time to lighten up in energy at the 54 level. That turned out to be good advice as the XLE closed the week about 10% lower at 49.53. That 54-55 level on the TEN YEAR chart turned out to be very thick. But that call wasn’t about being right or wrong with regard to the XLE direction, it was mostly about not risking a big downside for only a small upside reward. At 54-55, there just wasn’t much reward left on the upside, maybe 4-5 points. Well, the downside is already 5 points now with the possibility of growing even larger. I’ve made this point a few times with energy up at these levels, but risking more than you can make on a trade isn’t a very good long term trading strategy. Trading isn’t about being right or wrong, it’s simply about math and getting good odds on the bets you are putting down. Nobody knows which bets they will win, that’s why they all need to have a positive expectation to show a long term gain. Anyone buying above 50 now has a very difficult decision, take the loss now or risk a much bigger loss if the market turns down? And how many of those traders who got long above 50 will sell out breakeven if price gets up there again? Would have been a much better move to accept the math, take the profit up at 54 and wait for the pullback to try the trade again.

 

So where does energy go now? The upside still has some big problems. That 54-55 level is THICK. There are many older holders from 2009-2020 still sitting just above 55 and we saw exactly how thick that level was on the last test. The question now is do those sellers get more aggressive and come down to the 50-52 level to try and escape? In addition, now we also have some current bagholders that purchased in the 50-55 area who are probably going to be sellers if price moves up 10% and let’s them out breakeven. And do the current bears also show up to sell/short that 54-55 level on the next test? What about the buyers from October 2020, are those guys done taking profits or are they also going to be sellers if XLE takes another shot at 54-55? What you now have is 4-5 different groups who are all sellers targeting that 54 area. XLE has added even more supply to what was already there. I’m not saying that price can’t get through 55, but it’s getting really crowded with sellers up there.

 

The real problem for energy is if TLT continues to fall (rates up), the UUP decides to break to the upside and SPY/IWM both fall. That situation just brings out even more sellers in addition to the ones mentioned above. Not only will there be more sellers, if the overall market starts to roll over, those sellers will get way more aggressive. The XLE is sitting in a very dangerous situation. I still don’t think it’s time to get long XLE yet, but a long play could develop if there’s another sharp move down toward 45-46, or even as far as 42. I also wouldn’t short XLE, as any snap back toward 54-55 could be sharp. We’re just kind of in no man’s land right now with energy.

 

One concerning thing I’m seeing on Twitter is many posters claiming that the bullish thesis is still intact because the fundamentals haven’t changed. To this I would say, “What if the recent move up in XLE wasn’t so much due to fundamentals?” If the move up wasn’t based on fundamentals, then does it really matter whether they have changed or not? No, it doesn’t. I’ve tried to make this point several times that there are two (or more) separate drivers in energy, fundamentals and rotation/momentum. So many people don’t seem to notice the difference. If you don’t know the difference, then how will you ever know when to exit your trade? All these guys are leaning on the fundamentals, yet the XLE just dropped 10%. If XLE price continues to drop, then how long are you going to lean on those fundamentals (which aren’t the primary price driver), to make your exit decision? What if this entire move up in XLE was simply a faster money rotation/momentum trade rather than based on fundamentals? I think there are many looking at fundamentals when they should be looking at rotation/momentum. That blind dedication to fundamentals could cost them all their profits before they realize this move wasn’t about fundamentals at all. KNOW WHY YOU ARE IN ENERGY STOCKS.

 

In the bigger picture, the XLE still hasn’t recovered the February 21, 2020 pandemic start date. Energy is still a laggard in the overall market picture. I’ve said this a few times, but buying the laggard and hoping it catches up to the rest of the market isn’t the best trading strategy. You are buying relative weakness when you should be buying relative strength. You know what goes down first (and usually the most) when the overall market turns down? Yep, the laggard. What if we look back in six months and find this entire energy move was nothing more than a dead cat bounce in the bigger picture? It’s possible. Don’t get tunnel vision into the lower timeframe charts. Focusing on the bigger picture can really keep you out of traps.

 

I’m still not buying all the Twitter hype on energy, there’s just too many people on the long side of the trade and they are all talking up their own supporting narrative. The companies all still have their usual, long standing problems. Debt, burdensome dividends, bad management, low to no cash flow, ESG competition, political headwinds, etc. In addition, it’s more than clear that a good portion of this oil price rise is solely due to OPEC manipulation and fast money chasing a reflation trade which might be maturing. It was fun while it lasted, but it’s getting late and the party could end soon. Ok, that’s enough bearishness and buzzkill in energy for now.

 

Trading Plan for the Week – Having said the above, I’ll be watching this pullback in XLE. If it drops into that 45-46 area, I may try a long play depending on how the overall market looks. If price drops to that 45-46 level, I’ll evaluate to see if there might be a chance at 42. As I said before, energy isn’t about being right or wrong, it’s about finding spots where the odds offer enough reward to make the risk worth it. I hate a long XLE play above 50, but I’d have no problem putting down a big bet in the low 40’s. It’s not about what I think about the future of energy, it’s about what kind of odds I can get on that bet, because honestly, none of us know where energy is going.

 

I’m watching 226 in IWM for any chance I can put on a long play to capture any bullish blowoff leg toward 250. If this market does make one more final run, I want to have something to ride the wave with and IWM is probably the best ticket. Action in the 226-230 area will be telling this week. In the bigger picture, I’m waiting for a short play in the 245-250 area.

 

Still watching XRT for a short play, but GME has lost all momentum and I don’t think there’s enough value in the short play without GME. I expect that the Robinhood/Reddit crowd is getting their stimulus checks and their favorite target has been retail. All I can do is wait to see if they return to their retail favorites which could push XRT toward 100 for a nice short opportunity.

 

GDX is probably in s spot where it’s time to lighten up. I’d like to see a move toward 36, but not getting greedy. The bigger trend is still down, so it may be a situation where lightening up and waiting for a second play on the long side after a pullback is the way to go.

 

ITB is back on the list for a possible short play. It got as high as 67 and I probably should have started a scale in there, but I missed it. If it makes another move on 67-70, I’ll be interested in trying a short. The ITB play really depends on which direction rates go. The housing sector really depends on those low mortgage rates and if those disappear, the sector could take a hit.

 

SMH and XBI are also in interesting positions. Both have the possibility to break to the upside. XBI needs to take out 150 and SMH needs to take out 242. The XBI corrected about 26% at its lowest, while the SMH was down  about 17%. These two have been leaders on the way up, so see if they make an attempt at regaining that leadership on any blowoff type market move in the next month or two.

 

The CAD is on the radar for a currency trade this week. I’d like to see it make one more dip to the 1.2400 level to long the USD/CAD pair. If the UUP does make that final base and start trending upward, the USD/CAD pair would be primed to break a very well defined technical picture. If it starts a new uptrend, that could be a negative correlation signal for USO.

 

That’s all I have for this week, mostly just playing the waiting game right now. Sometimes the market just isn’t in a good trading position. I’m cautious because I really think this bull market is close to the end, but I’m also hopeful that there’s one last run before it all ends. Good luck this week.

Weekly Energy Equities Review, Market Outlook and Trading Plan for March 15-19

Short writeup this week because it looks like this market has entered that final blowoff leg that I’ve been writing about over the last month. I’ll be on the sideline for the next week or two until I see the final buying climax, at which point I’ll be moving to the short side of the market for what I hope will be a long downtrend. I have no desire to trade this euphoric stage of the market on the long side, the volatility is just too hard to control and the risk/reward on almost everything is fairly poor. I really think the top of this 12 year bull market may be within a few weeks of happening. I may miss some short term opportunity over the next few weeks, but I know what kind of conditions I trade well, and this current environment isn’t one of them. If I’m wrong and this isn’t the top, then no harm and I can evaluate and reset. All I can say if you decide to jump in long at this point is to protect yourself, because when this thing finally does climax and turn, it’s going to be fast.

 

SPY – New highs and likely headed for 400-420. Nothing but blue sky overhead and the euphoria will be in full swing this week. Watch the upcoming volume and daily ranges. If we start seeing very high volume days with very small ranges, that’s a sign that the market could be topping. Also, be very cautious of a big gap up on Monday and don’t get caught in a gap and trap type situation. Market currently seems to have absolutely no fear of higher rates, which is a bit surprising. However, if rates continue to spike with increased speed, I really don’t see how the market could continue to ignore that. But funny things happen at euphoric tops. If SPY starts to roll over, watch 373.

 

QQQ – I still don’t like tech. The volume on this pullback that started back on February 17 has been significant and the QQQ has struggled to reclaim the short term moving averages. As rates continue to climb, sellers will continue to be active in tech. Watch 310-311 on the next pullback. As money comes out of tech, see if it keeps flowing into IWM, XLE and KRE.

 

IWM – The euphoric blowoff leg started last week. In the last six trading days, the IWM has moved almost 13%. This is a 2000 stock index. Those kind of moves just shouldn’t happen in a healthy market. I think IWM is in the final leg of its bullish run and I’m looking for it to top out in the 250 area in the next week or two. I will be putting on a huge short trade soon. The key with IWM is to recognize the buying climax day. On the daily chart, I’m looking for a very wide daily range day on massive volume. As with SPY, if IWM starts producing very small range, high volume days, that’s also a signal that it may be topping. I’d much rather see the single wide range climax day rather than the small range day signal, as it would be a more obvious marker of a top. I want absolutely nothing to do with IWM on the long side right now. I don’t mind missing this move up on the long side at all.

 

TLT – Still in freefall with rates starting to pick up speed to the upside. It’s really doubtful that SPY and TLT can both keep going on their current paths. Something has to break here soon, and I think the SPY is the one that blinks. See if TLT can reclaim 138 early this week. If it can’t, then it could cascade down to the 130-132 area which would send rates rocketing. No way the equity market could ignore that. The next level down is 118-120. As long as rates keep rising, the banks should keep moving up (or at least stay flat), which has been a positive thing for energy as well. Banks and energy diverged a bit late last week, so watch that KRE correlation to TLT.

 

GLD/GDX/UUPGLD and TLT continue to move together in the bigger picture, however Friday was a little divergence with GLD managing to stay green while TLT took a 2% dive. The GDX trade I posted a couple weeks ago is still doing well crossing 33. The supply level to watch in GDX this week is 34. If it can break that level, there would be room to 36.50. The dollar (UUP) was a little soft this week, so that helped GLD. I expect that the dollar should strengthen up if rates keep rising, so that could be a headwind for gold and the miners.

 

Energy XLE, USO

Honestly, I don’t know how the bulls are hanging on to their positions here at this major 54-55 supply level. I’d absolutely be lightening up. I just don’t know how much more reward you can expect from this point, especially if the overall market does what I think it’s about to do. I mean what are longs holding for here, 4-5 points? They could drop three times that much on a pullback and that’s just horrible odds for trading. The only play I could understand here is if you are just trying to exit the long play on the coming market blowoff, but if you watched this past week, energy didn’t move with the overall market. The IWM clearly broke out, yet the XLE couldn’t break that 54-55 supply level. That level may be way thicker than even I thought. But, as I’ve said many times, all this is just my opinion, and I’m often wrong. I simply go with the math and odds in these situations and it’s served me well over the years. The XLE is up over 100% since November. You know the old Wall Street saying, don’t get greedy, especially when the remaining possible gain is so very small compared to the large downside.

 

Technically, the XLE 54-55 level is still the point to watch on the upside. One thing I’d definitely watch for Monday is a gap up above 55 that fails. If you see that, it’s a top signal and a pullback could follow. However, given that I expect the IWM to make a final blowoff run, the XLE could make one final move toward 60. If traders hold positions expecting more than that, I just don’t know what to say. On the downside, the first significant level is 53 and then 52. In the bigger picture, the next important level down is 45-46. The only way I would consider shorting XLE would be if it got really crazy and made a run at 60 with the IWM topping around 250. On the long side, I might be willing to give it a play on the long side if we get a pullback to the 45-46 area.

 

One other play I’m watching right now is a short on XRT. I’d really like to see this make a run at 100. Retail seems to be the favorite target of the Reddit/Robinhood crowd and it’s definitely overextended. But as we all know, things can get way more overextended than anyone thinks, especially here in a possible bull market topping area. The key to the XRT short is GME. It’s about 18% of the XRT right now. If it goes crazy and makes another run toward 400, or even 500, then the XRT will go parabolic for a great longer term short. It’s definitely one of those trades that you have to scale into, not plunge.

 

Again, sorry for the short writeup this week, but there’s just nothing going on for me in this kind of market environment. I’m a short term trader, and often daytrader, but I function best in a slower, more organic price movement type of environment. This euphoric, high volatility action just isn’t my thing. I’ll be watching this week to see just how far price moves and whether I’m right about his being the final blowoff. If I am, then I’ll be looking to get short. If I’m wrong, then I’ll take a week off, reset and come back with a new plan. Good luck this week and most of all PROTECT YOURSELF.

Weekly Energy Equities Review, Market Outlook and Trading Plan for March 8-12

The big question in last week’s article was whether this market move down, which started back on February 9, was simply a pullback before the final blowoff leg to the upside, or if it was the start of a longer term move down. After last week’s action, I’m still not sure. I think this week is going to answer that question though and will likely set the market on a directional path for the next 3-4 weeks. Friday’s big recovery suggests that the odds point to a move up to test the highs, where the decision will be made. I think this could possibly be one of the most important trading weeks for this entire year.

 

I’m 100% in cash and probably going to take it slow this week and stay on the sideline until the market tells me which way it’s going. Even though I’m a very short term trader, I don’t like trading this kind of volatility, especially in a market which could be at a major turning point and is running on emotion, momentum and FED pumping. I’m more suited to a smoother, slower, more organic and fundamentally based movement where I can easily control my risk. In this kind of market, at this kind of topping area, controlling risk is almost impossible. There are three positions when it comes to trading: long, short or in cash. There’s no harm in sitting it out, letting the market settle back into a comfortable volatility level, and then getting back to what you do best as a trader. Also, I’ll probably be off Twitter this week. It seems my market view is very different than almost everyone else right now, and it doesn’t help to be bombarded by a constant flow of adverse opinions. I think we are in that euphoric stage that occurs toward the end of a bull market and I don’t want to get caught up in that bullish euphoria, so the best solution is to avoid it.

 

SPY – The level to watch this week is 370-372. Last week I pointed out the 371 VWAP from October 30 and the SPY went almost exactly to it and turned in Friday’s big reversal. The bounce did reclaim the current week’s VWAP around 382, but it failed to reclaim last week’s VWAP up at 385. That tells me that the buyers are still in control of this market, but the bears did throw a pretty good punch and things may be more equal than it seems. The key now is to see what happens as the bulls try to take it back to the highs in that 392-394 area. If the bears step up there, or at any point before there, then this market could easily top out and roll over. The demand point to watch Monday is 380-382. If demand steps in there, then we probably get a move at the highs. The market will show its hand this week and a decision will be made regarding the environment for the next couple months. Just have to be patient and listen to what the market has to say.

 

QQQ – I think tech is still in trouble. It broke that October 30 VWAP around 311, but couldn’t quite manage to reclaim it on Friday, closing at 309. The QQQ is now sitting right where it opened the year, which had been a fairly defined support level since January 4. If you go back to the September – December period, that 300 level acted as resistance for several months. Price broke out from that level in December and this week price dropped right to that breakout level which was prior resistance, does it now act as support for the longer term? On the shorter term, price broke below that support level from January 4 and could only manage a bounce back up to it. Does that January 4 support level now turn into resistance? There are a lot of good road signs in QQQ and it’s just a matter of listening to what those signs tell you as price explores them.

The QQQ also failed to get above the current week’s VWAP of 310 on Friday’s close. It also closed well below last week’s VWAP, which tells me that sellers are clearly in control in tech, much more so than in the SPY. The big levels this week on the upside are 310-313 and 324-325. On the downside, last week’s 297 is the point to watch. The big signal to me will come at that 324-326 area. A clear rejection there could signal a top and new downtrend. I’d be surprised if the QQQ could manage any run at the highs around 338 this week.

 

IWM – The biggest market signal for me will come from the IWM this week, specifically that 226-230 area. The IWM managed to stay well above that October 30 VWAP, unlike the SPY and QQQ. Small  caps are where the strength is in this market right now. Does that strength continue and do small caps lead to the upside? The IWM is in a very well defined trend right now which began back on February 9. It has tested about eight times on that downward channel and bounced almost perfectly off of it on Friday. That bounce took it right back to the center of that trend channel and exactly back to the current week’s VWAP, which seems to suggest that things ended in a tie this week between the bulls and bears. The upper edge sits right near that important 226 area.

I’m watching 215 on Monday for a signal that demand is still under this market. If 215 gets tested and holds, then I expect that price will make a run at that 226 level for a huge gut check. If there is a clear rejection there, then I expect a major pullback, possibly as far as 180. However, as I’ve been saying for a few weeks, I really think we are going to get one final blowoff move to the upside before the bull dies. I could easily see the IWM taking out 230 (with a possible long trade) for a quick run to 245-250, where I’ll seriously consider getting short for one of my bigger trades of the year.

 

TLT – The really curious thing about Friday’s stock market volatility was that nothing else moved with it. It was strictly an equity temper tantrum. On Friday, TLT, UUP and GLD were basically flat as stocks gyrated wildly. That suggests that Friday’s action really had nothing to do with the macro picture. Since the macro picture wasn’t involved, that further suggests that the late week volatility in stocks was probably a temporary thing. See if that continues this week. As for rates themselves, they seemed to settle in this week, at least stopping the freefall. If they do find a base here, I would expect that would bolster the equity markets and send them higher. As I said last week, rates don’t have to go down to make equity markets happy, they just need to stop going up. Technically, I like the action in TLT as it had a high volume selling climax last week in the 137 area, however the retest of that area held this week, but the most encouraging thing was that the retest was on much lower volume. This suggests the bottom may be in for awhile in TLT.

 

UUP, GLD, GDX – This was an extremely frustrating part of the macro picture for me last week. I’ve been patiently waiting for the long GDX play, however it refuses to move to my entry point. I got exactly what I wanted with the dollar (UUP) as it moved up sharply. That sharp move up should have produced a flush in GLD, and subsequently a nice move down in GDX for a long entry. However, the dollar moved up, yet GLD stayed flat, and GDX actually went up! While the moves didn’t help my trade setup, they do strongly indicate that the theory of the trade is correct. The dollar move should have sent GLD/GDX down, but there was so much demand there that it wouldn’t budge. That suggests that there are many people thinking just like me on this trade wanting to get long. I’m going to be patient with this trade setup, because the current demand could vanish once they are filled. GDX could get one final shakeout move to the downside before the next move up. Our advantage as small traders is that we can get filled in that shakeout,  while the bigger players had to build their position in the thicker 31 area where they could find liquidity. I’ll be interested in any move below 30.50 to start a scale in long, probably in four pieces.

 

Energy XLE, XOP, USO

What can you say about energy? As the market moves down sharply, energy stays green. The only signal you can draw from that relative strength is that there’s huge demand underneath and that there’s probably a nice move up coming. The key for XLE, as it was at the 46-48 level, is how much supply remains in the 54-55 level? The XLE had way above average volume on Thursday and Friday as it grinded into that supply area. Will that supply back away from the market and try to draw buyers upward? Does that supply panic and come down on the market if the SPY does top out? It’s all unknown at this point, but one thing is for sure, you don’t want to step in front of this momentum. I had planned on a short here at 54-55, but not going to do it. There’s just too much momentum. Now, whether that momentum is correct or not is a totally different question. There will be a prime shorting opportunity, but it’s not now. I think this sector could blowoff with the IWM, in which case I could  get a juicy short opportunity on any breakout of 55.

 

I think the reason I remain bearish on energy up at these levels is that I’ve followed this sector for years. When you follow something that long, I think you develop an intuitive sense of what things are truly worth. Traders just coming to the sector don’t have that longer term view and the resulting intuition/feel. With a longer term view, you know when things are bad, you know when things are good. You know when true fundamentals are driving the sector and you also know when momentum is driving the sector. I compare these companies to different points in time over the last ten years and sometimes the valuations don’t make sense when measured against the longer term average. We were in one of those times last summer and we are in one of those times right now.

 

Yes, momentum plays are fun (and profitable), but the issue I have right now with energy, and the rest of the market for that matter, is that it is wildly disconnected from the fundamentals. This week’s OPEC meeting was a prime example of why I want nothing to do with energy on the long side right now. OPEC actually extended cuts. WHY? Have they simply become oil’s version of the FED? Why would you extend cuts if demand was supposedly so great? Why would you extend cuts if supply were running tight? You wouldn’t. It’s simply paper price manipulation. And like I said, while that might be fun to play, it doesn’t last and it can usually breakdown very quickly when you least expect it. When the game is over, everyone rushes for the exit at the same time, and that makes controlling risk almost impossible. There’s just something that isn’t right with the sector right now. It’s stretched away from the longer term norm and while there might be some money to be made in chasing that extension, the real danger is in the regression to the mean. I’d be willing to maybe chase a move based on true fundamental supply/demand factors, but I want no part of chasing something that is based on an OPEC pump and dump.

 

How long can OPEC manipulate price when there’s really no demand and plenty of supply? Did price reach 65 on manipulation or on fundamentals? Look, I know everyone is expecting demand to return, but so far it hasn’t. What happens to oil price if the returning demand doesn’t materialize? The supply is still there. These energy names are expecting perfection, and they are priced for it, as is oil. The individual companies are still bad businesses staring right into a green energy future. They still have huge debt, bad management, burdensome dividends and limited cashflow. The worst part though is that they have burned through their prime acreage, so they definitely don’t have the future resources they used to have.  All those things leave only disappointment and a quick trip back down. I could be wrong though and things can always be manipulated much further than most think, but I just see no reason to take the risk when there are better opportunities elsewhere. The much better play is a short when things spike upward to ridiculous levels, as they always seem to do lately.

 

The real key right now with respect to energy, is that you have to distinguish emotion, momentum and manipulation from the true fundamentals. If you buy these without knowing why they are currently running, you leave yourself exposed when they turn. I don’t think these are fundamentally good businesses right now, they just find themselves getting swept along in a raging bull market (which might be about to top) that is running on pure emotion, FED money and OPEC manipulation. Fast money is chasing the reflation trade, OPEC is throwing gas on the fire and retail is piling in on the chase. The best reason many can give for this energy run is that energy “has to catch up with the rest of the market”. In essence, what most are doing is chasing a lagging industry hoping it outperforms in the short term because it has been so bad in the longer term. It’s buying longer term relative weakness, and that’s not a great strategy. Will many get lucky and make some money chasing the momentum? Sure. But many will also give it all back and more when they don’t realize when the market has changed. They think they have bought quality companies, when in fact all they have done is buy wild momentum caused by a manipulated oil price.

 

And if all the fundamental information and OPEC manipulation weren’t enough to make a bearish case, there’s still the technical picture. I’ve posted on this a few times on Twitter so there’s really no reason to go in depth on it again. Basically, if you look at the longer term ten year weekly chart, XLE is running right into a major supply level. Do you really want to buy into a major supply level after a 100% run, with an overall market that might be topping? Not good odds at all. I’m not saying a long trade can’t work here, I’m just saying that the odds of success aren’t really high enough to support long term profit if you took this trade 1000 times. In sports betting terms, what you are doing here is betting Kershaw and the Dodgers at -400 odds. Yes, you are probably going to win that bet 75% of the time, but do you really make any money from it over the long term? No, because the play is too expensive and you have to basically hit it 80% of the time to break even. So while the bet (XLE long) looks enticing in the immediate term, the longer term odds don’t support it as being profitable. Basically, the wins end up being fairly small, while the losses end up being very large. Wish I knew a better way to explain it, but that’s the best I can do.

 

Ok, enough of the bearish bias. I just wanted to express why I’m not in on this long energy momentum trade. Am I missing some upside? Yes. Do I care? No. I’m in protect mode right now with regard to energy and patiently waiting on the opportunity on the short side. I’ll be trading other sectors while I wait. Sorry for the negative slant, but I always offer you guys my true opinion without sugar coating, even if it is very different than the overall common Twitter market opinion. Am I right? Who knows. But trading isn’t about being right, it’s about protecting what you have, avoiding negative expectation trades and controlling risk. Sometimes opportunity is just too expensive. I’ll wait on energy.

 

Trading Plan for the Week – The primary watches for this week are IWM and GDX. I’m waiting on a washout in GDX to start a scale in for a long trade. I’d like to start that scale at 30.50 with adds roughly every 50 cents down to the 28 area. In IWM, I’m looking for a long play if demand shows up in the 214-215 area. I’m also willing to play a breakout above 227 for a ride to 230 and possibly a blowoff move up to 245. However, the big trade for me in IWM is a short up around 245-250. I think the market is in that final euphoric stage, and if it is I want to take advantage with very large short bet up there.

 

As for XLE, I’m on the sideline this week. I’ll be watching to see how it handles the 54-55 area. If I were to get long (which I probably won’t), there will be a trade on the 54-55 breakout as it spikes up and then falls back down to test the breakout area. If price runs up toward 56-57 and then drifts back down to 54-55 on very low volume, I might make a long play using a very tight 53.50 as a stop. However, my primary watch is for a simultaneous blowoff spike in IWM and XLE for short plays in both. I think the top area in IWM should be around 245-250 and I think that might produce something around 60-62 in XLE. I’m also interested in a short in USO if this parabolic run continues. I’ve already covered how I feel about the OPEC manipulation, let’s just say if the market really gets crazy here I’d have no problem moving in on USO short if the price is right.

 

As you can see, most of my trades this week are longer term plays, so I’ll probably be on the sideline letting the setups form. I’ll also be fairly scarce on Twitter, as I’m really trying to avoid being bombarded by the herd’s bullish opinion. I’m looking for the short opportunity and I don’t want anything interfering with that play. Good luck this week, it’s definitely going to be an interesting one. Now it’s off to the winery for a couple bottles, some live music and an afternoon with the love of my life. Get out there and enjoy the rest of your weekend.

 

Weekly Energy Equities Review, Market Outlook and Trading Plan for March 1-5

The market finally started some type of pullback, however it remains to be seen if this is just a little pause before what I think is the final blowoff run or if the market has already topped and we’re on the way down. My recent bearish bias has been borne out of this run that originated in November. It just has that “late bull” feeling to it and I really think the end is near, likely within the next few months. I’d be really surprised if this bull market continued for longer than six months, especially when it runs into the next September/October period. The market is running on incredible liquidity, relief packages, stimulus, free FED money, zero rates, etc. It’s probably 2 a.m. and the party is in full swing, but it doesn’t last forever, and someone is going to get stuck cleaning up this mess. I don’t want you guys to think I’m some crazy permabear, but after 22 years of trading, I’ve been mauled by a few. It’s never fun and the worst part is that it happens before you ever see it coming. More like quicksand rather than an all out attack I’d say. But enough of the bearish buzzkill, the only thing I can really say is be responsible, manage your money and protect yourself best you can. On to the macro picture.

 

SPY – The price failure Wednesday afternoon was significant. The 392-393 area will be a difficult level to recapture. I think it was the force and speed with which the rejection was created that was most important. It had the feel of an upthrust pattern that got rejected before it was able to complete. It’s like traders were trying to take it up quickly, pick the stops and establish short positions before the fall but there was so much supply that they couldn’t manage it. Nothing newsworthy occurred after the close Wednesday, yet the bears were out in full force from the opening bell on Thursday, as they took it from 392 all the way to 378. Many of the recent pullbacks have simply been buyers pulling back, but this one was different, it was heavy selling volume and there really weren’t enough bids to absorb it. The volume on Thursday and Friday was significantly above average, as were the daily ranges. Those two things tell me that this was active selling. Someone wanted out, maybe some kind of rebalancing month end or maybe true selling. It will be interesting to see if that group shows up on Monday morning.

 

There’s a VWAP in SPY which started back on October 30 which represents this entire bullish leg (the one that has turned me a bit bearish). That VWAP is currently at 371, so that’s going to be an important point if this pullback continues. If price drops below that level and starts to establish, that suggests that this might be an extended move down, both in points and time. To even give back a quarter of this run off the March bottom would take the SPY down to the 355 area, which would be right back to where it was on the November 9 vaccine announcement. That 355 would be an important decision point in the larger picture. I don’t want to get too far into the future, but the 325-350 area could be a potential target on the coming SPY pullback.

 

QQQ – Tech was simply a disaster this week, but there was one good thing which I don’t think many noticed. As with the SPY, there is a VWAP from October 30 in QQQ which sits at 310. The QQQ bottomed three separate days in the 311 range. Watch the 308-310 level on Monday. There’s also an uptrend line near there from the March lows. If price establishes below 308, there is probably more downside to the 292-295 area. Any drop below 292 could open up 263-266. I doubt that happens, but that’s where the levels are. QQQ is trading in correlation with rates right now. If the TLT can stabilize next week, there’s a good chance QQQ holds that 310 VWAP and makes a nice recovery, much like it did in September and again in October. One other point, QQQ has been trading inversely with IWM, so watch that correlation. If QQQ recovers, that could signal a further pullback in IWM, or at least some sluggishness, which wouldn’t be a good thing for XLF and XLE.

 

IWM – Much like the SPY, the IWM had a major rejection in the 226.50 area on Wednesday afternoon which led to a selloff down to 215. I really think there still might be a bullish blowoff leg coming in IWM to the 245-250 area, but the action on Thursday and Friday was definitely concerning. Small caps will have to defend the 215-216 area early in the week or there could be a pullback coming that could take it to the 200-205 area. The October 30 VWAP for IWM sits at 198. As I posted last week on Twitter, I’m looking for something to play long for the blowoff  top and IWM is probably going to be my chosen vehicle. I’ll be watching that 215 area on Monday and if it looks like it’s going to hold, I may start building a long position for a ride to 245, however it’s going to have a very tight stop on it and may take a couple of tries. Size appropriately.

 

TLT – It was a wild week in TLT, just an absolute freefall down to the 137 area. As I’ve written the last few weeks, it’s probably inevitable that equities finally get concerned with rising rates, and we saw that last week. Was that 137 level the tipping point for equities? If equities are going to recover, the TLT needs to establish a bottom. I don’t think it really has to bounce higher, as just establishing a base would probably be enough to soothe the equity markets. Rates don’t need to start going down, they simply just need to stop going up. The perfect scenario would be a big bounce in the TLT (lower rates), as that would probably send SPY and TLT moving in the same direction for awhile. If rates start to slide back down, that could be the force that propels the final blowoff leg to the upside in equities. It would be a Goldilocks situation.

 

GLD/GDX – As the TLT continues to fall, so too does GLD. The two have been moving together since August of last year and the correlation remains in the bigger picture. As with most market correlations, as you drop to smaller timeframes, there’s less exact correlations. Almost all of the correlations I work with are on daily charts. While the TLT may well correlated with GLD, the more important correlation for gold right now is the UUP. They diverged sharply on Thursday and Friday with the dollar finding a bottom and gold breaking down below some significant support. The real question now, and the basis of my GDX trade, is whether this is a major pivot point in UUP or simply a small bounce in the dollar that washes out the stops in GLD/GDX and leads to a leg up for gold once the dollar fades again. Over the past few articles, I’ve been predicting the dollar bounce. As commodities rally and interest rates follow them up, it’s really inevitable that the dollar would bounce. It’s simply money flow to the highest yielding currencies around the world. As rates rise in the US, money will chase that yield, thereby causing the dollar to move upward. Someone was buying bonds Thursday and Friday, and they need/demand dollars to do that buying with. But like I said, the real key is whether this is a bigger trend turn to the upside or just a little bounce before continuing down. Plan for the former, hope for the latter on the GDX trade. I know I’ve said this a couple times, but if you take this GDX trade, be very careful. It’s a fairly risky trade because it’s somewhat countertrend, definitely a scale in and not a plunge. In fact, it may turn out that there’s actually no trade there at all if the reflation trade is stopped cold by rising rates and a rising dollar. This entire trade depends on the speed of change in the UUP, TLT, SPY and GLD.

 

UUP – I pointed out the 24.30 level, which established in early January, a few times earlier in the week and price did manage to drop just below that, however there was a huge bounce off that level on Thursday and Friday. The bounce took the UUP from 24.17 all the way to 24.52, which is a significant move in that instrument. The correlation between the dollar bounce and equities selling off should be a wakeup call. I don’t think traders are focusing enough on the dollar and the damage that could result if it snaps sharply back to the upside. The dollar is sending a signal in the larger macro picture, but I don’t think anyone is listening yet. The hardest hit group in a dollar bounce would most likely be the commodity stocks. They have been driven by the reflation trade, however a stronger dollar (and higher rates) are the forces that will eventually stop that reflation trade and limit the upside in inflation. If you want examples of this on the larger scale, just go back and study inflation in the 1970’s and the forces that finally brought that under control. This rate issue is a battle between free market forces and the FED, and this week I think equities might be considering that the FED could lose this battle and higher rates (and QT) could be on the way earlier than expected. Keep and eye on the CAD specifically for signs of change in oil. I posted a CAD chart on Twitter showing the long downtrend that may be in danger of breaking. If that downtrend breaks, that’s probably not a positive for the energy sector. A weak dollar has been propelling this run higher in oil and if the dollar finds a bottom and starts to strengthen, that’s a warning that USO could be hitting a top and begin to weaken. Every piece of information helps.

 

XLF – One sector that loves higher rates is XLF. As interest rates rise, so does the interest income for banks. This correlation was on full display Thursday and Friday. As TLT bounced sharply, the XLF topped out and had high volume down days, losing about 5% in just two days. If the TLT continues to bounce, financials could continue to pull back. This is an important signal for energy traders. The XLF/KRE have been moving in sync with XLE/XOP and IWM. If banks and energy start to diverge, that’s a red flag for energy. Keep an eye on the financials and see where they find some support. Also, notice if financials start to diverge at all from TLT. Also, one other sector that can sometimes offer clues on rates is the XLU. When rates move up, utilities usually move down, which was the case on Thursday and Friday. Every clue helps in the bigger picture.

 

Energy XLE, XOP

The macro picture above was not kind to energy this week, but all things considered, it held up pretty well and could still have room to make a run at the 54 level if equities can turn upward again. The XLE is still in an uptrend and was probably even a few points above that uptrend this week. There’s a bit of an upward sloping channel that started back in early November (starting with the vaccine announcement) that runs around 47 on the topside and 42 on the bottom. Price is still above that top uptrend channel, even with the larger equity markets selling off. That’s a strong relative strength signal and the factor that makes me think there’s more upside to 54 left in this latest emotion based run. As for whether the actual fundamentals support this latest run, I still don’t think they do, but when emotion and momentum are in control weird things happen. I think these oil stocks are way overvalued right now, but that’s just my personal opinion. I’ve said this a few times, but this is purely a reflation trade being driven by fast money looking for quick profits. It’s very doubtful that what we are seeing now in XLE is being driven by long term holders. And when fast money decides the party is over, the fall can be blindingly quick. It’s extremely important to know why you are buying these oil stocks. Either you are chasing emotional momentum OR you truly believe in the future of these companies. Are you chasing a temporary, fast money, flavor of the day reflation trade or investing in the long term fundamentals of the oil industry?  Don’t confuse the two.

 

Let me clear up one thing though. I’m a fairly short term trader. There’s going to be ranges in the XLE where I’m completely wrong, as I was in that 46-48 area. I thought there would be more supply there than there was, however demand chewed through it more easily than thought.  Momentum is a difficult thing to estimate sometimes. I missed a little play in that area, but really not that much. However, once you see that you are wrong, you have to get back on the right side of the market. As you can tell from most of my posts this week, I’m moving a little more bullish on the XLE, simply due to the amount of emotion and fast money chasing the reflation trade. There’s nothing wrong with being incorrect at certain points, but the real key to trading is to adjust quickly. Being wrong isn’t a flaw, but staying wrong is. Always remember if you follow me, I’m trading on a much shorter timeframe than almost everyone else you see on energy Twitter.

 

So where does energy go from here? I think the answer to that question really depends on what the overall market does this week. The best case is that the TLT finds a bottom, the UUP fades again, the SPY/IWM bounce and then XLE follows. If the IWM can regain 226.50 and make a run at 230, then I think XLE can make a run at 54. The unknown variable for me is how much supply is in that 54 area and how eager are sellers to exit their positions? It’s really the same question/issue that the sector had at the 46-48 level, how much supply is there and can the buyers chew through it? If the overall market starts to look shaky, does that supply get aggressive and start to move down on the chart, specifically moving just inside the latest high around 51? Just consider if you were a longer term holder in XLE, say somewhere from 2016 to 2019. You rode out the crash for some reason and price is now bouncing back and getting you back close to breakeven. You are watching the overall market and you feel like it’s topping on the longer term. What do you do? For the ones that really want out, they are going to drop their selling price and try to get inside the latest price range (51). On the other hand, if the market starts to rip (maybe a blowoff top?) what would you do? You would probably stand firm in the 54 area and wait for price to come to you. The same logic applies to the group of buyers below 40 that wish to take profits, as well as the group of bears patiently waiting to short the sector at this 10 year supply point. This is why I say this week’s action in XLE probably depends much on the SPY.

 

On Thursday, I posted a ten year chart of XLE going all the way back to 2011. There’s a huge supply level at 54. If you pull back to a 30,000 foot view weekly chart, it looks roughly like a huge head and shoulders pattern with 54 being the neckline. There are probably still a lot of holders in XLE who entered above that neckline. Will they pick that neckline spot to attempt an exit? The key, as I always say, is the math. Buying into a level where there is likely a lot of supply is usually a long term losing bet. I’m not saying that price can’t cut through 54, because it most certainly could. What I’m saying is that the odds just don’t say that’s a positive expectation play over the long run.

 

The better move if you want to establish an XLE long position now is to wait for a pullback. Entering here around 48-50 gives you at most 6 points of profit if price stalls at that 54 level. The downside could be 8+. Not good odds. The odds of the trade being successful increase significantly with a pullback to the 42-43 area. An entry there produces 11 points of profit at the 54 level, more if it breaks through. The risk on a 42-43 entry is maybe 5 points. You have moved from a trade offering you 6 reward/ 8 risk to a trade offering 11 reward / 5 risk. The odds needed to break even on the former trade are 57%, while in the second trade you only need to be right about 31% if the time to break even. It’s simple math. Quite a difference for just a little patience.

 

As for the technicals in the XLE this week, I’m watching the 46.25-46.50 area on the downside. That level held three times. If price breaks below last week’s range and establishes there for any decent amount of time, then the pullback could go to that 44.75 point where price jumped on the open back on Monday, February 16. Any drop below 44.75 risks taking a shot at that October 30 VWAP in the 40-41 range, at which point I’d definitely be looking at a long play. On the upside, the first level to watch is last week’s VWAP at 48.75. That price will likely control the action on Monday. If price breaks above it, there’s a fairly easy run back to last week’s highs around 50.50. Any move above that would likely require the IWM and SPY to be moving up sharply, so watch those for further guidance. Again, if the highs break, the level to watch becomes 54-55.

 

Trading Plan for the Week – My primary watch is the GDX play. I’ll be watching the UUP for the speed of any upward trend and where that trend might stop. If the dollar moves sharply, I’ll be very patient with building the GDX long. I’ve already got a small position from 31.50. I posted on Twitter the longer term plan on the GDX play and the weekly charts that support it. I think the entry on the play is in the 30 area, but if the dollar really does jump, I could see the GDX getting to the 27-28 area on a selling climax. It’s going to be a difficult entry, but I like the reward on the trade since the FED can’t stay out of the market. I’m looking for the GDX to make a run back to the upper 30’s, possibly as high as 40, especially if the larger market has some type of major setback and money rushes to the safety of bonds and gold. Also, there’s a really good chance that I don’t take this trade at all. If I see more signs that tell me the reflation trade is failing quickly, then I might just let this one go. I’ll post the entries on Twitter as I make them.

 

My next trade watch is a long in IWM. If the market does make that blowoff top, I want to be long something for the ride. I’m watching the 215 area on Monday to start in on a long IWM play to ride that move. If things look bad on Monday or there’s a big gap down, I’ll probably just step aside and watch for further clues. The ultimate plan though is still a short play in IWM after any blowoff move. It would definitely be nice to ride the move up and then flip to the short side, as that would provide quite a big margin of error and allow me to size the short up fairly large.

 

The last trade on the radar is an XLE long if we get a pullback. There’s an OPEC meeting coming up soon and that could be a catalyst that sends XLE down, although likely only temporarily. I’ll start to get interested around that 44.75 area and would definitely build a big position if price got back in the 40-42 range. I don’t think it will drop enough to start a long play this week, but that’s what I’m watching.

 

I’m still doing some daytrading, but I rarely post those to Twitter. It just seems to junk up my timeline and mostly confuses people when I trade in the opposite direction of my larger plays. So I’ve found it better to just omit it. I’m always open to questions about it though if anyone wants thoughts on intraday plays or market direction/levels.

 

That’s all I’m watching this week. Still no individual names right now, mostly just trying to really focus on the macro picture and these larger trends for some medium term swing type trades. Once the market shows a true turn down or clear upward resumption with plenty of room to run, I’ll then move back to individual name plays. Be careful out there and remember, this market can turn on a dime and the quicksand can trap you.  Good luck this week.

Weekly Energy Equities Review, Market Outlook and Trading Plan for 22-26

This is a difficult market. I went back to 100% cash on Thursday and have no real desire to jump back into anything this week at these levels. I had a great short position in IWM from around 227.75, and I really thought it might pull back toward the 215 level, possibly even 205, but it ran into a wall of demand Thursday around 220 causing me to cover, which was good because it ripped right back to 225 Friday. I posted an interesting chart on Friday showing that there may indeed be another leg up coming in IWM, possibly to the 245-250 area. I doubt I’ll be riding that long, but I have no problem sitting back and waiting for the short play if this is a blowoff top.

 

The only thing I can really say about this market is that correct risk-controlled trading gets more and more difficult as the market disconnects from reality and the bubble grows. Sometimes you just have to exit the game for awhile and just watch the action because the odds on one side just don’t offer anything with a long term positive expectation. Trading on the long side is getting VERY expensive. It’s a bit frustrating to slow down when the masses are pedal to the metal long and making money, but I’ve also been doing this long enough to know those guys will stay at the party too long and lose everything, and then some. I know, because I’ve done it before. We think of a market disconnecting from reality, but the truth is the market is nothing more than individual traders, you and me. The market is not some external entity, it is made of us, and many are trading on the edge of disaster in a market that they think will never go down. The “market” isn’t disconnecting from reality, we are. It’s time to tighten things up. Size down, tighten stops, be more selective in your setups and realize that things can change on a dime. Survival above all else.

 

SPY – It was a bit of a negative week for SPY. It opened at new all time highs around 394 on Tuesday morning, but then just drifted down all week closing at 390. The week’s VWAP was 391.15. It really didn’t give any clues for what to expect this week, but the important points to watch are 393-394 area on the upside and 387-388 on the downside. Given what this market has done for the last three months, you have to assume that the bull keeps running. I won’t be getting long, but it’s also a very difficult place to get short. I need to see some real euphoria and another price spike before I attempt another short play.

 

QQQ – Tech was much the same story as the SPY, but the QQQ remains in an uptrend. I’m watching the 338-339 level on the upside and the 326-328 level on the downside. The interesting watch in tech is AAPL. It’s getting dangerously close to breaking its uptrend, so keep an eye on 127. A breakdown in AAPL would probably put in a top for MSFT and then trickle into the other FAANGs, especially FB, GOOGL and AMZN, all of which have been consolidating for months trying to decide which direction to go. If AAPL and MSFT turn down, then FB, GOOGL and AMZN could decide to break to the downside out of their consolidations, at which point the lesser techs could follow. As rates climb, keep an eye on tech.

 

IWM – Small caps are still my favorite short target and last week showed the potential for profit on the short side. IWM opened the week around 230 and gave up 10 points in three days. You have to be nimble to catch the moves, but the big move is coming soon and that’s the wave I’m looking to ride. I think there’s probably another move up coming in IWM, especially if the action I described above evolves in the QQQ, and if rates keep rising. There has been a rotation from big tech to small caps going on for months and that could accelerate if tech makes a move down. The rotation has been primarily from tech into banks and energy, so keep an eye on that QQQ/IWM correlation for clues on energy, as well as the TLT/XLF for clues of money rotating into banks. If IWM and KRE keep going up, that’s a good signal that XOP/XLE will follow.

 

TLT – Bonds are trapped in a brutal selloff, which is causing rates to rise faster than the FED wants. The real issue for equity traders is where do rates top out, or alternatively where does TLT find a bottom? At some point, rates will reach a point that spooks the equity market.  On the other hand, there’s probably a point where rising rates will cause the FED to step in and blow even more air into the bubble. I don’t know where either of those points are, but if we start having more days where bonds and stocks are both red, that’s a signal you must pay attention to. I have way more experience with stocks than I do with bonds, but if I had to guess, the TLT should bottom in the next couple weeks. The low point on the pandemic panic back in March was around 138, while the TLT closed around 143 on Friday. I’d say 136-138 would be a good spot to possibly setup a long play for a bounce.

 

GLD/GDXTLT is also offering a big clue for gold. I posted a GDX trade last week, but I’m starting to get a little concerned about that setup. Both GLD and TLT have been moving together since August. For GDX, I am watching the 30-31 level, which was the breakout point from the Aug 2019-Feb 2020 base. The problem is that the TLT also made that same base formation, however TLT has broken below that level, will GDX follow and also break below that level? There’s a big level for GLD coming up this week. If TLT continues to fall, it will be difficult for GLD to hold the 165-166 level. If that level breaks in GLD, there’s easily 10 points of room to 156-158. That should be enough to knock GDX down to a possible entry location. The only worry I have with this trade is that the GDX gets into a spiral down toward the 25 level. Definitely have to be patient with the entry and scale it rather than plunging in with one move. I’ll post the entry on the GDX trade on Twitter if it arrives.

 

UUP/CAD – The dollar is still the big question mark in the macro picture. I wrote last week that there’s a level at 24.27 that the bulls must defend. It dropped to 24.33 and closed at 24.36 on Friday, so I’m thinking that demand level gets tested early this week. If that level holds and the dollar finally does turn upward, that’s going to knock gold down for a great entry into GDX. The only question is how fast is the rise in the dollar? I mentioned a downward spiral in GDX being possible, and that’s just what could happen if the dollar rises faster than traders expect. On the other hand, if 24.27 breaks this week and the dollar collapses, GLD and GDX should move back to the upside and that trade is probably gone. As for the CAD, it took out an important level Friday. It just keeps strengthening, which is a good thing for oil. Watch the 1.2600 level and then the 1.2700 level for clues on the dollar/oil correlation. If the CAD takes out 1.2600 and strengthens quickly, oil could keep moving up.

 

Most traders have just written the dollar off and they expect it to continue to collapse, but I think that’s wrong. As commodities rise, rates will continue to rise. If rates continue to rise, yields in the US currency will become more attractive in the Forex market and money will eventually flow into the dollar to take advantage of those higher yields. I think the dollar is getting stretched to the downside and the snapback could be quick, which could be damaging to commodity stocks including GDX and XLE. Watch the dollar this week, and if it looks like a bounce, then it could be a good move to lighten up on some of the commodity stocks.

 

XLF – As the TLT keeps dropping, financials keep rising. The XLF is now well above the 31.55-31.62 breakout area and it doesn’t look like there’s going to be an immediate re-test of that breakout area. Financials are in a blue sky area now and who knows how far the market will take them. I think there’s a really good chance that the XLF chart could end up looking very much like the current IWM chart. If you are long energy, then this XLF action is very positive since both sectors have been running together on the rotation out of tech into banks/energy. Watch the TLT/XLF correlation for clues on the energy sector.

 

Energy XLE/XOP – The XLE is trapped in the 45-46 area right now, which isn’t a bad thing. Price stayed in a one dollar range for the entire week, which is a little unusual for energy. There’s a huge supply level in that area which extends back to the March OPEC meeting disaster at 46 and the mid-June highs around 47. The buyers are chewing into that supply. The real question is how much supply is actually there? Do we run out of buyers before all the supply is cleared, therefore leading to a big pullback? Or do the buyers actually chew up all the supply and break through that level and make a move at the next supply level up at 54? I’m really not sure how much supply is there, but I think it’s fairly large. If the overall market keeps rising, then the buyers will keep chipping away at that supply level. However, if the SPY finally gets a pullback, the demand for XLE might step back and the remaining supply could get aggressive and start moving down on the chart, thereby producing pullback toward the 40-41 area.

 

I’m still bearish on energy. I think people who read my Twitter or blog think I absolutely hate energy, but that’s not true, I just don’t like the current trading position of energy. It’s just in an area where a long trade just isn’t worth the risk, and it’s been in that area since early December. If it moves to a better area, then my bias changes. The max return on the trade is still that 54 area (8 points), while the downside could easily be 37-38 (8+ points). The odds on either side are probably 50/50, so the trade just doesn’t have much expectation to offer right now. The better move is to let XLE pull back toward the 41 level and then take the long trade. In that situation there’s 13-14 points of potential profit with about 5 points of risk, while the odds of the trade working are still around that same 50/50. The long trade at 46 offers no long term positive expectation, however the long at 40 is nearly 3:1 and a huge positive expectation. If it did pull back that far, I’d likely move to being a bit more bullish and might even take a shot long in that area. Most times trading isn’t about being right or wrong, it’s more about what you win when right versus what you lose when wrong. While I am bearish on XLE right now, that doesn’t necessarily mean I hate energy, it simply means that the I don’t like the long side of energy given these odds and payouts.

 

As for the technicals for energy, I posted an XLE chart last week showing an upsloping channel which started back in the first week of December. Price has moved just above the upper channel and also right into that thick supply area of 46-48 which goes back almost a year. XLE is right in a very likely pullback spot right now, yet it hasn’t dropped at all. There’s demand at this level, but again, there’s also huge supply blocking the way up. I’m watching 48 on the upside for clues this week. If it can break through this wall at 46-48, there’s no reason that it can’t make a quick rip toward the low 50’s, at which point I’ll probably move to the short side. If price rejects in this 46-48 area, then the supply probably starts getting more aggressive and 40 becomes the downside point of information. If price reaches the 38-40 area I’ll probably move to the long side. Again, my bias isn’t so much on the energy sector and its fundamentals, it’s much more based on trade locations, odds of success and risk/reward offered.

 

For Monday in XLE, it’s all about the top of last week’s range around 46.50 and the bottom of the range around 45.50. Last week’s VWAP was almost perfect center at 45.95. One thing I would point out though, if you are a breakout trader, be really careful here. This thing is setup to where it’s going to give you a false signal on the first break. If it gaps up or breaks to the upside Monday, I’d be really cautious chasing that. Same story on any downside gap or break, it’s likely a stop hunt for a run to the upside. If I see the downside stop hunt, I very well might put on an intraday long trade in XLE. If you are trading XOP, the basic theme is the same, but just a little more tricky. There’s a heavy fair value area around 77.25, with the downside being 75.50 and the upside being 79. The XLE setup is a much easier trade, however the XOP trade probably offers more reward to the upside.

 

Trading Plan for the Week – On Monday I’m considering an intraday long trade in XLE. I’ll be watching for any gap down or breakdown early in XLE. If I see it and think it’s a stop hunt, I’ll put on a reclaim trade as price re-enters last week’s (or Friday’s) low, with the stop being placed a safe level below the Monday morning low point. On this trade setup, you MUST let price get sufficiently back within last week’s price range or there’s no trade. Don’t anticipate or guess or try to front run the trade, just let it develop and then enter. That’s really the only daytrade I have on the radar for Monday.

 

On a bit of a longer term (for me anyway) I’m watching a possible GDX long trade as price breaks under 32. I’ll be looking to scale into the trade in probably four pieces. This one will require some patience, as the GDX could spiral down quickly if the dollar and TLT move sharply. The key is to wait a long as possible for the first piece entry. Once in, I’m looking for the trade to move back up toward 36-38 for a 20% gainer. I expect there is some FED action coming if rates continue to climb, which could help gold.

 

On the same timeframe as GDX, I’m also watching XLE for a long play in the 40-41 area. This is another trade that could spike down quickly, so scale entering in a few pieces is probably the way to go. A scale started at 40 could probably go with four pieces down to 35. The reward on that trade could be >25% if the XLE does eventually take a shot at that 54 level. Worst case is an entry around 40 with another (fourth) shot at the 46-48 level, for a 15-20% gainer. I really can’t see energy going much lower than 35, unless the overall market gets really ugly, in which case I’d be cautious to enter anyway.

 

I’m watching the move up in IWM for another short play. I think the euphoria in this market is most evident in small caps. I’ll be watching 230 this week for clues. I might try a smallish short trade at 230 depending on the speed of upward movement, but what I’d really like to see is a breakout of 230 and a very quick move to 240-245 for a really big short position. The IWM short will require some patience and it’s definitely a trade where the entry is a scale in with probably four pieces.

 

I’ve got TLT on the radar for a possible long play this week, but I’m not sure where that trade location is. Bonds are extended and eventually the FED is going to step in. I’ll be watching this week for any tradable setup to the long side, especially on any selling climax early in the week.

 

KRE is also on the radar for a short play, but with the TLT/XLF correlation, I’d probably be better off playing the TLT long rather than trying to play the KRE short. Even if bonds find a bottom, financials could continue upward. However, the KRE is running into some supply at the 65 level and given the speed of this move up, there could be a pullback coming there. A short on a rejection of 65-66 could be a play this week.

 

Those five trades are really all I’ve got on the watchlist for this week. I’m still avoiding individual stocks right now, as all of my possible plays are larger market, macro type plays. It’s really frustrating to be right on the macro picture and then play an individual stock that simply ignores the larger picture and does something totally unexpected. There’s a good chance this market continues to grind up this week, but like I said, the long side is becoming really expensive. It’s kind of like betting on the heavily favored home team in sports, at some point the odds just get too high and don’t represent the skill of the team, it’s all geared to take advantage of the home team fan/bettors. And that’s when the upset is just around the corner and the correct play is to go against the home team. Good luck this week.

 

 

 

 

Weekly Energy Equities Review, Market Outlook and Trading Plan for February 16-19

Twitter is a great place for exchanging market opinions. You can find almost any opinion on there to support any trade or market view. But one thing I’ve noticed lately is not so much differing bull or bear opinions, but simply the fact that energy seems to be drawing a greater number of opinions, and the opinions are starting to be more assertive and emotional. Much the same thing happened in March during the OPEC fiasco. Last March you couldn’t find a single bull anywhere, now you can’t find a bear anywhere. Significant? Does this increase in hype and emotion mean we are reaching a turning point and a possible market pullback? Maybe.

 

One thing that is a bit strange on this latest energy run, and the entire market for that matter, is that nobody has really given any reason for it, yet I can give a list of reasons why it’s probably shouldn’t be running. The biggest and most common bull reasoning floating around Twitter is some form of, “the economy is going to be lit AF as soon as this virus is over bro, party on oil!”. It’s almost as if everyone is looking for this mystical promised land somewhere in the future, yet the view has absolutely no grounding in reality. That kind of situation was exactly like the internet bubble where all the problems of the present were simply pushed aside for the utopian future that the internet was going to bring.  Is oil running on its own merits or is it simply a broken down boat being lifted by the tide of the overall market and looking for some mystical shore?

 

I feel like I’m the only energy bear in the world right now. I haven’t found the right trade yet and I have no short position yet, but I think the opportunity is coming soon. This market is getting close to a blowoff, both overall and for energy specifically. I’m not sure exactly when it’s going to happen, but I’d guess within the next 6-8 weeks. Here’s a few reasons why I think this energy move is about to exhaust itself:

 

The first angle I think people are missing with oil is the political angle. Can Biden stand the pressure of $60+ oil? At what point do rising gas prices start to take a toll on a very weak and recovering economy? Many times high oil prices are itself the thing that kills the sector run. If this virus situation does magically go away, how far up are gasoline prices going to spike when travel opens up? These are the questions that the government and FED will have to deal with. Do we end up in a situation where the rise in oil prices is the cause of its own death? Biden does have some options for higher oil prices. Remember about a year ago when Trump filled the SPR with sub $30 oil? Think Biden won’t use higher oil prices as an excuse to release all that Trump oil at double the price and claim the profits as his own? Or does Biden use $60+ oil as an excuse to justify even larger regulation of fossil fuels and justify new green technologies which will hurt oil in the long run even more? There are many other political pitfalls out there and oil prices might be getting close to that danger zone where politics will become an issue for the bulls to worry about.

 

Next is OPEC. At some point soon, they will want to cash in on their work. They have done everything they can to get prices up and now it might be time to turn the taps back on and collect the benefits of that higher price. I think they have reached the end of their cuts and that might be a shock to the market at the next OPEC meeting. Russia is probably going to be the cause of those cuts ending or even reversing. Things aren’t going well for Putin right now and elevated gas prices aren’t going to help him. He agreed to cuts that he didn’t want a year ago, now he’s going to be expecting Saudi to return the favor by ending those cuts. I feel like the market assumes these cuts are going to last forever and that this is the new normal, well, it almost assuredly isn’t. Remember how the stock market responded to the FED’s taper? You could very well see the same response in oil to an OPEC taper.

 

OPEC also finds itself right back in the situation that started this price war. Prices are rising and US shale is putting rigs back to work and increasing production. You think Saudi is going to keep the cuts in place while the US jacks up production and takes advantage of the high prices that OPEC created? Not likely. There’s a good chance we have reached the end of this cooperation cycle. When things got tough everyone banded together to save oil prices, but now that price has recovered it’s back to normal competitive behavior. Can US shale compete?

 

SPR and OPEC issues are really just supply side elements. As I wrote last week, EIA numbers haven’t budged during this latest oil price run. Inventories sit right where they were back in October, with gasoline and distillates being even higher. That’s very similar to where things are all around the world on the supply side. There’s still a huge amount of supply out there and it’s just waiting to be tapped. I keep seeing all these claims of low supply, but the numbers just don’t confirm it. There’s also another side to this problem – DEMAND. Just as the weekly EIA numbers haven’t shown much change in inventories, they also haven’t shown much change in products supplied. Current demand just isn’t there yet.

 

If oil is going to justify this latest run, demand is going to have to pick up, and soon. The market seems to have this fantasy that oil demand is going to climb back above pre-pandemic levels, but I think people are very wrong on that prediction. The psychology of the public is damaged. It’s not a switch that can be flipped on and off, it’s going to take YEARS to change the attitudes of citizens. Just look at the mask issue. People can’t live without them now. You think when things get a little better that everyone is just going to take their mask off on the same day and throw them all in the trash? No. It’s going to be even worse with travel fears. That fear is real and it’s not going away anytime soon. Do you think corporations are all just going to bring every employee back to an office? No. Work from home is going to be huge from here on out. How in the world can you expect oil usage to get back above pre-pandemic levels when we don’t live in that kind of world anymore? Things have changed and oil demand will feel that change for years to come.

 

Also, the above assumes that the virus does go away. I’m of the camp that it’s here to stay for years. It can be managed, but it’s never going away. The government will continue to make more and more rules regarding travel. Instant tests, masks, quarantines, etc. Many people won’t travel just because of the hassle. Just look at what we do now, we are still taking our shoes off at the airport over ONE event that happened 20 years ago. The same will happen because of the virus.

 

We also have green technologies to deal with now. Look at all the electric vehicle companies coming online. You think that is going to help future oil and gasoline demand? Oil is a dying industry. It’s not going to be a sudden heart attack, more like a chronic disease that takes years to finally become fatal. But that death is coming. Most of us here are short term traders and we don’t move the market. If the energy sector is going to move to significantly higher levels, that’s going to require huge buyers with very long term outlooks.  Does the long term exist for oil anymore? Or has the oil sector turned into a “trading” sector where the money cycles in and out without any sustained gains or future? Look, I love the oil sector, but you have to be honest with yourself and realize oil is probably closer to its end than its beginning.

 

The above are just some of the things that I think will cause the sector to top out soon. If you notice, almost all the things listed above have nothing to do with the actual companies themselves. The energy sector is being pulled along by forces other than company fundamentals. If you really want a depressing look at energy, just take a look inside most of these companies. The huge debt is still there. The dividends are a massive albatross that is killing their budgets and cashflow. Management still contains the same idiots who were running the show a few years ago, taking huge bonuses and living with a drill until we die attitude. Many companies have used a majority of their prime acreage and are now down to second tier land. Take a look at the Baker Hughes rig count, it’s up big over the last six months, yet production hasn’t moved up, why? Maybe it’s just a delayed reaction, but what happens to oil price when all these rigs do start pushing production way above the current 11 million per day? Or are we down to second tier land that isn’t producing as much oil with the same number of rigs?

 

Sorry to throw all that negative stuff out there. I could probably throw another couple pages of negatives out there, but it all just points to the same conclusion. My point is to show that there are MANY negatives out there for oil, yet all I see everyone talking about is “how awesome everything is going to be when Covid goes away”. Traders are focusing on a dream of what MAY happen rather than focusing on the fundamentals and things that we know for sure. That’s how bubbles are, they lose touch with reality. It’s a recipe for disaster and that’s why I’m bearish right now. At some point soon, the true underlying facts will matter and the dream will die a quick death. That’s the point where I want to get short. If I miss some upside, that’s fine.

 

Enough with the depressing oil views. As for the rest of the market, I think there’s a couple more weeks of euphoria left in this run that started back in November. The Covid move started back on February 24, 2020 and we are approaching the one year anniversary. That might be as good of an excuse as any for a pullback.

 

SPY – The SPY was fairly flat for the week. It opened 389.30 and closed 392.64, and that’s with a $2 tape paint on the close Friday. Basically, the index did nothing last week. Momentum has stopped and some indecision has replaced it. The real question this week is whether this is just a pause to refresh and then a move up or if this is true indecision which could lead to a pullback. I think we will know by lunchtime Tuesday. If this thing gaps up and then takes out the 387-388 level, then it’s time for a pullback.

 

QQQ – Tech had a fairly flat week. It opened around 333 and was trading 335 before that final 30 minute pump on Friday. Same as with SPY, is this just a pause in the trend or is it indecision leading to a pullback? Watch 335 and 330 for clues.

 

IWM – Small caps are my short target right now. I’ve got about 40% of the position I want with an average price on the short of 227.75. I’d love to see one more blowoff move this week to get the rest of the money in. If I could get the average price on this trade up to the 232 area, I’d be very happy with the trade. One thing I noticed about the IWM this week was that when supply did hit, there were no buyers there. It’s almost as if traders are distributing this right now on the way up. The market only rises when there’s no volume. That’s a sign that someone wants to keep the price up to allow distribution at the highest price possible. I’d be much more bullish if the moves up were on good volume, but they aren’t. If a few big sellers do show up, I don’t think IWM has any chance of staying up against them. The only question is WHEN are they going to show up.

 

XLF/KRE – I think this sector holds the key to the overall market direction over the next couple weeks. I’ve posted the TLT/XLF correlation chart a few times and it’s holding true. As TLT moves down (rates up) the banks move up. It makes sense because the banks make more interest income with higher rates. I’m a little concerned about the relationship though. Last week bonds fell to new lows, yet the banks just couldn’t show any meaningful breakout. I can’t really count that final hour on Friday, which was a pretty suspicious tape paint on a boring Friday before a three day weekend. If banks fail again at last week’s highs, that’s the first red flag that the overall market might be getting ready to pull back.

 

GLD/GDX – I’ve been waiting on GDX to get down to the 31 level for a long trade, but I’m starting to think it’s never going to happen. It’s looking like GLD and GDX are both at a decision point right now. They have both been in a downtrend since last August and a change in that trend could happen soon. Also, there has been a direct correlation between GLD and TLT, so keep an eye on the TLT downtrend. If TLT starts up, I’d expect GLD and GDX to do the same. There could be a good trade there if you can time it right.

 

UUP/CAD – This might be the most important watch of the week, especially for energy. The UUP made an effort at turning upward and trying to break its long downtrend, but it has dipped over the last couple of weeks and now sits close to an important demand level around 24.30. I’m looking for the UUP to drop down and test this demand and if it holds, we could be getting close to a change in the larger dollar trend. The weak dollar is driving the entire macro picture right now, especially commodities, including oil. The USD/CAD is showing the same structure. There’s a level in the 1.2600-1.2650 area that needs to hold if the dollar has any chance at reversing. This relationship was very evident Friday. In pre-market trading, the USD/CAD made a big move up, USO was negative and XLE was down about 1%. But when the market opened the dollar collapsed, oil ripped up and took XLE with it. The correlations between these are getting stronger, so keep an eye on them. Also, if the UUP does make a big move up, watch GDX to possibly come down near 31 for an entry. It feels like everyone just assumes this dollar weakness is going to continue forever, but I think it may change sooner, and more sharply, than people are expecting, which is even greater reason for my cautiousness on energy at these elevated levels.

 

Energy XLE/XOP – I mentioned this in a Tweet yesterday, but if you go back to the early November run, the XLE went from about 27-28 first week of  November all the way up to about 42 on December 10. We now sit at 45. If you weren’t in for the month of November, you missed the move. The XLE has done almost nothing for the last two months. This is one of the reasons that I just don’t understand the “energy is a huge outperformer” crowd. Yeah, it had a good move for a month, as did the entire market, but what has it done since? ALL sectors are moving up and many have moved up even greater than energy since December 10.  Technically, it’s sitting in an uptrend channel, but right at the upper channel level. It’s also sitting at a huge supply level around 46 from the March 9 OPEC disaster, as well as the June highs of 47. The XLE needs to break that level soon or it’s going to get tired and need a pullback. I don’t know how much supply is in this 46-48 level, but the chart suggests that it’s a huge amount, but you never know for sure.

 

If the XLE does somehow break through this 46-48 level, there’s an even bigger supply level sitting around 54. That point basically marks the pandemic start level, as well as the lower range of an XLE specific range that started way back in 2018. Not a small level and there could be massive supply there that could be a cap on the sector for a long time. If I was planning a longer term XLE trade from the long side, the 54 level would be the highest potential reward number for the trade. That’s probably your max reward in the shorter term for risk management and position sizing calculations.

 

I also keep seeing people say that energy is setup for a short squeeze. I just don’t see it. Who would possibly still be short after that fall in March? Everyone who was short covered there for a very profitable trade. And the ones who didn’t cover on the March crash most definitely got squeezed out on the November run. There is no significant amount of shorts left in energy, that trade completed. There may, however, be a whole group of shorts on the sideline (including me) who are looking to get back into the short trade that was so successful over the last few years. Those sideline shorts are a part of the supply which resides at the 46-48 and 54 levels. Another huge portion of the supply at those two levels are desperate traders who have held throughout this entire Covid drop. I’d guess there’s a huge group who would be thankful to see this thing top 46-48 so they could dump and get out somewhere close to breakeven. So, you have new shorts looking to sell to enter, old longs looking to sell to get out breakeven, and a crowd of profit takers ready to sell and cash in their tickets that they bought in October-November. That’s a whole lot of sellers just overhead. Is the possibility of maybe making 6-8 points worth buying into all that possible supply and risking 7-9 points downside? I don’t think it is. The smart play is to wait for a pullback. I posted that chart on Twitter Saturday.

 

As I posted on Twitter, the XLE is just in a spot where the math says a long here around 45 just isn’t justified by the potential reward versus the potential risk. I’d say the odds of getting past the two overhead levels on a single push are very low, definitely lower than 50%. Here at 45 you are risking 7-9 points to make 6-8 points, that’s LESS than 1:1 or even money. At best, the trade is a long term breakeven play, at worst it’s a HUGE negative expectation play. The correct move right now (if you are bullish) is to let this pullback to 40 or so. An entry there gives you the same 50% chance of the trade winning, however you get paid 10-11 points while only risking 5-6 points. That’s almost 2:1, rather than the 1:1 you get on the 45 entry. You only need to be right about 33% of the time when you take a coinflip 50% trade getting 2:1 payout. That’s much better than taking the 45 entry which requires being right greater than 50% of the time to show a profit.

 

The point of posting the math above is that sometimes the fundamentals don’t matter. Opinion doesn’t matter. Being right or wrong doesn’t matter. Sometimes trading just comes down to the mathematical payout odds versus the probability. Like any good gambler, and we are ALL gamblers, making money requires that we ALWAYS keep the math and odds in our favor. I see too many people taking expensive trades. Yes, you may hit that inside straight draw and win the current pot, but over the long term you will bleed your money out until you go broke. Always think about long expectancy in trading.

 

Trading Plan for the Week – I’ve got the short IWM trade at 227.75 and I’ll be looking to add to that position. I’ll be watching for a gap open Monday that fails and re-enters last week’s range. At that point, I might add 10% to my short trade and then add if it gets near the bottom of last week’s range. If the IWM gaps up and starts running, then I’ll probably start watching the 231 area to start scaling in the other 60% on the trade.

 

The second watch is XLE. As I’ve been posting, I’m watching the 46-48 level to get short. The XLE is showing some relative weakness to the XOP, mostly because of the excessive movement of the very small caps in the XOP, so I’m more willing to be short the weaker of the two. If you prefer the XOP, then watch the 78-80 area for a possible short entry. If you are bullish, then XOP is the way to go for the play. If the XOP can break this pre-pandemic level, there is space to 96 if things get crazy. But remember, along with that bigger reward comes greater risk. If the IWM does collapse like I’m expecting, the small caps in the XOP will catch the worst of it and the XOP could come down faster than XLE. When choosing between the XLE and XOP, it’s simply a matter of how much volatility you are comfortable with. For me, I like the lower volatility of the XLE as it enables me to more effectively control risk. Also, keep in mind that weather is pushing the sector more than normal right now. This cold snap has been brutal for an extended amount of time. While this is great for the present, it isn’t something you can extend very far into the future.

 

Also, I apologize for not covering the individual energy names over the last few weeks. I’ll try to get back to that next week. When I’m bearish, I’m usually playing the overall sector with the ETF. I have no desire to short individual names, that’s how you get blown out of the water in energy.

 

Hope you guys all enjoy the rest of this three day weekend. Keep an eye on your risk control and money management next week, things could get crazy volatile very quickly in the next few weeks. Good luck and feel free to hit me with any questions.