Energy Equities Outlook and Trading Plan for October 21-25

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

 

Energy Equities Outlook and Trading Plan for October 14-18

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

Energy Equities Outlook and Trading Plan for October 7-11

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

Energy Outlook and Trading Plan for September 30 – October 4

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Energy Outlook and Trading Plan for September 23-27

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Energy Equities Outlook: Huge Short Opportunity Coming

It has been a great two weeks away and some much needed rest and clarity. Sonoma was a beautiful place and a drive up the coast of California was a great thing to do, I highly recommend it. I see that the bears got totally roasted while I was gone. That was very similar to the last chart I posted before I left. Once XOP broke that 22.68 level and took out the downtrend line, the squeeze was on. That move last week should have cleared out almost all the short positions. If there were any shorts left, this week’s early action should clear out the rest of them. That was a lot of buying power used up and those guys will probably be looking to put those positions back on in a big way soon.

 

The big news over this weekend seems to be the drone strikes in SA taking out refining capacity and causing some temporary shut-ins. Don’t fall for the hype on this one. Anyone who chases this action is going to get burned. The geopolitical risk premium just isn’t what it used to be years ago. The oil price/shale stocks correlation just isn’t there anymore. US shale companies are reacting and moving based on different factors unrelated to oil price. Shale companies have their own set of unique problems and drivers. Just because oil spikes up, it doesn’t mean that these stocks will see a sustainable spike in price.

 

As for the news and rumors themselves, I’m not totally sold on the fact that these are accurate. SA wants price up, so why waste a perfectly good crisis? A little exaggeration of what is going on helps their cause a great deal, so why not overstate things a little? Why not shut down for a couple days and spike the price, send some fear into the market and put everyone on edge? Seems like a perfectly reasonable plan to me. The only problem is the market will become even more desensitized to the geopolitical problems and that’s one less factor to hold price up. You can cry wolf a few times, but eventually everyone catches up to what’s going on.

 

A quick review of the XOP shows a nice little base between 20.75 and 22.68, which the market broke from on Monday morning (Sep 9). It moved up to 24.57 midday Tuesday and then simply drifted lower the rest of the week. The spot to watch is the breakout point of 22.68. The market made a run at that level on the open Thursday morning and held, but the bounce off it was very weak. The 8 day moving average is sitting at 22.97, while the 20 day moving average sits at 22.13, and the 50 day moving average at 23.35. XOP closed at 23.42, which is just a few ticks above the 50 day. In summary, the market broke out of a little base, but the action was fairly weak and doesn’t inspire much confidence that it can continue.

 

So where is it headed now? Given the weekend news, I would expect a nice gap and run for the early part of the week. It’s possible that we could see a little 10% run which takes XOP up near the 26 level and it’s likely that it could even push 27 if the market overreacts, especially with the SPY looking to make new highs. The SPY will be the controlling factor this week as it sits at all time highs. Does it keep going or are we at a failure point into the toughest month of October? If it runs higher, I think XOP can reach 26-27, if it rolls then the XOP probably tops out 25-25.50.

 

A couple of other things to watch for clues are the IWM and XRT. The IWM has just been ripping straight up and now sits at an important inflection point. If it can take out 161, this would likely send energy stocks upward. It’s the same story for XRT at the 46 level. Both of these are good gauges of the economy (and the recession speculation) and are moving on similar influences as XOP.

 

Trading Plan for the Week: I’m not chasing this on the long side. I don’t think the market is going to sustain the momentum on this geopolitical hype. The market will look past this stuff as it has just gotten desensitized to it. Remember the Strait or Hormuz hype and how that fizzled out quickly? Years ago that would have sent prices flying, now the market just shrugs it off, mostly because the sector is moving on different drivers.  I think we are going to get a spike up on an overreaction and that is the point I want to short. I’m not exactly sure where the point to get short will be, but I suspect it is somewhere in the 26-27 area.

 

If this market attempts to take out 24.57 and fails, then energy stocks are toast. These rumors and geopolitical news should at least be enough to break the recent highs, but if it doesn’t that is a screaming signal that the sector is in real trouble. The opportunity to run is now for energy and if it doesn’t go then things could roll over and get ugly. I’m talking 17 range ugly. No matter what the government stats and talking heads say, recession is getting closer, not further away. The election will hide this, but it’s there. When recession finally hits, oil is going to be the first casualty. Be careful listening to ‘news’, there’s a much larger agenda behind everything you hear.

 

One other thing that bothers me about this latest rotation into energy stocks is that it isn’t fundamentally based. It’s fast money attacking a sector which is less than 5% of the S&P. It’s a year end quick hit to make some fast profits in a sector that can be easily manipulated, especially when there is fear and rumors like we have this weekend. There is some big money trying to make some year end gains and that usually ends up being a very short term event. When that big money wants out, the bottom can fall out of this sector in mere days. Just don’t get caught in the hype that this is some kind of major turn for energy, because it isn’t, it’s just fast money looking for the quick fix.

 

So in summary, I’m sitting out the early part of the week. I’m going to let this run as far as it can and then I’m putting on a large short position. It will be a slow scale in, but I think it could be a really large opportunity. I hate to be a downer and rain on the bulls parade, but my bias is shifting back to the bearish side after this latest bounce. I think there is some room to move up from here, but the risk/reward for a short becomes very attractive in the 26-27 range. The real trick, as always, is timing it right.

Enjoy the rest of the weekend and be really careful getting caught up in the news hype on Monday.

 

 

Energy Equities Outlook and Trading Plan for August 26-30

Energy stocks were looking good most of the week testing the top of the latest range a few times and seeming like they might break through, but the China trade issue just derailed everything. Trading is hard, but it’s really hard when trying to trade around Trump Tweet bombs and FED events. This week might not be much easier.

 

I had a decent plan going into the week of exiting my existing positions and then trying to establish a new long XOP position on what many were probably going to consider an inverse H/S right shoulder on a pullback to XOP 21.55. The exit part of the plan went well and the profit on the XOP, SLB and HAL trades was about 6%, which isn’t a bad return for five days of holding. The new XOP long trade never gave an entry signal because the downward momentum was just too much. The XOP gapped from 22 down to 21.50 Friday morning, moved sideways for a bit and then just fell off the cliff from 21.50 to 21 in about 30 minutes. I ended the week still sitting in 100% cash with no positions, and at the end of the day I was definitely happy about that.

 

USO is still holding up surprisingly well. It closed the week at 11.19, which wasn’t too much lower than the previous week’s close of 11.40. Losing only 21 cents in week like we just had shows there is some demand under there. On the downside, 10.75 will be an interesting level. On the upside, 11.90 is the one to watch. If oil can stay in this larger consolidation pattern, the E&P’s have a chance to recover. If USO collapses out of this consolidation and takes out the 10.50 level, things could get ugly.

 

So what are we looking for in energy equities this week? I think we probably see a test for the E&P’s of the low at 20.56 early in the week, possibly on the open Monday. There is some real panic out there right now, especially from retail, and I wouldn’t be surprised to see the market gap down and shake out almost every long position. I’m not sure how far down E&P’s would have to drop to accomplish that, but it’s in a prime spot to completely wash out, maybe even to the 19.50 range.

 

If we get the washout down under 20, I will definitely be establishing a long position for a nice bounce. It will be a very short term trade though, not any type of longer term hold, maybe 4-5 days at the most. The key on the trade is the corresponding action in SPY. There is possibly a big test coming in the 280-282 range this week, which correlates to a 20.56 test for XOP. The overall market is in control right now and there’s really not much chance that any sector is going to be able to diverge from it, especially consumer based sectors like energy and retail. By the way, those charts for XRT and XLE are still the two most correlated sectors in the S&P500 and they were two of the three worst performers Friday (SMH was the other). I think SPY could dip down to the lower 270’s this week and still recover, but if it cracks that 270-272 level, things could get bad and repairing that kind of damage might take awhile.

 

There weren’t many bright spots within individual energy names, but if you take a look at the list, almost all the E&P’s had an inside week. They tested the prior week’s high and failed, but they were strong enough to also hold the prior week’s lows and close within the prior week’s range. The market was negative, but not negative enough to produce new weekly lows in most energy stocks. Surprisingly, the weakest individual names were the larger cap names: CVX, COP, OXY, EOG, VLO. These names are where the bigger money is hiding out. Most of the smaller names have been beaten up so bad that there just aren’t many true sellers left (mostly new shorts), but the larger cap names making new weekly lows is likely true selling. Money usually washes out of the sector beginning with the weakest names and moves up the quality ladder until the last sellers exit the quality names and that seems to be where we are headed. There is also the issue of these quality names being highly indexed, so when the SPY tanks, the larger energy names take the hit harder than the non-indexed smaller cap names.

 

My favorite target this week is EOG. I think it is probably the E&P with the most quality money hiding out in it. When non-energy funds purchase energy names, they pretty much stick with the surest bets, and that has clearly been EOG. The problem is that when those non-energy funds decide to start selling everything, they dump indiscriminately and the mass exit out of a stock like EOG can be devastating. EOG is actually a thinly traded stock for its market cap size. The spread is always about 7-8 cents and it only trades about 3.5 million shares a day. Compare that to a more liquid name like COP which usually has a penny spread and trades about 6 million shares a day. It’s much easier to exit COP than it is to exit EOG and that’s why overreactions can occur in more thinly traded names. I’m hoping for one of those overreactions and looking to pickup EOG in the mid to upper 60’s. It’s not so much a play on the fundamental quality of the stock, but rather a play on the lower liquidity causing an oversold condition which can be played for a nice bounce. CXO was another example of this type of play, as it is even more thinly traded than EOG and the overreaction there was severe.

 

My second favorite target for the week is PE. It has been holding up well lately and seems to have strong underlying demand in the 14-15 area. If it gets back under 15, I’ll build a long position, possibly for a little bit longer duration term trade than normal. I think this company survives and it’s still the top stock on my buyout list.

 

I also still like the service names for periodic bounces. HAL and SLB are my two standard plays and I’m hoping for 17 and 31 on those to make another trade. One other service name that is getting interesting is HP. The rig count numbers Friday were surprising, losing 16 rigs, and that’s a direct hit to HP and PTEN. I don’t think it is a long yet, but if it gets down under 35 it might be time to take a shot at a big bounce. I don’t have much interest in the refiners. If oil prices do get some type of upward movement due to lower rates, the higher input cost combined with lower demand is going to be a real killer that I want no part of. I’ve never had a good grasp on the precise fundamentals that drive the refiners, so sometimes that area is just a no trade for me unless the technical picture is clear, and right now it isn’t.

 

The natural gas E&P’s are just a disaster. I keep waiting for a level to take a shot at COG, but it just never seems to get any kind of real demand. EQT, RRC and AR have just been demolished and trying to pick a bottom in any of those is just futile right now. I am going to take a speculative trade on MR at some point under 2.50. It’s an extremely risky play, but the latest earnings report and the guidance report before that were both excellent. If natural gas does find some type of bottom, MR could be an easy double.

 

One last thing, I’m a very short term trader. I get a lot of guys viewing my Twitter and thinking my views are for the longer term. If anyone is using my views to trade the longer term, that’s a mistake. I play a much different game than most of the investors on Twitter and that creates a little friction. My timeframe is completely different from most. Also, I use a strictly technical view, while most of Twitter uses a fundamental view. If I ever disagree with anyone, it’s usually because we are each trading on a different timeframe with a different basic focus approach. Most of my plays are liquidity driven opportunities and have nothing to do with the fundamentals of these companies. For me, the stock and the company are two totally different things. Knowing that, it’s much easier to have trading discussions if both sides understand the timeframe and approach of where the other trader is coming from.

 

So that’s the summary for this week, prime watches on individual names are EOG, PE, HAL, SLB, HP and MR. The top trade idea on XOP is a long bounce play on any washout to the 19-20 level. On the upside, 22.68 is still the level to watch. Enjoy the rest of your weekend.

 

 

Energy Equities Outlook and Trading Plan for August 19-23

E&P’s finally got a bounce late in the week and could be looking to make a move for at least another 2-3 days before hitting some supply. I don’t think they have seen the final bottom, but this was definitely a great opportunity for a nice long side trade in a market where sentiment has gotten way too skewed to the bearish side. There were a lot of traders caught offside on Friday, both in XOP and SPY, and that caused a very sharp move. When the shorts get trapped, the bounce can be extreme. We saw this a couple weeks ago on a two day move up near 25 and then the market just absolutely tanked. If we get another decline somewhere starting around lunch Wednesday, I’d say the move Friday was more short covering than real buying.  There are a lot shorts out there and those guys have to ring the register for profits too.

 

Looking at the week as a whole, I really don’t understand the extreme bearishness out there in the media and Twitter. We had two big up days and two big down days and actually closed pretty close to where we opened. If you would have read the news without knowing what the market was actually doing, you probably would have thought we were down $20-25 on the SPY. We were down a mere $2.77, which isn’t exactly a bear market. It’s just an extreme herd mentality out there right now, but that kind of environment is where you can find some of the best trades. Also, oil really held up pretty well for the week and still remains squarely in a consolidation pattern after a failed attempt at a breakdown. The Friday close on the XOP was 21.44, which was well above the prior week’s lows, so it held the range pretty well.

 

I think sometimes people get way too focused on the news and fundamentals. This week’s big headline was the “inverted yield curve”.  To anyone paying attention over the last couple months, this wasn’t really news, but it did stir up some panic in retail traders and the bigger money took full advantage. Anyone watching the TLT break at 123 has probably been focused on this latest move since it passed that major point. The bond market had some issues, but sometimes the activity in one market just doesn’t spill over into stocks.

 

One thing that has really surprised me is what has happened to energy Twitter (as well as FinTwit overall). Over the last few months it has just gone downhill. There used to be some really great independent opinions out there, but it seems like it has turned into a complete group think. Any time someone posts anything bullish, the bear herd just attacks. It’s turning into TSLAQ Twitter. Several of my favorite posters have just quit posting altogether. I’ve noticed that there are a lot of accounts that have been opened in the last six months or so and almost all of those are voices just screaming blindly on the bear side. It has just turned into a mob of tin foil hats all calling for the end of the world. It’s pretty amazing to watch, but the end result is always the same, those guys will inevitably fade into the darkness never to be heard from again when the market turns. The only decent thing to come out of it is the short squeezes we seem to be getting at certain intervals. Don’t get me wrong, I love a good short too and most of you know I’ve been trading the short side most of the way down, but you have to have balance and an open mind.

 

I’ve got three open positions coming into the week: XOP (21.05), HAL (18.40) and SLB (32.30).  The positions were built over three days and I imagine I’ll scale out over the next 2-3 days. I’ve got breakeven stops on all three.  I don’t really mind if those get hit, as I’ll probably be entering those same trades again at better prices. I had another couple great positions in MTDR and JAG, but I cut them on Thursday and consolidated down to a more simple strategy of just the three holdings split 1/3 services and 2/3 E&P. Really wish I would have held those longs, but honestly, the JAG position had already run up about 6% profit and the MTDR position was doing nothing. I just didn’t expect much more run with JAG and took the profit and gave up too soon on the MTDR position. It happens.

 

Outlook for the week: I’m looking for a strong open Monday and likely a continuation into Tuesday, possibly Wednesday morning. There was also a big Barron’s fluff energy article over the weekend, so be on the lookout for a gap Monday. A few points of interest: Week Low 20.56, Week High 22.68, Week VWAP 21.44 (which was also the week’s close).

I’m watching that 21.55 point, which was the release point on the SA announcement. The market reacted to that point a few times on the move down and it was also the EXACT stopping point on Friday’s big run. Tuesday’s big run started at 21.58 and the big gap down on Wednesday opened at 21.52. There is definitely a good bit of interest in that level and VWAP for the week finished close to it at 21.44.

 

Probably the most fascinating chart to me is the USO chart. It is still holding that consolidation pattern. I’ll post the chart on Twitter. It is holding that lower formation very tightly while hitting an upper level right on that .618 retracement. I don’t put much faith in retracement levels, but it has pulled back to that level five times in this consolidation pattern, with the sixth time being a bit of an overshoot of the 11.55 level on Tuesday (along with everything else spiking). USO closed the week right near that retracement level at 11.40. Oil still looks well supported. If it breaks down out of this pattern, my view will change, but as long as it holds, I think the E&P’s will move sideways to up.

 

As for individual names, I think there are a lot of people getting energy wrong. The bearishness isn’t warranted…yet. I think a large number of traders are going to be slow on the turn and will get themselves trapped in some of these names. When the crowd starts thinking that it is a one way market without risk, that’s usually when a big turn can happen. I don’t think we are there yet, but it’s coming. I like quality names at this point in the cycle. I’m looking to buy COP under 50, EOG near 70, MPC near 40 and OXY near 41. I would absolutely load the truck on XOM near 61. CVX is a bit of a tricky one, as that seems to be where the biggest money is hiding out. There could be more decline in CVX than there is in XOM. I’d wait on buying CVX closer to 105. I really doubt most of these names will get to these ideal levels, but we can hope.

One name that really fascinates me right now is HES. It has been one of the strongest names in the sector, which is a bit surprising since they will be moving to a more gas heavy mix with their South American project with Exxon. That stock should be coming down, but it just won’t budge at all. Their Bakken competitors like CLR, MRO, OAS and WLL have all just been crushed, yet it holds in. I’d keep an eye on this one for a buyout, possibly by Exxon itself.

Another name is RDSA/B. It’s at a very big level at 55 and has just been crushed lately. If you like dividend plays, this is your stock.

 

In the overall market SPY, this one could go either way right now. A larger pullback is coming, I’m just not sure that now is the time. The 278-280 level is going to be big this week. If it breaks that, there is room down to 270-272. There’s also a really good chance that this thing just rips right straight back up past 300 soon. There is going to be large supply at 295, but if it gets through that there are going to be a HUGE number of trapped shorts that could take this right out the top. Also, if you do short SPY or XOP (or anything really) you have to constantly be aware that any resolution to the China trade situation is going to completely blow you out on the short side. That unknown is really making shorting an expensive proposition right now and is a factor that I think many shorts aren’t calculating into their risk/reward numbers.

 

It might be a sideways week, but that wouldn’t be such a bad thing right now. Just keep those stops tight. I’m headed out for a couple bottles in the warm sun with some live music, my favorite way to spend a Sunday. Enjoy the rest of your weekend.

 

Energy Equities Outlook for the Week Aug 5-9

$XOP is getting closer to that final washout and this past week’s price action was encouraging. There was a huge volume day on Thursday of ~56 million shares traded that took price down toward the 23 level. That was followed by a much lighter volume day of ~30 million shares on Friday, which was able to close back above Thursday’s low.  Friday’s low was only about 30 cents below Thursday low, which isn’t much considering the action in the $SPY at the time. Those are signs that the selling pressure may be declining. Thursday’s volume was the largest volume that the $XOP has seen in years. That could end up being the selling climax which initiates an accumulation area. Much of my trading is based on Wyckoff formations and sometimes the selling climax and the lowest price do not coincide. Sometimes the low price will occur several days after the volume selling climax. Only time will tell if this occurs in the E&P’s.

 

Another encouraging sign was the volume after lunch on Friday, it just disappeared. The sellers were gone. $XOP did about 5 million shares from 12:30 to 3:30, which is well below average, and that’s occurring after a 56 million share day on Thursday and a 21 million share Friday morning. There was 4.3 million in the last 30 minutes, but even that isn’t much above an ordinary day. Did the sellers run out of supply?

 

The fascinating thing to me is what is going on in the media and places like Twitter. It’s 100% bearish. I think sentiment is getting it wrong and when it turns the move will be extreme. The tricky part is catching that turn. As we saw on Tuesday, you can wake up any day and this sector can rip to the upside. There are likely still a lot of short positions, probably increasing given the action on Thursday and Friday. Those shorts entering later in the week are probably late to the party and their covering could be the first spark to ignite a rally.

 

Also, one thing on the Twitter hype/sentiment issue, I’m probably going to back away from Twitter a little during the day and try to limit myself to a couple posts during market hours.  It’s starting to mess with my judgment during the trading day. It’s dangerous how you can develop a bias of sticking with an opinion after you post it for others to see.  As a daytrader, my opinions change extremely quickly and any bias or ego trying to be right isn’t good. When something becomes a distraction, it’s probably time to put it on the shelf for awhile. I love the entertainment of Twitter and it’s a great place to journal my thoughts, but distractions aren’t productive. Twitter is an addiction that I think many traders have and they don’t realize how it affects their judgment and open mindedness.

 

I’ve been very bearish on the E&P’s, but after all the things set out above, I think we are getting close to a tradable bottom. I think we could see a couple more down days that may washout the remaining weak holders and the volume on those days will be important. I’ve been saying 21 as the bottom of this move. I’m not sure if it can get there, but it could get close.

 

I posted an interesting chart Friday (and an update of that chart on Saturday) on Twitter of the current broadening formation in $XOP that started back in mid-July. The concept behind that pattern is that volatility is increasing, which could very well point to a larger trend change. The swings in that pattern were 8-10%, which is pretty volatile. Volatility is a signal that retail could be capitulating and larger, smarter money is beginning to take a position. If this market was going to washout, it should have happened on Friday. Earnings from the two biggest $XOM and $CVX weren’t great, other earnings during the week were disasters and the $SPY was a on a very negative three day run. The 56 million share day on Thursday should have been followed by another huge volume day and it also should have produced a day that closed at new lows, it did neither.

 

This week’s plan: I’m looking for the $XOP to open the week with some selling pressure which could take it down to the 21.50-22.50 range. I’m not sure how far into that range it will get, which makes it difficult to find an entry. The best option is to use a scale in approach and enter in pieces and just try to get a good average price. The key on the down move will be volume. If the volume is heavy, I’d be way more cautious with the entry. If the volume is light and it’s clear that the decline is more a lack of buyers than an increase in sellers, then I’d probably be a little more aggressive with the entry. There are many retail type traders that will read the news over the weekend and make decisions on that, most of those decisions will be to get out of energy. The market will take advantage of that and force those weak traders to sell at low prices, possibly on a gap down. Once those early week shares are absorbed, it could turn quickly. If size hasn’t sold by now, I really don’t see them dumping way down here, it’s the smaller players that the market will take advantage of early in the week. I’m looking for a low volume Monday/Tuesday and then a turn upward.

 

As for a profit target, we saw on Tuesday/Wednesday just how fast this market can rip to the upside. It’s compressed like a coil right now and even a little pressure caused a nice move. The first target is the 24-24.25 area, then 24.75, then 25.75-26.

 

I took a few positions this week in individual names. The biggest position was $CXO at an average price of 78.15. I get the issues they had, but they are one of the best of class of the Permian. The basis of what they are really saying is that they are making a decision to pull back a little and live within their means, and unfortunately the market punished them for being responsible and doing the right thing. The market did the exact same thing to the best in breed natural gas E&P, $COG. Money is heavily skewed to the quality names, hence the premium, and when they disappoint the faster money moves on. $CXO is now a quality name priced without the premium. It was a 20 billion market cap on Wednesday, I got it for 15 billion. Also, this wasn’t an industry wide decline, it was more specific to $CXO. It will work it’s way back to par with the others. I’ll put one of those in the longer term portfolio any chance I get. I’m also looking at getting back in $COG this week as it moves close to 18. I’m mostly a daytrader, but ignoring the longer term opportunity is just crazy. I’ve been trading this sector long enough to remember that it is an incredibly cyclical sector, booms and busts. I think many people are getting a little too caught up trying to let their ego predict “the death of shale.”

 

One other point on $CXO, I’ve also seen some people mention a buyout on this one by $CVX. I don’t really think it’s going to happen, but it’s just another little bonus reason to buy. Also, I don’t see $CXO being an acquirer since they already bought $RSPP, so the chance of getting penalized holding an acquirer is smaller. I’ve seen the same rumors for $PE being a buyout candidate. While this is no reason to buy, it can always be a nice little benefit if it happens.

 

I also picked up another Permian, $PE at 14.95. I’ve got about 25% of what I want there, but I’m hesitant to move in any further until I see earnings on Thursday. I really don’t want to get into a $CXO type blowup if I can avoid it. Actually, I’d love to see a 25% decline in $PE, I’d load up on that. My other large position was $XOP and I scaled out of most of that on the open on Friday. I’ll be reloading that one on the open Monday. My other purchase was $HAL at 20.95. I’m about 30% in on that one and will add this week if it declines.

 

I’ve got a few on the radar: $MTDR any drop under 16, $MPC any drop near 48, $SLB near 35, $COP near 54 and one fun microcap speculation $MR under 2.50. I’m sure the upcoming week will open up more possibilities and I’ll try to post them on Twitter as I see them.

 

$COG Trade Errors and Outlook for the Week Ahead

It was such a good week, right up until Friday morning and the COG trade. I dropped the entire week’s profits on that trade and had to cut it near the lows of the day. That close near the lows was a pretty good signal that there may be more downside ahead. I can possibly buy it back later. I made several errors on that one and I haven’t had a trade go that bad in a long time. No matter how long you trade, errors still creep in from time to time. It’s a great time to review the entire trading process when you slip and make an error. No shame in making an error, the shame is in not learning from it or correcting it before it is made again. I always learn way more on the losers than I do on any winners. This blog is my place to journal my thoughts, so here is the review on COG, maybe it helps someone else out there.

 

So what was the biggest error? The biggest error was trading against the larger trend. I’ve been sitting here for several weeks waiting for the XOP washout down to the 21 area and any type of swing long right now is just too early. Daytrades can be good counter trend plays, but I traded COG as a swing. I thought I had a good grasp on the fundamentals on COG and could take a shot there at grabbing a quality stock near a bottom. No matter how good a grasp we may think we have of a company, we are all still outsiders with no real knowledge of what is going on inside the company. Second error was thinking my opinion of the stock’s fundamentals was better than the price action on the stock.

 

Actually, I don’t think my  view on the fundamentals on COG itself was all that bad, the mistake I made was not stepping up one level and looking at the fundamentals of the natural gas E&P’s as a sector and considering what COG was saying about production. The thing that killed COG was the cutback in production. The earnings, buyback, dividend, capex, etc. were all pretty good in the report, the killer was the production decrease. I didn’t give that piece of news enough respect. The street has been asking for these companies to cut back, COG did cut back and the market went totally opposite of what I thought it wanted and decided to severely punish them. I thought the production cutback would be well received by the market, it wasn’t. Price action is always king.

 

Third error was trying to pick a bottom. I rarely try to pick a bottom on a stock without letting it create some type of bottoming formation. I had just posted that thought on HP the day before and how I had to let that trade go because there was no risk controlled and defined stop to play off of. I should have done the same with COG, but again, I thought my view of the fundamentals was more correct than it was. Price will tell you if your view is correct. It’s usually more profitable to let the market tell you where the bottom is rather than trying to pick it yourself because you think you have a good grasp on the quality of the company.

 

I did do a few things right though. I had my plan, entry and add down in the 19-20 level which I held to. Once the action showed me I was wrong, I cut it and took the loss. I didn’t add more or try to average down outside of my normal scale in process. Once the stock showed no bounce and finished near the lows, the market was saying the trade was wrong, and that means get out before the loss snowballs.

 

So what is the outlook for the energy sector this week? I still think the XOP has a washout and this might be the week that it starts. We haven’t had many E&P’s report yet, but if they start reporting the same production decrease decision that COG made, this whole sector may react just like COG did. Earnings calls will be interesting. The week will end with XOM and CVX reporting on Friday morning premarket. Those reports will either save the sector or will set the stage for a big washout the following week. We also have the FED on Wednesday and that could be a sell the news event, or worse it could be a disappointment if the FED is too hawkish. Both results could send the overall market down. A FED disappointment combined with bad earnings capped off by the XOM/CVX earnings could be a perfect storm to send this sector spiraling down the week after.

 

So how to play it? At this point, I’m not playing it. I’m sitting this week out. I’ve been waiting for a washout on the XOP and trying to trade the long side right now, even intraday, is just going against the overall trend and against my overall opinion. Combine that with all the landmines this week, the FED and earnings, and it makes a fairly unattractive situation. I think the best plan is to see what the earnings reports are like this week, let the FED do their thing and then let the two big dogs do their thing on Friday morning. Once all that news is out, the market should make a decision on which way it wants to go.

 

I am still interested in getting long this market on a washout, but I’m going to be a little more patient and cautious finding that bottom after seeing how the market treated COG. It was a good warning flag and even though that trade lost, it might well have saved me a lot of money in the bigger picture by showing that the sector is a good bit weaker than I thought.

 

In summary, I’m going to let the market tell me where the bottom is. My opinion is that it’s in the 21 area, but I’ll definitely be waiting for the market to tell me if I’m right or wrong before putting my cash down.