Real World Versus the Digital World, Which Does the Market Believe?

Just a short article today on some market thoughts and how my market view may be changing a bit based on recent real life experiences, as opposed to digital Twitter world experiences. I wonder if other traders may start to drift toward the same beliefs, especially when it comes to oil and oil stocks.

 

Two weeks ago I took a family vacation to Key West. The plane was packed full. The Atlanta airport was also packed full of travelers. Once in Key West, there were people everywhere, and they were spending money. There was even a parade for the Hemingway Festival that must have included 10,000+ people. Not a mask in sight. Last night I went to the Jimmy Buffett concert where there were probably 50,000+, and while there were a handful of mask wearers, I’d guess that 99% just didn’t care at all. They were there to have fun, live and SPEND MONEY. Beer lines were long ($13) and the Merch lines were full ($40-$60 t-shirts). People want to live again.

 

Sometimes when we live in a digital world like Twitter, we lose track of the real world. There’s this small group of doomsday individuals on social media, yet occasionally they appear to be the majority. Truth be known, that group is probably extremely small, yet incredibly loud. They don’t represent the majority, especially in the real world. As traders, I think we get sucked into this digital world and it affects our market views. The difference in the digital world and the real world is HUGE right now. Just something to keep in mind when you make trading decisions. Are your trading decisions based on the digital world or the real world? Which is the correct view?

 

From what I’ve seen in the real world lately, this economy has room to run. Go back to November 2020 and the vaccine announcement. The market exploded higher with the SPY going from ~328 to ~442. The XLE went from 30 to 56. Now, imagine that this Delta variant disappears (it will). Imagine that the government backs off and drops all these silly lockdowns and mandates (they will). Imagine that all the already vaxxed get the booster (they will) and the remaining unvaxxed are coerced to comply (they will be). That kind of situation could be November 2020 all over again. There is so much bottled up demand out there, I’ve seen it first hand. Given this demand, I can’t imagine how the economy itself could reverse downward in any significant way. While there’s always black swans, I just don’t see people hiding again, they want to live – and spend.

 

So what could go wrong? The market has it’s own sick way of fooling us. I think the one thing that could go wrong is that things go too well and the whole thing overheats, which forces the FED’s hand. Good news becomes bad news for the market. It’s counterintuitive. We see the inflation problem that developed on the November vaccine announcement and now that inflation is at dangerous levels. What happens to inflation when a second round of “re-opening exuberance” happens? What happens when all those 50,000+ from the Buffett concert learn that it really is ok and safe to live again? What happens to their friends who are still living in fear when they see others living life again? Will they also join the party? And then it snowballs back to life as normal. The real question is, can this economy, and all the QE and printing, withstand that kind of spending without overheating an producing inflation that forces the FED to act, and possibly act quicker and more forcefully than desired?

 

If it overheats, the FED has no choice but to implement a taper and possibly raise rates. The real question is how fast will the market require they act? What happens to the stock market if the FED is prevented from manipulating it? Can it stand on its own without the money printer on full blast? There will be some big volatility as we blindly feel our way through that inevitable process. And then there’s the scenario of what would happen to the economy if the market did crash and all the confident 401k holders immediately stopped feeling wealthy and subsequently stopped spending? It’s one vicious cycle.

 

The one question that bothers me is whether the government realizes all this and is purposefully keeping its foot on the throat of the public with covid fear, lockdown threats and mandates. Are they throttling the recovery to protect the largest source of wealth we have (the stock market)? Are they throttling it so the FED can continue to print and enrich the 1%? Exactly what would happen if the government backed off and opened this great country 110% and allowed people to live (and spend) again? Do we ever get the chance to find out the answer to that question or does the whole process and cycle remain manipulated forever?

 

I really don’t know what happens from here, but what I do know is that bottled up demand fighting against the government oppression is going to produce some BIG volatility at some point. Who ultimately wins this battle, citizens who are ready to live again, or a government who wants to control those citizens so as to alter market cycles and manipulate the stock market? Only time will tell.

 

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

I haven’t had much time to write over the summer, but life is getting back to normal after a couple months of high school graduation activities and family vacations. Time to get back to trading. I’m going to start this writeup with the macro picture and the inflation trade and then move to energy.

 

The inflation trade, which started back in November, seems to have found its top, at least for now. While pretty much everything has risen together, on many days money has specifically flowed from tech (QQQ), bonds (TLT) and the dollar (UUP) to small caps (IWM), banks (KRE), metals (XME), gold (GLD) and energy (XLE/XOP). If you were to use just those variables, it’s been easy to determine risk on/risk off in the inflation trade, and the market in general. The profitable trade each day has been to long energy when the rest of the macro factors pointed to risk on. Intraday trading has been fairly straightforward, but longer term plays have been more difficult.

 

This inflation trade has pulled back over the last month and the question now is where does it stop? I think we are going to get some big clues this week. My guess is that we aren’t yet close to the bottom of this latest pullback and Covid politics could derail things. Covid is no longer about health, it’s about politics, power and money. The inflation variables of XOP, XLE, XME, KRE and IWM all look like they topped out last week and could roll over hard this coming week. The areas to watch are XOP 86, XLE 51, KRE 65, IWM 224 and XME 46. I think we might get a test of those levels early in the week. If they get rejected, the sellers could show up in force. On the other side of the trade, watch QQQ 366, TLT 150 and UUP 25. If money runs for the safety of megacap tech, bonds and the dollar, that also suggests the inflation trade is headed down. I’m getting the feeling that it’s going to take a bit of a capitulation type move to bottom this inflation trade and reverse it back upward. That move could provide a great entry for longer term plays. It’s not clear yet where those low points might be. Here’s a quick look at each and some levels to watch this week.

 

SPY – The only level that really offers information is last week’s high of 441.80. I expect price to test it early Monday morning, which will set the direction for the rest of the week. On the downside, watch last week’s low of 435.99. In the bigger picture, 420-424 is the lower area to watch for chart damage. If that level breaks, a correction could be starting and a break back under 400 is possible.

 

QQQ – This is the one area you don’t want to short. I think this becomes the safe haven in any market correction, and while it might pullback, it’s probably going to pullback less than SPY and IWM, and when it hits a bottom, the bounce back can rip shorts. Watch last week’s high of 368.89 to see if it tests simultaneously with SPY.

 

IWM – This is where the market weakness is showing. Smallcaps are lagging badly in the short term. The 224-226 area has been a significant level throughout this entire range that started back in January and it again rejected it on Thursday and Friday. Watch to see if that level gets one more test early in the week. If it fails, price could easily move back down to the bottom of the range around 210-212. The scary situation is if that level breaks and price dips below this six month range. Do the sellers throw in the towel or do bigger players step in and clean up any supply underneath the range, thereby shooting it toward 250?

 

TLT – Bonds have actually been fairly stable since last week’s FED meeting, but they are sitting at an important level in the uptrend that started back in May. Does TLT break above the 150 level or does the uptrend fail and sink back toward 140? I’m really not sure on this one. If it breaks upward, banks and energy are going to take a hit, therefore TLT is a primary watch this week. In the bigger picture, there should be significant supply sitting 154-156 to cap the upside.

 

UUP, USD/CAD – The XLE bottomed back on July 19, which happened to correspond with a top in UUP on the same day. If the dollar strengthens again, it’s going to be a headwind for energy stocks. The UUP level to watch is 25.00-25.20. For the USD/CAD, watch the 1.24 and 1.23 levels on the downside and 1.26/1.30 on the upside.

 

GLD, GDX – The decline in the dollar that began on July 19 has also helped GDX. There was a great trade around 33, but I got greedy and was waiting to see if GDX would break down toward 31-32 and missed the long play. The 35-35.50 area will offer some macro picture clues for the inflation trade, but there’s really not much trading opportunity in GLD or GDX right now.

 

XME – The metals made a huge run last week from ~39 to ~46. They were helped by a weak dollar, and the action showed some relative strength for the sector. If you want to gauge the volatility of the inflation trade, metals are the area to watch. Look for clues around the 41 level on the downside and 47.50 on the upside. I’m not interested in trading XME anywhere between those two points.

 

KRE – The banks are still showing a solid correlation with TLT and rates, but that correlation did have a few days last week where they diverged. If TLT starts down this week and the banks don’t react upward, that’s going to be a warning for energy. KRE should test the 64-65 area early in the week, so watch the price action there.

 

In summary, these variables control the bigger picture environment for energy and this bigger picture should control the direction of energy stock trades. Try to avoid trading counter against this inflation macro.

 

Energy, XLE, XOP, USO

I know I keep kicking this dead horse, but the fundamentals for energy stocks just don’t matter right now. The oil versus oil stock argument is worthless. The only thing that matters right now for energy is the unwinding of the rotation that started back in November. Inflation is the theme that is controlling, not oil or oil stock fundamentals. At some point, fundamentals will matter again, but that time isn’t now. I see a lot of Twitter gurus leaning heavily on fundamentals, which tells me immediately that they really don’t understand the current bigger picture. I’m sure you have all seen Energy Twitter’s biggest Permabull cheerleader constantly pumping fundamentals, and there’s a whole crowd of his sheep that are trying to make themselves feel better in the short term about their sinking long positions by leaning on fundamentals. He might be right in the very long term, but these guys are losing some significant money over the last month with that approach simply because they have tunnel vision and are ignoring the bigger picture. It will be interesting to see how much permabull guru finally loses and where he throws in the towel.

 

The technical picture for XOP and XLE is very clear. There’s major supply sitting above XOP at 86 and XLE at 51.50. Those are the two points to watch this week. The bulls might get one more test of those levels this week and if they fail price is likely headed back toward 47 for XLE and 77 for XOP. One note on XOP, the natural gas stocks really caused some divergence to the downside last week, so keep an eye on that group if XLE and XOP diverge again this week.

 

As for the actual commodity, USO, there should be big test in the 51-51.50 area this week. Keep an eye on the dollar, specifically the USD/CAD pair for clues. If the dollar reverses course and starts to strengthen again, there’s a good chance that could put a top in for oil. Also, watch the metals (XME) for clues since they have been moving strongly with oil. Just remember, the commodity and the underlying stocks are two separate things. I’m seeing a lot of guys fighting the oil stocks because they think they should be rising just because oil is rising. That just isn’t the case currently, so don’t fight it.

 

Majors – I didn’t dig too far into the earnings reports for XOM and CVX that were released on Friday, but the one thing that stood out to me was the emphasis on buybacks, debt payment and dividends. When you see companies pumping those items, it’s usually because the underlying business sucks. For many, the dividend is the only reason they hold the stock. When companies start selling investors on things that aren’t directly business related (like oil production), you have to ask yourself why. I also saw that both are again planning for less Capex spending. LESS money spent on the basic business of drilling for oil, yet MORE money spent on buybacks? That suggests to me that they really don’t believe in the longer term merits of this oil price run. Maybe that’s partially the reason both were down big on Friday after earnings.

 

E&PCOP is going to be a watch for me this week. Feels like a decision is going to be made around 58-60 in this one. If it tops out there, the rest of the group will follow. EOG and PXD are showing some relative weakness against COP. Watch the 150 area for PXD and 75 for EOG, there will be clues given off by the price action at those points.

 

Natural Gas E&PEQT and COG got crushed Thursday and Friday. I came very close to picking up some EQT around 18, but passed on the trade. If the sector corrects in the coming weeks, I’ll be very interested in the 14-16 area. COG might present a long play sooner than EQT. I’m watching the 15 area for a possible play, depending on the bigger sector picture.

 

Services – Of all the services stocks, SLB has the most dangerous chart. The 30-31 area seems to have large supply sitting overhead. The chart is setting up in a head and shoulders type pattern. If price rejects again around 30, it should then move toward 25-26 for a big test of that neckline on the H/S pattern. Again, I don’t put much faith in patterns, but the underlying logic is there for SLB. I’m watching the 18 level in HAL. If it drops to that area, I might put on a long trade there, again this depends on the larger sector picture.

 

Refiners – Refiners are taking the biggest hit in the energy sector lately, but they did have some good bounces last week. MPC is my favorite of the group and I’m watching the next pullback to the 51 area for a possible long trade. One caution on these, the summer driving season is quickly coming to an end, and that end might get accelerated quickly if Covid lockdowns start reappearing. September starts flu season and the overreactions and fear this year will be insane. The media created this inflation trade on the vaccine announcement back in November, and they can kill it just as quickly if things go south this fall.

 

Trading Plan for the Week – There’s not much available this week. I exited my XLE long position on Friday with a 4.9% gain and now I’m sitting on the sideline in energy waiting for either a test of XOP 86 and XLE of 51 or a breakdown and retest of the lows around 77 and 46. I have no desire to take a position anywhere between those two points right now. My bias has turned from bullish back to a more neutral “wait and see” bias. I’m not yet bearish and definitely not interested in trying to short anything in the energy sector right now.

 

Outside of energy, I’m watching IWM 224-226 for a possible play. If there’s an area that could be a possible short, this is probably it. But it’s going to have to be an absolutely perfect setup with a concrete stop to manage the upside risk. My only market position right now is a long in IWM from 211. I probably should have sold that position on Friday at the same time I exited the XLE long, but I wanted to keep some exposure to the upside in the inflation trade and holding the IWM position seemed like the better approach. I’ll be exiting the IWM long on any failure of last week’s high, and then likely flipping short if the situation is right.

 

The only other area I’ll be trading this week are the banks, specifically XLF and KRE. The large cap financials are going to present a test around 37 which should provide some great information. If TLT breaks to the upside, it might be worth getting short XLF against 37. On the other hand, if TLT collapses, I’ll be looking at a long play in KRE off that 61.50 level.

 

One note about Friday’s exit on XLE, this wasn’t a great trading move and not normally something I do. The week away from the market was relaxing and it felt good to recharge, however it really took me out of the flow with the market. I left a really positive bullish situation and returned to something that was bearish, and that threw me off. I took the trade off to get my head right. The initial written trade was based on expecting a sharp move in XLE out of an extremely oversold area around 46-47 back to fair value around 51-52, however that move just didn’t happen like I wanted, which suggests the sector is weaker than I thought. If you are a longer term trader, you should use a wider stop than I did because there’s a good chance last week’s move was just a minor wiggle in the larger picture. I can always put this trade back on when/if XLE tests the 51 area or if it falls back toward 47. Sometimes regaining bigger picture rhythm is more important than short term profits.

 

This week is probably going to be one where I collect information rather than trade. It feels like most things I trade are in no man’s land right now and just not good risk/reward bets. Hopefully that changes this week, but patience is a must here. Now it’s time for a trip to the winery with the love of my life for a couple bottles and some live music. Good luck out there this week and don’t be in too big of a hurry to jump in this market.

 

 

 

Weekly Energy Equities Review, Market Outlook and Trading Plan for June 21-25

Sorry for not posting the writeup the last few weeks, I’ve had high school graduation stuff going on almost every weekend, and honestly there just hasn’t been much to write about. The last couple of months have just been a slow grind upward, but last week’s FED meeting threw a curveball and now we might actually start seeing a two way market for awhile.

 

So what happened with the FED? I think they finally reached a tipping point where inflation went from a lower probability event to something that is probably a very high probability event. Inflation has been a fear for years, but it seems like it never fully develops, however this time I think they sense that they have taken a step too far with QE and inflation is now inevitable. The question now is whether it’s transitory or permanent. The market responded by taking a step back from the inflation trade. I think many traders entered the inflation trade thinking the FED would let the economy run hot for an extended amount of time, however Wednesday’s meeting may have changed that view as the FED showed some willingness to step up and fight the inflation battle in an attempt to keep it from getting out of hand. As a result, we saw all the commodity plays take a step back, including energy stocks.

 

So the question now is, how many steps back do traders take and how long do they let these commodity plays pull back before they hit them again for another run up? Short answer is that I don’t think they are going to let them pull back very far. In the XLE, I think the pullback goes to the 50-51 area, which would be about a 10% pullback from the high of 56.54. At worst, the pullback could go 47-48 (about 15-17%), but I really don’t see any way it goes below that. There’s just too much short term money out there willing to gamble.

 

I’ve been pretty bearish over the last few weeks, but as I’ve tried to explain over and over, I’m not bearish on the direction of energy stocks. I’ve been bearish on the trade in energy stocks. If anyone missed the baseball analogy in my Twitter feed, go back and give that one a read. Gambling isn’t about who wins the baseball game, it’s about what kind of odds you get on the bet. Same for trading. I see guys hugely bullish and piling into the XLE in the 55-56 area, but as I kept pointing out, that was a really bad trade and the reason I’ve been bearish. There’s a huge supply level at 60-62. The entry at 55-56 only has the opportunity to give you 5-6 points of profit. However, as many are now finding out, the downside is probably bigger than 5-6 points. This was the situation I’ve been telling people not to get into, and therefore the bearish outlook.

 

So what would turn me bullish? A pullback to the 50-51 area would flip me from a bearish outlook to a bullish one. And it has nothing to do with the direction of the XLE. The ultimate target is still 60-62, that supply level hasn’t changed. However, now the entry is in the 51 area, which gives about 10 points of profit rather than the 5-6 points of profit that other guys were getting with that 55-56 entry. But the real reason to turn bullish is the risk side of the equation. With a 51 entry I can probably get away with a 1 point risk for a short term trade and a 4 point risk for a long term trade. So now, instead of risking 5-6 to make 5-6, I’m risking 1 to make 10. This is why I’m hugely bearish at 55-56, yet hugely bullish at 51. It’s not about the direction of the XLE, it’s only about the odds on the bet. I know it only seems like a few points, but the odds at 51 are astronomically better than the odds at 55-56.

 

The risk of 1 point for a return of 10 points is a short term trade for me. However, at 51 I could even justify a longer term trade now. The risk for a longer term trade would probably be 47, which is about 4 points. The reward is still 10 points to the 60-62 level. That’s a risk of 4 to make 10, or about 2.5:1. That’s an incredible upgrade from the 55-56 entry where you are risking 8-9 points to make 5-6, or about 1:1.6. By being patient and waiting for the pullback, the entire trade has changed from bearish to bullish. Again, I’m not some crazy permabear basing my opinion on the direction of the XLE, which is clearly going up. I’m a trader who sees the bet only in odds, not direction.

 

I hope that kind of clears up why I was bearish at 55-56, but bullish as things pullback to the 47-51 area. It has nothing to do with the quality or fundamentals of energy stocks, only the odds I’m getting on the trade. So with that out of the way, let’s take a look around the market for the upcoming week.

 

SPY – The SPY has started a pullback, the question is how far. Price closed just below the 50 day moving average on Friday, so there is likely going to be a bounce on Monday or Tuesday to test the 50 day from below. The price action on that test will reveal a lot about what kind of pullback this might be. The first level of demand below the 50 day is around 405. Next level down is around 390. That’s still only about an 8% pullback, which isn’t much, especially considering the run up we’ve had in the last few months. A 10% pullback would take the SPY to around 382, which just happens to be where the 200 day moving average sits. I’m really not sure what kind of pullback this might be, so just have to be patient and let the market tell us.

 

QQQ – Tech was stronger than SPY and IWM last week. There might be a couple reasons for that. As the inflation trade has grown, money has moved from growth areas like tech to value type areas like banking and energy, as well as small caps. That rotation was clearly reversing after the FED meeting. Watch the QQQ and IWM correlation. One other reason for the strength in QQQ as the SPY moved down is that many see mega cap tech as a safe haven. If you have to be invested in the market, many consider tech the best place to be. It’s almost like the safe haven role that gold used to have in the past. There is always that chance that they all go down together, but see if QQQ maybe shows a little more resilience this week than other areas.

 

IWM – This is the area of concern for anyone trading energy. Small caps, banks and energy have been the darlings lately and have moved roughly together for quite a bit of time. It really looks like IWM might be topping out and rolling over, which is a big red flag for KRE and XOP. I’ve posted a few charts on the IWM showing the probable price path and it looks like that prediction might be coming true. There was clearly a double top around 234. The real key though is the action at 215. There’s a neckline that extends back  to January 1 that has been tested four times already. It looks like it might be headed for test number five this week. If the 215 level breaks, there’s nothing to stop a fall to the 175 area. That congestion area from mid-February to present is really looking like a Wyckoff distribution pattern with that recent 234 move being an upthrust formation. If IWM breaks the 215 level with big volume, that probably pushes XLE to test 47, so IWM needs to be the main watch for the upcoming week.

 

TLT – Bonds are making a big move up, but should hit some supply around 148. As money moves out of stocks, it’s finding a home in the safety of bonds. I’m not interested in trying to play TLT long, the trade is just too difficult. Given the FED’s position on raising rates a little sooner than expected, it’s a little curious as to why bonds are going up. The most useful signal coming from bonds is the effect it has on banks. As bonds rise, bank stocks fall, and as I’ve pointed out a few times, banks and energy have been moving together. Falling bank stocks probably isn’t a great sign for energy. Also, banks are about a 15% weighting in the IWM, so if banks fall, that likely drags IWM down. I’m looking for TLT to top out this week around 148-150.

 

GLD and UUP – The most damaging thing for commodity names this week was the incredible strength in the dollar after the FED meeting. The UUP (DXY) closed above the 200 day, so this could be a  longer term trend change. GLD took the brunt of the hit, losing about 6% in a little over two days of trading. I think this sets up a nice long trade in GDX early this week. I’ve posted the UUP chart a few times in the last few weeks pointing out the double bottom possibility. That formation has been developing since December 2020, so the recent move up should have been expected. The FED announcement probably lit the fuse for that move. The UUP should find some resistance somewhere between 25.25 and 25.40, but then it probably moves back down to test the 200 day ma from above. As for GLD, it gets really attractive in the 160-162 area. I rarely play GLD, but I do like GDX as the play on gold.

 

XLF and KREKRE is in an interesting spot this week and it’s an important watch for energy traders. It’s sitting right on demand around 63.50 in a formation that has been developing since mid-March. If KRE breaks down, the next level is around 58. If KRE breaks down, XOP likely follows. Watch the banks/bonds correlation this week for clues.

 

Energy, XLE, XLE, USO

There was a curious divergence last week in energy names. The money seemed to flow out of almost all large cap names, but my energy stock list did have a good amount of small cap names that were still green. My core energy list has 35 large cap names and all of them were red Friday. This suggests that the current pullback was probably larger funds adjusting their inflation trade. Many of the smaller names just aren’t widely held by funds playing the inflation trade, at least not in size. The XOP seemed to hold up a little better than XLE because of this. See if this continues Monday.

 

There wasn’t really any single area in energy that took a bad hit, they all pretty much went down about the same. XOM seems to be a better long play than CVX. The US majors seem to be better plays than RDSA and BP. I’m still not interested in moving into any individual names. I think this is a time when it’s more productive to play the sector as a whole because there is a macro force moving the sector. If you get the macro force direction correct, you are pretty much guaranteed to make money with XLE. If you try to get fancy and pick individual names to play the macro move, you will often pick the wrong stocks and miss the move.

 

If I was forced to pick one area to play, I’d probably go with natural gas names EQT and COG. I like EQT as the better company, but COG is probably the better trade down at this level. The refiners will also probably become attractive soon, especially if oil price starts to fall and driving demand starts to rise. My only other single name target is WTTR. I started in on the position last week under 6 and will be adding down to 5.

 

Trading Plan for the Week – Primary trade this week is long XLE in the 51 area. I’ll be playing it with a fairly tight stop. Ideally, I’d like to see it dip under 50 where I’d probably move from a short term play to a longer term play. If it dropped toward 49, I’d get long with a stop at 47 for a 2-3 point risk looking for a move back to 60-62. If XLE looks like it’s going to establish demand around 50-51, I’ll take the long trade and put a 1-1.5 point stop on it for the same move back to 60-62. Those are two different plays that depend on what kind of pullback XLE makes. The SPY, IWM, TLT, UUP and KRE will all be pieces of that decision. If the overall market starts down, I’m going to be way more patient and the longer term XLE play with the 47 stop will probably be the play of choice.

 

I’m also watching IWM for a play around 215. If it pulls back to that January neckline, there’s going to be a larger picture decision made there. I’m not sure how it’s going to develop or what kind of trade I’m going to put on there, but that’s the location where any trade will appear. I’ll post on Twitter which trade looks best if it reaches 215.

 

The only other trade on the radar this week is GDX. As the dollar ripped to the upside, gold really got hit hard. I’m very interested in GDX in the 31-33 area. There’s some really big demand at 31 that should act as a concrete stop on the trade. It’s setting up for a trade where I can probably risk 2-3 for a gain of 6-7 on any move back to the 40 area. I’ll post more on Twitter as it gets closer to any entry.

 

Good luck this week. My only real advice is to be really patient this week and let the market tell you where the turn is. Don’t try to anticipate or outguess this market, especially up at these levels.

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.