Energy Equities Outlook and Trading plan for July 1-5

Energy is still languishing way behind the rest of the market, even with the recent attempt to bounce off the bottom. The SPY is hitting new all time highs, WTI is flirting with $60 and the E&P’s are still doing nothing. What else do we really need to know? This holiday shortened week should see a solid open on Monday and maybe catch a little continuation on any positive OPEC news, but it is all likely a temporary move.

 

This week is pretty much a wasted one for me. I’m out Tuesday and Wednesday, Thursday is a holiday and there likely won’t be anyone returning to trade on Friday. On a light week of trading, there could be some exaggerated moves on lighter than normal liquidity, especially on the OPEC meeting/news.

 

The G20 meeting between Trump and Xi was positive on the overall headline, although how that matches up with the market’s expectations will come later tonight on the 6pm open. I’m guessing we get a nice gap up and likely further buying on additional OPEC speculation. It was nice to see good China news, as the China play that I’m in (LK, Luckin Coffee) should get a big pop on Monday. I might trim that one on any move over 20.50. If it shows no reaction to the news, I might take what profits are there and wait until the next round of China talks commences.  It should be a positive week for energy stocks, but we will see.

 

In the larger picture, I’m looking to establish a short position in the next week or two. The China deal news and the OPEC meeting should provide some nice hype to possibly get the XOP into the 28-29 range. I’d like to start scaling in on a short around 28.50. That range from January through late May should cap the price for awhile, as there is quite a bit of supply between 29 and 31. The first of that supply should show around 27.80. If I can get an overall entry around 29, I could give this trade about 2 points of run against me before I’d have to consider stopping it on any break of 31. If the market starts falling again, the profit potential is likely a test of 24 and then 20 if that level breaks. The odds on the trade are about 2.5:1, possibly more if things overshoot to the downside. If the trade is successful, it would provide a good pad to flip and go long when these stocks wash out at the bottom.

 

Oil stocks seem to be caught in a difficult position compared to the rest of the market. The primary issue right now is demand, which is a direct consequence of economic health and activity. Everyone wants that rate cut from the FED, but it is going to take some depressing economic numbers to push them to more cuts, and depressing economic numbers is not what oil wants to see. On the other hand, if the economic numbers are good, then the FED will not cut and all stocks will probably take a tumble. This likely hits oil stocks a little harder because any delay in rate cuts will likely cause some strength in the dollar, which would be another headwind for oil. Watch gold for any hints on dollar strength and clues on rates. If gold starts to tank, the other commodities might have no choice but to give up the FED rate cut gains that they have already priced in.

 

XOM and CVX are my two biggest watches right now. The 128 level in Chevron and the 84 level on Exxon are high water marks for energy stocks. Chevron is getting close and well above most of the relevant moving averages, but Exxon is lagging and still under most moving averages. COP is lagging about the same as XOM. If you look at the larger cap E&P’s: COP, EOG, OXY, CXO, PXD, CLR, DVN, they are all still well below the 200ma and many of them are still below the 50 ma. This recent bounce has been nice, but realize that this little bounce off the bottom is at a time when the SPY is hitting new all time highs and WTI is still near $60. The relative weakness between oil stocks and the overall market is still fairly extreme and the fact that WTI is still around $60 and these energy stocks still can’t get off the bottom is very concerning. What happens if oil price falls under $50 on depressed economic growth?

 

It’s the same story with services stocks. SLB, HAL, NOV, BHGE, HP all still well below the larger moving averages. Natural gas E&P’s have been an even bigger disaster. The refiners have had a nice couple of weeks, but the big three of PSX, MPC and VLO are all still below their 200 ma’s. I guess my point here is that we are dealing with a sector where all the individual stocks are still depressed well below the 50/200 day ma’s while the rest of the market makes new all time highs. The sector has problems. If the bargain hunters were going to hit these stocks, they likely would have already done so by now. And all this with oil looking at $60, so the sector can’t really blame a low oil price for their troubles.

 

On a longer timeframe, I think the play here is to let energy stocks bounce as far as they can while the SPY keeps rising, but when the overall market shows any reversal, the short in energy stocks is on and on BIG.

 

I don’t plan on doing any daytrading this week, I’ll just be watching on Monday and Friday. Good luck this week and be really careful about getting caught up in any bullish bounce. FOMO is a dangerous thing.

It’s time for an afternoon at the winery, some live music and a couple of good bottles in the warm sun. What better way to spend a Sunday afternoon.

 

Energy Equities Outlook and Trading Plan for June 10-14

It was a crazy market week and I’m just going to be honest up front and say that I don’t understand it at all. I do have a theory though. Also, it seems like the Mexico tariff issue has been resolved, so this market is probably going to gap up huge Monday morning and run for at least two days, which could be enough to take out ATH. Monday is going to offer some really great clues on the health of this market. Let’s take a look at the SPY first.

 

The SPY started selling off on May 1. On almost every day, the market would start at the lows and finish on the highs, or form a large hammer type candle, both of which are definitely bullish characteristics. However, if you pull back a level, all those days combined formed an overall downtrend. Each individual day had strong demand, but that demand was buying into an all you can eat buffet of supply, therefore the overall trend was down. That is a clear distribution situation. Somebody with large holdings wanted out, yet there was enough demand to soak it up with the SPY running from 293 down to 273. Near the end of May, something happened. I think those sellers decided price had dropped too far. On Monday, June 3, they stopped distributing, however the demand was still there. With the FED news coming out, the sellers picked the perfect time to remove the supply. Anyone who was short just couldn’t find any supply to cover and the speed of the FED induced rally caused them to panic and drive it even further.  The smart money knew if they pulled back the supply at exactly the right time, the shorts being forced to cover would pay any price out of panic, which was exactly what happened with the price move. Smart money used the FED news, panic of the short bears and FOMO of the bulls to let the market breathe and rise to a level where they could start distributing again. If I was distributing and wanted better prices, I would have done the same and let the market recover.

 

The real tell comes early this week. Do those sellers return and start distributing again near the highs or are they done? It’s my opinion that they aren’t done and that they return. They were able to distribute for a month from May 1 to June 3. If they started distributing again, they could probably get another week or two of distribution done on the way up to ATH, then another three or four weeks of distribution back down to where price was on June 3, around 273. An even better tell is where this market stops on the up move. I posted last week that the most painful move would be a quick rip to 296, as that would squeeze EVERY remaining short out of the market. Rallies in a downtrend are brutal for shorts. All the stops are just above the all time highs around 295. Once those get picked, the market could head straight down.

 

This is just my theory. I’m not shorting the market anywhere ahead of 295, and I’m probably not going to short on any breakout toward 300. The above is simply the only scenario I can come up with that makes sense regarding what happened last week. I do believe this bull market is getting close to the end. Now, whether it ends here with a triple top or if this is the start of a blowoff top, I really don’t know. What I do know is that I’m going to be more cautious on the long side for the rest of the summer than I have ever been. The FED used a bullet last week, and that is one less bullet they have for later. Once this rate cut hysteria wears off, and it will, the market will need another fix. Will the market get it and will it be enough to continue past ATH?  Most crashes and bear market beginnings happen in September-October, maybe that is what we are setting up for.

 

Another thing that concerns me is the IWM. It isn’t following SPY at all and isn’t anywhere near ATH. The IWM is a sensitive measure of economic growth, just as oil is, for the overall economy. The IWM has been moving very closely with XOP, which screams economic weakness. It seems as if the big money is shifting all their holdings to large cap safety and out of small cap growth. Watch that 148 level this week.

 

Enough on the overall market, and on to energy. The XOP is in bad shape. There is just huge supply at that 26-26.25 level. I posted a chart yesterday on Twitter showing the VWAP over the last couple of weeks and the sellers have clearly been in control on every test of that level. And remember, this is with the SPY ripping straight up to ATH and the E&P’s can’t even get off the bottom near all time lows. That says a lot. I’m still looking for the XOP to make a run at the 24 level, however, I’ve moved even more bearish and I think it probably overshoots to the downside, especially if the SPY gets rejected at ATH. If the SPY fails, the XOP could easily collapse to 20. I don’t think the chance is large, but it is getting larger every day as the XOP sits at lows while the SPY rips. The relative weakness grows and the signal is getting louder.

 

The XLE has been better, but that is strictly because of XOM and CVX, which make up 43% of the XLE.  Those two S&P and DOW components have gotten caught up in mega cap focused rip to ATH, but the rest of energy is weak. The XLE is hiding that weakness because it is so concentrated on two mega cap stocks. When the common fund manager wants to own a piece of energy, it’s usually going to be Exxon or Chevron. Those two stocks are going to be the barometer for energy this week. If they roll, the whole sector comes crashing down. Don’t let the XLE fool you as to what is really going on in energy, the XOP is a much better overall gauge of health (or sickness in this case).

 

Trading Plan for the Week: I sold all my holdings on Friday. They were only 20% positions, as I was trying to scale in as the market moved toward 24. Had I known the Mexico issue was going to be resolved, I definitely would have held, but that was impossible to know. So I’m 100% cash and my plan is still to wait and let these energy stocks drop to test 24 and evaluate there. If 24 looks weak or if the SPY rolls over, I’ll probably wait even longer to start scaling in. The perfect storm of falling oil prices, slowing economy and a crashing SPY could totally crush E&P’s down to levels that are generational lows. I DO NOT want to be early in that situation. I’ll still be scalping moves, but I’ll be extra slow in establishing large, longer term trades.

 

Bottom line is that I’m extremely bearish on energy right now. I think there is the potential for things to get really ugly and many companies just won’t make it. I’m sticking with quality on any longer term trades and I have no desire to drop down to any mid or small cap energy names, it’s just too much gamble for me and it isn’t really necessary as the quality names will still produce large percentage moves. My ideal targets are XOM, CVX, COP, EOG, SLB, HAL, MPC, basically the biggest and most solid. The next level down for me includes NOV, VLO, OXY, DVN, PXD, CXO, MRO, CLR, PSX, COG. The third level is speculative with PE, MTDR, NBL, HES, RRC, JAG and CDEV. I’ll post prices as I enter these positions.

 

As you can see, I’m not excited about this SPY move up. I think FOMO has a very tight grip on a lot of traders and those guys are losing sight of the bigger picture. The market moves to cause the most pain possible and I have no desire to get caught in that. At the end of the day, it’s a risk versus reward situation. Is there enough reward left in the market to justify the growing risk?? Not for me.

Have a great week.

Energy Trade Plan and Outlook for June 3-7

The bears continued to win last week with the XOP opening Tuesday at 27.19 and grinding a smooth path downward to close at 25.63. The selling was very controlled and orderly, so I’m thinking the bottom isn’t in yet and we will soon get that high volume washout. I’m still watching and waiting on this thing to hit 24 to evaluate and do some buying. I didn’t daytrade energy at all last week and it was difficult to just sit and watch, but hopefully that patience will pay off with some good deals on the long side early this week.

 

The only energy trade that I made was a very small position in HAL at 21.20. It’s just a starter position in a larger scale as services continue to fall. At some point, there will be a volume selling climax and that’s the point to really build the position. I’m not sure where that point will be, but I’m guessing a break under 20 might be it. From a pure risk/reward perspective, HAL is my favorite energy play on this down move.

 

So what’s got energy all upset? I think the demand side of the equation has taken over as the higher concern. The slowing economy, as evidenced by the ten year yield sitting at 2.133, is hitting all resource stocks equally hard. The tariffs aren’t helping either, but as they say “it’s the economy, stupid”. The rise in the TLT, GLD and Yen clearly point to risk off and lower rates coming. Lowering rates has usually stoked the market to new highs, but in the recent past the rate lowering has been used to pump assets up, however this time the rates are being lowered just to smooth out a possible rough landing of the economy. Basically, past rate cuts have been done just to blow the bubble, but the next cut will be to soften the bubble bursting, two totally different things. Be aware that Powell speaks Tuesday, so there could be reaction on rates then.

 

I am adding several of the metals stocks to my watchlist over the next month. These stocks act very similar to energy and usually lead the way down when the economy falters. I’ve added X, NUE, AKS, AA, CENX, FCX and SCCO. These are purely a play on a slowing economy and the FED coming to the rescue for very quick gains. Any resolution to the trade issue or a FED cut would send these flying. The holding period on these might be a little longer than what I usually do.

 

My outlook for the SPY right now is 265, at which point a decision will have to be made. Either the market makes a stand there, or it rolls over and makes another run at the December lows. I think the FED will come to the rescue in the 255-265 range. They won’t let this economy tank. They have been propping the market up for a decade, and there’s no reason to give up on that plan now, especially with the presidential cycle past the midway point. The key on this though is to be a trader, not an investor. When the FED steps in and pumps, be nimble.

 

As for energy itself, you can know all the fundamentals of these companies, but that’s not what really moves them right now. Energy continues to become more largely based on sentiment and macro factors rather than individual company fundamentals or metrics. I see so many guys getting bogged down in well results, IRR, capex, cash flow, etc, however when you take a step back, those things aren’t what’s moving these stocks. If it were, you would see the better companies getting rewarded, however that isn’t happening, they are all move together these days. Energy stocks now make up only about 5% of the S&P and they are just getting caught up in the flow of the overall market.  It’s the same with the actual commodity. The fundamental aspects of individual companies will matter again, but just not right now.

 

This week’s plan: The same as last week’s plan, I’m waiting on the XOP to test that 24 level and then I’m going to start scaling in to my wish list of stocks. The big level for me is the 26 area, possibly 26.30 which was last week’s overall VWAP. I’m thinking we get another test of that area this week, hopefully early in the week. If it tests 26-26.30 early Monday and fails, the next move will be a test of last week’s lows and then a break to 24 to test the late December lows. Once it gets to 24, then the real evaluation will begin. I’ve still got no desire to short this market because it can still have rips like we saw on Wednesday. There are a lot of people short and those squeezes in a downtrend are brutal. Just don’t get involved, the time for a short has passed, don’t chase it down here.

 

A move up and failure is an easy plan, however the more difficult plan is what to do if the market opens gap down Monday and then just keeps going. I really don’t want to see this market head straight down Monday morning because those are the situations that can easily reverse and start an uptrend. It is really hard to establish longs in a risk controlled way when the market makes that sharp V type bottom. I think if the market opens anywhere in the 24-25 range and then moves back into last week’s range, you have to jump on the long side for a bounce move. The stop on that position would be a move back below last week’s range, which is essentially a failure of the bulls to get back into last week’s range. The longer price stays below last week’s range, the more likely we get another down move, so that battle to gain/hold last week’s range is the primary point of interest for the week for me.

 

If we get that 24 test, these are my primary targets on the long side: XOM, CVXHAL, SLB, NOV, MPC, VLO, COG, EOG, CLR, DVN, PE, and MTDR. Depending on price action and how big the decline is, I’d also be interested in these if the price was right: MROAPA, OXY, NBL, RRC, CDEV and JAG. As I said last week, I’m not really interested in dropping too far below this quality/size market cap. Longer term, I’d prefer the XLE over the XOP, and prefer the OIH over the XES. The risk right now in energy is huge once you drop down to the small and micro cap names. I really like some of those names, but I know for me personally, I have a difficult time holding names through a sharp sector wide decline if I have any fear whatsoever of the stock filing a bankruptcy.

 

I have looked at the smaller service names and there are some deals here. Some of these companies will survive and the gains will be be massive for longer term holders. The key though is to avoid the ones who don’t make it. It only takes one bankruptcy to wipe out all the portfolio gains from a good trend run up. For me, there is plenty of juice in the quality names if this market bounces, so there’s just no need to chase or try to hit that home run with these small services companies. If fact, I got bit on one of these a couple weeks ago. I started a position in PES and it just totally collapsed. Luckily the position was still small and the loss didn’t hurt too bad, but it’s a stock that I’ve watched for a long time and really didn’t have any concern with bankruptcy, however if you look at that stock there really isn’t much doubt about what is going on there. No matter how sure you feel about a stock, you never really know the true condition of the company, and sometimes it is just best to stick with quality and take the gains the market gives you rather than gambling on big home runs in risky names.

 

So that’s it for this week, just waiting patiently to see where the bottom is. Looking for the high volume selling climax and then ready to scale into some longs for a FED rescue with either lower rates or the inevitable QE4. It’s sad that this is even a strategy, but you have to take what the market is giving. Now it’s time to enjoy a great Sunday. Wife is at ASCO19 conference in Chicago and I’ve got the whole day to do absolutely nothing and I plan on taking full advantage of that. Good luck this week.

Energy Sector Thoughts for the Next Couple Weeks

Last week was an ugly one for the bulls as the XOP finally broke out of the three week range and hit a low of $26.72. That low took out the early February and early March low points. It seems that the E&P’s are headed for the December lows around 24.

 

The scary part for the energy sector is that the overall market may also just be starting to top out and roll over. The SPY was shaky last week as well, but it did hang in there and could test the highs around 295 one more time before coming down hard. If the overall market corrects, the energy sector is probably going to get crushed. The 24 area held on the last SPY correction, but that correction was based on a tantrum in response to the FED getting tighter and wanting higher rates. This coming correction isn’t based on that, in fact the assumption now is that rate cuts are a given. The correction now is more likely based on a slowing economy (requiring the lowered rates). If this correction is indeed caused by a slowing economy, that is a direct hit for oil. The supply/demand curve is already weak and if the demand side collapses then oil prices are probably looking at something under $50, possibly low $40’s. The FED might be able to save many sectors with lower rates, but energy isn’t one of them. Lower rates don’t stimulate growth or oil usage, they simply cushion the fall.

 

I’m not sure if anyone really knows the true picture for oil right now. For every report that says there is a shortage, there’s another that says there is a glut. Somebody is wrong. Many reports say there is a shortage of needed refinery inputs, but those grades aren’t increasing in price and gasoline isn’t increasing in price either. Something is wrong with the supply/demand evaluation and one side of the market is definitely getting it wrong. At this point, the news reports are meaningless and price is the only variable that counts. Right now price says supply glut and/or falling demand.

 

Sometimes looking to other commodity sectors helps produce a clearer picture of economic growth. The closest sector to energy is probably basic materials: aluminum, steel, copper, chemicals, lumber, manufacturing inputs. If you take a look at companies like X, AA, CENX, FCX, DWDP, DOW, MMM they are getting crushed just as bad as energy. These usually get a lift when rates are lowered, unless that reason for rate lowering is a steeply slowing economy. When the demand for raw materials starts to fall this quickly, it’s a pretty safe bet that the demand for finished products will be slowing in the future. Keep an eye on these to see if they give any hint to an upturn in energy.

 

Another clue is the DXY. Keep an eye on the dollar. It has been very strong, which isn’t a great help to oil. As rates start to get lowered, see if that brings the dollar down at all. The US is still way ahead of the rest of the world in rates, which in turn causes a stronger dollar. If rates start coming down closer to the level of other countries, the dollar may come down as well. That could help, but there is still the underlying problem of slowing economic growth.

 

So if we assume that the economy is slowing, dollar is strong and rates are falling, what is the best way to trade the E&P’s? The obvious answer is to short them, but that is the short term answer. I think the sector could test the December lows, but that’s only about three points away which isn’t really enough reward to justify the risk on that short trade. One or two news headlines and you could get caught in a big short squeeze. I’m not looking to short right now. I think the better play is to sit it out for a week or two, let these E&P’s show their hand at 24 and then BUY.

 

Energy is probably the most hated sector in the world right now. Everyone is on the same side of the boat on these things, and so far they have been right, but at some point the sentiment will shift and the opportunity is going to be huge. I think there is going to be a spike in oil prices soon and not just a small spike, but a realization that oil isn’t going anywhere and the last five years of low investment is going to lead to a big shortage that will last for a couple years. If you have been on Twitter, the CrudeQualityMatters argument has been around for about a year, but I really don’t think it has been given enough attention. Shale isn’t the answer to the supply/demand curve. It has limited uses. The US still doesn’t control the type of oil it needs for refinery inputs and that could be a problem.

 

But back to the short term trading picture, I am letting these things fall and test the lows around 24. If they never get there, then energy will have been stronger than I thought and it will be fairly easy to get long somewhere as they bounce. But if they do get there, there is a good chance they overshoot to the downside and that could be one of those opportunities that only comes around every couple of years in energy. Bull markets only begin when the last seller has thrown in the towel. If the XOP takes out 24 and heads toward 20, all of these companies will get dumped completely on a huge volume spike and that is the market turning point. You just have to be patient enough to wait for it, DON’T BE EARLY!

 

If the liquidation does happen, where do you want to be? I think you have to stay with quality. I might be more tempted to go with the XLE over the XOP. Some of the smaller E&P’s won’t make it and that might limit the upside in the XOP. Remember that in the XOP, something like QEP counts more than XOM because it is an equally weighted index. It’s the same argument for selecting the OIH over the XES.

 

If I had to create the perfect portfolio at the bottom, I’d go with XOM, CVX, MPC, SLB, COP, OXY, EOG, DVN, PE and COG. Equal weight them 1/10th of the portfolio and let them run for six months to a year. If you wanted to take on a little more risk, then dip down into the next tier with HAL, NOV, VLO, PXD, CXO, CLR, HES, NBL, APA, MTDR and RRC. The argument could definitely be made that PE could be replaced by PXD/CXO in the perfect portfolio, but I think PE could really be a huge winner in the Permian. If PXD/CXO run up, PE will likely run up more. One subsector that also might be a winner in the next year is offshore. When it becomes clear that shale isn’t the answer and that it has reached it’s maximum usage level, the larger companies will move back to longer term projects for a different quality of oil. RIG, ESV, DO, OII, FTI. These would require a little bit longer timeframe to hold. These are just my opinions, not advice!

 

The question is how far down do you want to reach if this sector collapses? At what level do the bankruptcies start to happen? That’s definitely a tough one. I think you stay away from any services companies other than SLB, HAL, NOV, HP, CLB, BHGE. I think most of the bankruptcies are going to hit service companies, not E&P’s. When looking at E&P’s, it all comes down to debt, those are the spots where you don’t want to gamble. That’s really all I think you can do. Many of these smaller stocks are risky gambles now and if you really want to be in energy, stick with quality and don’t get greedy trying to hit a home run with these small and micro cap stocks. The returns in the quality names will be large, no need to take the extra risk of getting pinched holding a bankruptcy victim.

So that’s the plan, sit it out for the next couple weeks and let this sector fall to the 24 level. See if it overshoots and has a volume climax and then start scaling in slowly. If it never gets to 24, then I’ll move back to scalping the long side. The goal for me is to get positioned on a spike down for a longer term hold and large return. These opportunities don’t come around very often and you at least have to give them a try.

Trade Plan for the Week of May 13

I haven’t been following the energy sector as closely as usual over the last couple of weeks simply because the trading range has been so small that the opportunities just aren’t there for me. The XOP has moved for the first 30-60 minutes most days and then just nothing for the last 5-6 hours. However, this week could offer a great longer term trade and possibly some good trending action for daytrading scalps.

 

I’m still bearish on the XOP overall and I’m looking for a longer term SHORT trade this week. The E&P’s have been stuck in the 29-30 range for the last 7 trading days. If you look at the past, this ETF has a history of doing this within a strong trend, and it is usually a continuation pattern.

 

There is a huge demand level in the 28-28.50 area and I think the market will test that area soon. I have no idea if it will hold, but my gut says it probably won’t and we may be looking at a free fall to 24. On the other side of the coin, if it does drop down and test that 28 range, I don’t think the bounce will be sharp with a 7 day range of supply sitting just overhead, which should allow plenty of time to get out of a short trade safely. It is one of those situations where the odds of breaking down are much less than 50%, but the payoff on the trade is probably 5:1 if it does.

 

So how to play it? I think this moves up before it goes down. I’m looking for an early week run up to test the upper side of this 7 day range. If that happens, I’ll be looking for a defined failure pattern up around 30.25-30.50. If price gets above 31, then I’m probably wrong on this trade and I’ll be way more cautious about trying a short up there. Any short up around 31 would have to be an almost perfect pattern with a concrete tight stop.

 

If there is a failure pattern, start scaling in on the pattern in the 30.25 area and then add heavily as price comes back into the 7 day range around 29.90. When price gets back in the range, it should move to the opposite side of the range at 29 pretty quickly. There is always an option to pile more size into the trade on a break of 29 for a very large sized overall trade with a target of 24. If 29 breaks, then bring the initial stop down toward the top of the range around 30.25, if price has enough strength to bounce at 29 all the way back across the range, then this isn’t as weak as expected and I’d probably cut the trade and see how it reacts to another test of the upper side of the range. The trade can always be done a second time.

 

One thing I’m NOT looking to do is start the trade on an early week break of 29. If the trade moves straight to that point Monday morning then I’m not interested in this trade. That kind of action could be a test of the bottom of the range and any failure would probably lead to a very sharp bounce that I just don’t want to get caught in. I’m looking for the upside test and failure first, not a downside test and failure first. Everyone sees the demand at 29 and the novice shorts are going to hit that and it’s about 90% likely that any run to that level early in the week is a stop hunt and a trap if it occurs before a test of the top of the range. Don’t get trapped with the anxious retail traders. If price does run to the bottom of the range and breaks through, then I’ll just miss the trade, that’s fine. There will be another opportunity to enter when this makes a timid bounce off the 28 level back toward the breakout point at 29 for a short setup.

 

Much of this depends on what happens with SPY and WTI. The overall market put in a bit of a bounce late last week and I think there might be an early week attempt at an up move, but I’m not sure how much strength is left in this market and if there are enough buyers still around to push this higher. The 290-291 area is big. A move up and test with a failure in the SPY would coincide nicely with a move up and test failure in the XOP. One other thing to watch is XOM, it is sitting right on support at 76. It has been in this rough 76-84 range since early 2017 and what it does here could be an early signal for the entire sector. If it drops below 74, that’s a huge warning.

 

If the XOP does trend down, I’ll be looking to pick up a few names when it hits the bottom. I like OXY and if it gets caught up with the rest of the market in a downdraft it could turn into a real bargain under 50. My second favorite name on a pullback is HAL. This one has been absolutely crushed since earnings day up around 32. I’m also watching MPC in the refining sector as it gets close to testing that 50 level.

 

I’m still a fan of the smaller Permian names, but they just won’t come down to an attractive entry point, which I guess is a good signal that everyone else likes them too. PE, MTDR, JAG, CDEV are all still on my radar. PXD, CXO and FANG are also on there, but I like the smaller names better than the larger ones.

A few secondary names on my list are CLR, CLB, PBF, PES, GIFI.

Good luck out there this week. I’m off to finish the weekend with a couple good bottles of Nebbiolo Rose’, a Sunday afternoon nap and ending with watching Billions tonight. That’s a good day right there.

 

 

Trading Plan for Monday, April 8, 2019

This past week was difficult for me, as my overall bias for the E&P’s was bearish, which is exactly opposite of the action toward the end of the week. I didn’t think they would break out past 31.55 so easily and I missed the move. I think the most aggravating part of the week was when I got long after Wednesday’s EIA number, but got shaken out only to see the sector rip up Thursday and Friday. The EIA number was terrible with a huge build, yet the initial reaction was a rise in price.  Someone was using the bad EIA number to load up and once they were full, price drifted down for the rest of the day and shook the weak holders (ME!) out. I saw the positive signal, I just didn’t have enough faith to hold through the pullback.

 

The energy sector has been diverging from the overall market so severely that I’m not sure if this is a true breakout or simply the energy sector just catching up with the rest of the market. Either way, the E&P’s are going up. My bias is bearish, but it’s just foolish to fight such an obvious uptrend. If I see a breakdown, I might try a short, but it would have to be perfect and very risk controlled. The long side is the correct side this week.

 

Trading Plan for Monday: The plan for this week is simple, find a comfortable place to get long and just sit tight for the week. I do a lot of shorter term trading, but this week isn’t one of those times where it pays to be in and out so often. A trend seems to be starting, so just get a solid entry long and ride it out until the sellers show up. I like the XOP this week, but I’m also going to place some money on the XLE. I’d really like to see a slight pullback to test the 31.44-31.62 area for an entry long. Anything I could get lower than 31.44 would be a bonus. I’ll probably start scaling in as it dips under 31.50 and save some ammo for any dip near 31, although I don’t think it dips that far this week. On the upside, there doesn’t seem to be much supply between 31.50 and 34. Once price hits the 34 level there should be some supply that it will need to absorb for a few days. If it can chew that up, it could make a move toward the 200 ma ~36.

 

The only problem this week with getting long is that I’m really not sure where I’m wrong. I think the first warning would be Friday’s VWAP at 31.54. If that broke then Friday’s low of 30.88 would be a huge red flag that my long trade is wrong and I’d probably be forced to cut it. The 50 day moving average is down at 30.22, but I don’t think I’d wait that long to get out. The 30.88-31.00 area probably says the long trade is wrong and would stop me out. If this market is truly strong and breaking out, then price just shouldn’t pull back that far.

 

I usually don’t play individual stocks in a situation like this, but COP is definitely a play for me this week. The reason for the interest in COP is the concrete stop at 65. If that point fails, I know I’m wrong and can cut the position without any hesitation. The upside on this one is probably 70. If I can get in around 66, that’s a $1 risk for a $4 return, which I’ll take any day.

 

My only concern with energy this week is if it opens with a gap up or a strong opening drive and fails. We have been in this range since early January and all clues point to this being a re-accumulation (actually an accumulation which was distorted by the sharp drop at Christmas). The concern is if this range was actually a distribution and we now see an upthrust at the end of this range which leads to another leg down. Friday’s action would have probably shown that clearly and it didn’t, which makes me feel better about the long side. It’s just something to watch out for. If we get through Monday with a solid green day, then it should be clear sailing for the rest of the week.

 

There’s also the chance that the SPY tops out this week around 294 for a BIG double top. I don’t think the odds of this happening are very high, but it is a possibility to watch out for. My guess is the market runs up to the 294 level early in the week and then spends a good bit of time forming a handle type pattern and consolidating around the highs for at least one more try at a breakout higher. This market could easily hit 300 and once the meltup and FOMO kick in, there’s really no telling how far this market could go. The worry I have with this is that it could morph into a blowoff top which then becomes the head of a HUGE head and shoulders type formation. But that’s probably a long way down the road. Just enjoy the bullish environment for now and ride that trend until there’s a clear signal to abandon ship.

 

Trading Plan for Thursday, April 4, 2019

The energy sector had its first significant down day in awhile with the XOP dropping 2.3% and the XLE down 1%. The question now is, was this just a normal pullback day or the start of something more serious?

 

The concern for me is the increasing relative weakness and continuous divergence of the energy stocks from the overall market. On a day where things looked so bad for energy stocks, the SPY was still green. It was the same story on Tuesday when the XOP was down about 1% and the SPY again was green. Are energy stocks flashing an early signal for the overall market? Is the threat of a slowing economy showing in one of the most economically sensitive sectors of the market?

 

At this point, I’m going to say that Tuesday and Wednesday were just a normal pullback within the range we have been in since mid-January. Another day or two of decline though would change my mind. The decision point for me in the XOP is 29.61. If this is truly just a move back down to the bottom of the range, then price should stop and bounce there. If this is something more serious, then price will break that level and then move to 28 for another decision there.

 

The problem for energy is what happens if the SPY finally rolls over and makes a significant pullback? Given the run since Christmas, a pullback has to be expected soon. The energy sector is showing weakness with a strong SPY and if the overall market rolls over, things could get really ugly for energy. The same logic applies to oil itself. The SPY/WTI correlation has been fairly high and those charts look very similar. WTI hit 63 and the underlying energy stocks still rolled over with oil up there. If the SPY AND WTI both roll over, there’s almost no way the XOP survives that. It seems the fate of the E&P’s right now rests more with the action in the SPY and WTI than with their own fundamental condition.

A secondary watch is the TLT and the test it is making at the 123 level. If that level holds and the TLT starts running up again, the XLF should roll over and could take the SPY with it.

 

XOM and CVX are still above the 50 and 200 day moving averages and staying above those levels will be a big clue for future sector direction. If the leaders crack, the others will follow. For the E&P’s, many of them broke down below their 50 day moving averages Wednesday. EOG, OXY, APC, CXO, APA, FANG, PE, MTDR, JAG, MUR, RRC, SM, WLL all broke the 50ma on the same day and that’s a pretty powerful signal. I also posted the COP chart yesterday showing the 65 level as a significant signal point, so watch the 65 level today for E&P directional clues. Several of the services names are also sitting right on the 50ma. SLB broke it Wednesday, HAL tested it and failed, NOV has been below for awhile. The OIH should test the 50ma today. Refiners show the same pattern with MPC and HFC already below, PSX rejecting the 50ma on Wednesday and VLO sitting right on it for a test today. The key for Thursday will be if all these stocks can fight and regain the 50ma or if they just collapse and move away from the 50ma quickly and easily on heavy volume with funds throwing in the towel.

 

So how to play it today for a trade? This is either going to bounce today or it isn’t. I’m watching Wednesday’s low of 29.99 and the 50ma at 30.17 for clues. The sector found some difficult resistance around the 50ma area for the last couple hours on Wednesday and that level will be important today, either as support if price can get above or resistance if it fails to get above. If price can get back above the 30.17 level, the next area of supply will be at Wednesday’s VWAP of 30.48. If the market can clear that level, then a full on bounce and recovery could very well take hold and a move back to 31 is possible.

 

However, if 30.17 fails and price breaks below 29.99 I think this easily moves to 29.61 for a test of the bottom of the range. There will be a big fight there and it could bounce a few times. If it ultimately fails, price should move to 28 very quickly. The next signal around 28 will likely take a few days to play out.

 

Thursday’s Trade:  It’s 6:30ET right now and the market isn’t showing any direction. Depending on where this opens, I’m looking to set up a short play off the 30.17 area and will use Wednesday’s VWAP around 30.48 as my stop. I’d really like to get short somewhere in the 30.20-30.30 range for a breakdown to 29.61 with the possibility of the home run to 28. The stop on that play is about 25 cents and the reward is likely about 75 cents, but could be as much as $2.00. If this market gaps down and I still wanted to put on a short trade, I’d probably use the same logic to get short using 30 as my entry point and 30.17 as my stop area. I don’t like this setup nearly as much, but it’s really only way to get short on a gap down with any risk control.

The only place that I would be looking to try a long trade today is around the 29.61 level. While the XOP could open strong, there is just too much supply over the market right now to trade freely to the upside. I’m not saying it can’t run up, but simply the odds on that trade just aren’t very good. The better play long would be to let the action play out around 29.61 and hope the bottom of the range holds for a run back to fair value in the middle of the range or maybe even a run back to the top of the range.

Trading Plan for Monday, April 1, 2019

Last week was one of the slowest trading weeks I’ve had this year, just a continuous tight range between 30-31. There have been a few opportunities within the range, but I’ve just resigned myself to waiting for the either the breakout at 31.50 or the test at 29.61. Anything in between is just going to get chopped up.

 

I think the biggest reason for the slow week is that my bias is bearish, however the XOP is showing bullish characteristics. When the two don’t mesh, hesitation creeps into my trading and I get too cautious, especially with scalp type trades within the range. When there is no clear direction, sometimes it’s best to retreat to the sideline and wait to enter when the market reaches points of interest that mean something and convey a more certain direction.

 

This week is going to be a difficult one, as there are so many different ways the XOP could go. Top 5 paths from the decision tree:

1.  A positive open on Monday and a rip straight to the top of the range at 31.50.

2.  A dip to 29.61 and then a run at 31.50

3.  A dip to 29.61, a failure, a run at 28 and a failure there to 24

4.  A dip to 29.61, a failure, a run at 28 and a big bounce which fails at 29.61 and collapses

5.  A dip to 29.61, a failure, a run at 28 and a big bounce which breaks back above 29.61 and then makes a run at 31.50.

 

I know that sounds like a lot of options, but it helps to try and stay one (or five) steps ahead of the market so you know how to react to whatever is presented. One thing I don’t want to see is a gap up open to 31.50 (or a sharp opening drive there) which gets clearly rejected. If that happens early Monday, the rest of the week could be straight downhill. I’m bearish in my view right now, but I don’t see a short on that kind of action being very profitable. If this market does breakout, it could run so quickly that executing a tight stop on a short could be impossible. While a short might be likely and profitable, it would be brutal if the squeeze happened on a breakout.

 

My ideal trade for Monday is a pullback to the 29.61 level and then a run at 31.50 for a possible breakout (path 2). The most useless path would be more consolidation in this 30-31 range. If the XOP continues to consolidate, I’ll be on the sidelines.

I’ll try to post daily plans this week if things are moving. I didn’t really post much last week because there really wasn’t much to say given that tight range.

 

 

Trading Plan and Overall Market Outlook for Monday, March 25, 2019

What an ugly day on Friday. The question now is whether this was just a temporary pullback or the start of something serious. It’s probably too early to tell, but by the end of this coming week the answer should be pretty clear.

 

The real key to watch here is the TLT. I posted a chart a couple of weeks ago saying watch that 123 level, which has been an important market level since mid 2017. The market gapped up to 124 and closed the day at 124.86. That is a huge move taking out an almost 2 year resistance level with absolute ease. You can’t ignore the significance. If you want to know why the stock market dropped, that’s the answer. Lower rates should have fueled this market to new highs, yet it didn’t. The key here is WHY rates are dropping. The severity of the gap in TLT combined with the drop in the SPY clearly shows concern that the economy is slowing and recession could be approaching, and that’s likely the ‘WHY’ supporting the FED’s dovish move.

 

Sitting here looking at charts this morning and the most concerning group of stocks to me is the drop in the Financials since the FED announcement on Wednesday. JPM ran right into the 200 day moving average at 108 and has moved straight down closing at 99.76 on Friday. I just don’t see how the market is going to move up without the financials. The problem obviously is the expected lower rates, which aren’t much help to bank profits. The underlying question though still remains: Why are rates going down and what really caused the FED to take a very drastic and somewhat absurd move of lowering rates into a stock market that was headed to all time highs? On the face, their conduct doesn’t make sense, but if you dig deeper and consider that they most likely see a recession coming, then their conduct starts to make A LOT more sense.

 

No central bank should ever be lowering rates into a stock market approaching all time highs. It’s just a waste of ammunition and there’s no reason to do it, other than to manipulate and blow a bigger bubble. Unfortunately, I think they are caught between a somewhat manipulated stock market and an underlying economy that is going the other way. The market and the economy have clearly diverged and have been for a couple years. I think it’s possible that the FED has been forced to shift their position to protecting against the slowing economy, at the risk of blowing a bigger stock market bubble. They simply have no choice at this point. If that’s the real reason, then the move of lowering rates in the face of an all time high stock market doesn’t look quite as absurd.

 

The second most concerning group of stocks are the commodity stocks, things like X, AA, FCX, CLF, etc. When rates drop, these component stocks of the XME usually respond by going up, and they did on Wednesday and Thursday, but Friday they got crushed. This is a clue about the ‘why’  rates are dropping (TLT rising). When these commodity stocks drop on lower rates, it’s because the economy is slowing and I think these commodity stocks offer a real clue as to why the market fell on Friday in the face of a very dovish FED.  These commodity stocks are more supply/demand driven than other types of stocks. A slowing economy can shift the supply/demand dynamic quickly. The market should have run on lower rates, yet it didn’t.

 

Utilities are another group offering clues. They moved up on lower rate expectations as they normally do, but the move in the XLU was to all time highs on the weekly chart. That’s not just a rate move, that’s more than likely a flight to safety and dividend preference move. When investors would rather buy Utilities instead of bonds or tech, that’s a red flag. The Consumer Staples operate on a similar theme, but not quite as purely as utilities. The XLP held up well Friday, closing down just 7 cents, although it is looking toppy on the weekly chart. But when you compare Utilities/Staples to Financials/Tech, the market is sending a signal.

 

Which brings us to the oil sector. If this TLT/SPY correlation on Friday is for real and is on concerns of a slowing economy, energy stocks are going to get absolutely crushed over the next couple months. Oil stocks moved in line with commodity stocks on Wednesday/Thursday, and then followed them down Friday. If the economy slows, the supply/demand characteristics of commodity and oil stocks will show quickly. Oil has already been dealing with supply issues and if the demand side of the equation starts to also become an issue because of a slowing economy, there’s probably nothing that OPEC, nor anyone else, can do stop the coming price collapse.

 

If the slowing economy theme starts to pick up speed, oil could quickly find itself back in the 40’s and I really don’t think any of the E&P’s could survive that drop in their current condition. They are already struggling with WTI almost 60 and I’d hate to see the carnage at WTI 40.

 

So what to watch this week? I posted this week’s Decision Tree on Twitter (on the right side of the blog). I think the most important watch is the TLT to see if it pulls back to the 123 level and if it holds that breakout point on a retest. If it doesn’t even bother to pull back for a retest of 123, that’s going to be an even clearer signal of the danger in the stock market. Next, keep an eye on the financials to see how they respond to the TLT action and whether they can diverge from the current TLT up / XLF down correlation. Another watch is the DXY to see if it picks up strength or if it just moves sideways. With the dovish FED and lower rates, it should be weakening, but it really isn’t.

 

So how to trade energy this week? I think the best trade opportunity is going to be on the short side. The XOP should try to bounce early in the week, along with the SPY. At some point, the market could fail again and that’s going to be the short entry for the XOP. I’d stick to the XOP rather than the XLE if shorting is the plan. The XLE should be able to weather the collapse better with XOM and CVX sometimes being stocks that money flows to for safety. It doesn’t always happen, but I’ve seen it happen before. No sense in trying to short them when the XOP is a much softer target.

 

As for exact levels on the XOP, I’m really not sure how far it could bounce Monday. The E&P’s closed at 30.05. The 50 day moving average is 30.18, 20 day moving average at 29.98 and 8 day moving average at 30.37. The 30.50-30.65 level is the first supply and 31.00 is the second supply. If this market is truly weak, it shouldn’t be able to take out 31.

 

On the downside, the level for me is 29.61. That has been a solid demand level since early January. If that breaks, then 28 is obviously the next demand level. If the 28 level breaks, then things will get really ugly, really quickly and 24 could be the result.

 

From the Decision Tree (posted on Twitter Feed), the four most likely XOP paths this week:

1. Total breakdown. 29.61 breaks without much resistance and then the market makes a run at 28 and also breaks that level.

2. Market breaks down below the 29.61 level, drops to 28 and then bounces back to 29.61 for a test of that level.

3. On the retest from below, the market breaks back above 29.61 for a run back toward 31.

4. On the retest from below, the market fails at 29.61 and heads back down to 28 for a fourth test of that level, at which point it probably breaks down.

 

Two paths that could occur but I don’t see as likely:

A. The market tests 29.61, holds and then rips right back to the top of the range at 31.50.

B. The market simply drifts sideways in the 29.50-30.50 range all week.

 

That got longer than I intended. I’m off to have a couple bottles of good wine in the warm sun this afternoon, hope you guys have a great Sunday.

Trading Plan for Thursday, March 21, 2019

A huge EIA draw and an incredibly dovish FED really pumped up the energy sector on Wednesday, but given the magnitude of those events, the move should have been larger. Those two forces probably should have pushed XOP out the top at 31.60, but the market gave up the gains and finished at 31.03, which is barely above Tuesday’s high. The difference in Tuesday and Wednesday should have been much greater considering the news available on Wednesday, versus what we had on Tuesday. So many people focus on just the news and they forget to observe the reaction of the market to that news. When the reaction doesn’t match the news, that’s a useful signal. Let’s see if the hesitation at the top of the range follows through into Thursday.

 

SPY – The overall market still finished the day in the red, even with the dovish FED giving the market everything it wanted. That’s not an encouraging sign. The SPY was sitting around 281.15 at the time of the announcement and finished the day at 281.53, after reaching a high of 283.50 on the announcement. This wasn’t even close to Tuesday’s high point of 284.36 and that $2 roll back from the highs probably shouldn’t have occurred and might be a signal that the market has run out of steam. In fact, the SPY barely closed inside Tuesday’s low of 281.41 by 14 cents. It’s possible that many were expecting this move from the FED and the announcement functioned as a sell the news event. The only way to know for sure is to observe the action on Thursday. Bottom line here is that the SPY should have held those gains and probably finished at a new high after that FED announcement, yet it didn’t, and that’s a red flag.

 

XOP – It’s the same story with energy, more so with XLE than with XOP. The EIA draw was huge and combined with the dovish FED (especially the Dollar reaction) the energy market should have made new highs and held those highs, but it didn’t. XLE made a new high at 67.42, but tumbled back inside Tuesday’s range. The XOP made a new high by 6 cents and barely managed to hold above Tuesday’s range. I gave the XOP a shot short at 30.97, but cut the trade at 31.01 for a small loss. The entry was too early, I should have waited for the FED announcement to filter through a little more and tried to get an entry closer to the top of the range around 31.50. The better short would probably have been the XLE because the EIA number affected the E&P’s way more than the larger cap names. Most of the small cap E&P names that make up the XOP really got a bounce on that EIA draw. I should have considered this and moved to the XLE for a short and that was my mistake.

 

The true health of the XOP will show on Thursday. If there is real strength here, this market should easily take out Wednesday’s highs of 31.43 and then close well above that level. Any failure at Wednesday’s high is a huge red flag and the warning gets more serious if the XOP can’t hold above Wednesday’s range. The further down in Wednesday’s range that the XOP closes, the larger signal of weakness that would be for me. There should be solid support down at Wednesday’s low of 30.05 with the round 30 level and the 50 day ma sitting at 30.16 and the 20 day ma at 29.99. I feel fairly certain that the XOP will hold 30, but would also be concerned if it got anywhere near that area.

 

If there truly is strength in the XOP, it shouldn’t dip much below 30.80 on Thursday morning. After a quick test there, it should easily take out the highs at 31.43 and then challenge the 31.60 level for a breakout of the Jan-March highs. I’m going to consider it a disappointment if the market doesn’t make that move today, as it has great EIA numbers and an incredibly dovish rate and dollar environment to work with. If this information can’t push the XOP out the top of the range, then I’m not sure what could, as it doesn’t get much better than this for oil and the E&P’s.

 

So given that outlook, how to trade it? I’m looking for a pullback under 31, preferably close to 30.80 to get long for a run at Wednesday’s highs. That’s my ideal trade. Most likely though, the XOP is going to open with a gap up, which makes a more difficult play. If it gaps close to the highs, I’ll probably let it break out and then hope it drifts back down and retest Wednesday’s range at the 31.43 level, where a long trade should set up. Not my preferred type of trade, but if I want to catch a breakout run toward 32, that’s going to be the safest way to do it. So, two choices basically 1) let it pullback close to Wednesday’s VWAP in the 30.85 area and get long OR 2) let it go ahead and show the breakout strength and then let it pullback to the breakout point for a long. Anything in between those two options is simply guessing and will likely chop you up if this ends up consolidating all day.

 

On the short side, I’d probably wait for a clear failure signal before getting short. If the market puts in a clear failure at Wednesday’s high of 31.43, I’d probably try a short using that point (or today’s intraday high) as my stop. Pulling back and looking at a chart from early December until current, we are clearly sitting at the top of the range and any failure is going to send us back into that range, possibly to the opposite side of that range. I’m probably leaning about 65% long and 35% short on today’s trade possibilities. It’s going to take a very clear signal to send this market down and if we don’t get it, the natural flow and inertia might keep pushing the market higher.

 

The only individual stocks I have an eye on today are XOM and CVX. They absolutely did not participate in Wednesday’s strength and CVX even somehow managed to finish in the red, down about -.5%. If these two aren’t going to run, then the XLE isn’t going anywhere. COP was also a bit of a concern finishing the day barely green at +.3%. Also, the refiners were a weakness with MPC finishing barely green at +.3%, PSX -.7%  and VLO almost unchanged. The refining portion of the sector was definitely hurting Exxon and Chevron. Keep an eye on the refining subsector today to see if it can bounce back and carry XOM and CVX with it.

On the macro level outside of energy, keep an eye on the 123 level in the TLT.  Watch the XLF to see if it bounces back today in the face of lower rates. Also, keep an eye on gold to see if money wants to keep moving to commodities. Watch the EURO to see if it can hold the 1.1335 level. If the EURO starts failing again, that could take gold and oil back down with it.

APVO – Big volume on this small biotech and another couple of 13G’s filed on Wednesday. This one is looking more interesting by the day. Long at .87 and will be looking to add on any dip below .80.