Weekly Energy Sector Review and Trading Plan for December 6-10

In my last post on November 21, I debated whether the XLE drop down to 54.50 was a buying opportunity or a trap. It was my opinion that it was likely going to be a trap. Well, two weeks have gone by and price is still sitting right around 54.50. It hasn’t turned out to be the trap I expected, but it really hasn’t been much of a buyable dip either. Things are just stuck in a range, but I think there might be some resolution coming this week.

 

I’m still leaning bearish, but I have to admit that I’ve been impressed with the resilience that XLE has shown with all the bad news that’s been thrown at the market over the last two weeks. The omicron covid news hit full force out after my article from two weeks ago, and if you would have told me XLE would still be above 54.50 after that news, I’d say that’s definitely some strength. If I was around 85% bearish back then, I’d say I’m somewhere around 70% bearish now. Still not bullish, but definitely not as doom and gloom as I was two weeks ago. There are some buyers under there. Who knows how long they last, but they are there.

 

Not going to lie though, this has been a difficult two weeks of trading in energy. I’ve been pinned to the sideline for most of it. There’s absolutely no way to swing anything overnight with these random 2% gaps. It makes risk control almost impossible. I tried the XLE short twice and scratched them both breakeven. All I’ve been able to do is some intraday scalps. Out of a five point fall from 59.50 to 54.50, I’ve caught maybe 1.5 points of that move. Not great, especially when I had the bearish thesis all set up. Many times making directional calls is easy on Twitter, but once you figure in the risk control and stops, things become untradeable.

 

So where does XLE go now? I trade a lot of other things besides energy, however I don’t post much of that stuff because readers aren’t interested in those, they are reading for energy. But, from what I can see from the other sectors of the market, I think there may be one big dip coming and then a reversal upward into the end of the year. That big dip could come early this week. I’ve been looking short, but if you aren’t already short, I don’t think this is the place to start a short play. I’m sure many will try to short the coming breakdown, but I get the feeling they may end up trapped and squeezed into the holidays. I know this probably sounds crazy coming from the guy who is bearish on energy, but the next decent play is likely going to be to the long side this week. I’m not talking long term though, I’m just looking at the next 2-3 weeks.

 

For me, the key to this market is IWM. Smallcaps sat in that 210-235 area for about nine months, took a shot at breaking out of the top of that range and failed. Price has now fallen back into the range and seems to want to test the lower boundary of that previous nine month range. I get the feeling that price is going to make a run at the 207-210 area soon and then we’ll see what kind of demand is there. This pattern likely ends up being very similar to a head and shoulders type situation where the bearish pattern is perfect, price breaks below the neckline and then buyers rush in. What should have been a perfect reversal pattern quickly turns into a bullish continuation pattern. That’s my guess anyway. If IWM finds demand around 207-210, then it likely makes a quick move back toward the top of the range (or at least the middle) over then next couple weeks. Who knows where it goes after that, but finding demand underneath that nine month range strongly suggests some short term bullishness.

 

That’s the best case scenario. The worst case would be if IWM takes a look at that 207-210 area and totally fails there finding absolutely no demand. If that happens, that opens up 170 fairly quickly. I don’t think this happens. There should be enough demand underneath to at least stop price above 200, at which point it probably bounces back up and tests 210 from below. If price fails to get back into the range at 210, then that probably starts the waterfall to 170. There should be plenty of time to get out of longs if this happens. I see many calling for an absolute crash soon, but I just don’t see it, there’s still way too much money floating around out there.

 

One specific area to watch this week is XBI. If IWM is an important clue for energy direction, then biotechs are important because they make up a large portion of IWM. I posted on Friday to watch the 102-107 area for major support in XBI. I expect that it will test that level early in the week and if it holds that could help produce a nice bounce in IWM. I’ll be looking for some solid structure to get long XBI within that area of demand.

 

The other area to watch is the smaller regional banks, KRE (as well as XLF). Banks, smallcaps and energy have been benefitting from the inflation play. These smaller financials also make up a large portion of the IWM. One thing to notice is that both KRE and XLE are very close to testing their 200 day moving averages. They should both test at the same time, and I think that test might come early this week on a panic dip in the market. If KRE holds, then XLE should probably also hold. Use all the clues you can get.

 

Now, to take a step back up the macro ladder, the TLT and UUP are a concern. The TLT broke that 152-153 level to the upside on Friday, which suggests that banks should probably roll over here. Given the banks/energy/smallcaps correlation, that’s bad news for energy and smallcaps. I’m not sure I trust the move in bonds though, seems like much of this move was caused by the new covid variant stuff, which I think is totally wrong and off base. The government is doing all they can to convince people this latest variant is dangerous, but all the evidence just doesn’t back that up. When the market does finally wake up to the fact that the latest variant is a complete dilution of covid, I think the market reverses back to the upside, with bonds falling quickly, especially if the inflation/taper issue comes into focus again. I could see TLT being a short play in the 156-157 area soon.

 

UUP is still a problem, but it seems like it might have topped out around the 26 level. The strength in the dollar usually isn’t a good thing for oil, gold and other commodities. I use the USD/CAD pair for dollar strength related more to oil and it is pressed right up against that 1.29 area which has been resistance throughout all of 2021. Even if it does break to the upside, there’s an even bigger level sitting just overhead at 1.30-1.31. The dollar strength might be running into some headwinds soon and if it tops out, that could provide some support for oil prices.

 

Given the strength in the UUP, gold and the miners have been crushed over the last few weeks. I pointed out in the last blog post that GDX was probably maxed out at 35 (200 ma) and that seems to be correct. It closed Friday at 30.79. The 31 area in GDX has been major support, but I think that support is slowly weakening the more times it’s tested. I liked the long GDX at 31 last time it came down here, but I’m not interested in trying that trade this time. I think GDX could make a run down and test the late September low around 28.83. I’d definitely be interested in looking for a trade down at that level, but it really depends on where the dollar tops out on this run. If TLT reverses back down (rates up), that could spike the dollar upward and GLD/GDX down, so it’s a tricky trade entry. One other thing to watch on gold is the AUD/USD pair. It’s coming right into support around .6900, so see if that holds for a nice bounce in the Australian dollar (and GLD).

 

Industrial metals (XME) is also another possible trade setup if the dollar tops out and inflation hits the radar again. There’s a great long setup in the 39 area which has been building since March. The only negative is that XME has already broken down below the 200 day moving average, but a short term bounce back up to the 50 day around 44 isn’t out of the question if this market has a Christmas rally. The trade can easily use about a dollar stop for a $4-$5 gain.

 

One other sector to watch is the homebuilders (ITB). It really has nothing to do with energy, but it could present a nice short play. With bonds ripping upward, that has put downward pressure on rates, which is definitely a help when buying a house. If that TLT trend (and specifically the 10 Year) tops out and moves down quickly, that could put a top in ITB. Much like the XME play, it’s another trade where you can get away with a fairly small stop for a sizable gain.

 

Trading Plan for the Week – My ideal situation for Monday would be a sizable gap down in IWM and the overall market for a long play. If IWM tests that 207-210 area and holds, I want to get long XLE. I’m not playing any individual energy names, just trying to catch the overall sector move with XLE. The area to focus on in the XLE trade is 54.00-54.50. If I can structure the trade around that area, then the trade can probably be sized up with some confidence.

 

I’ve gotten away from XOP over the last few months, but there’s also some good opportunity there. One thing to notice is that XOP went right to the 50% retracement of that run which started in August down at 72. That provides a good point to play off of early next week. It also has the 200 day ma just under that pullback point for some added support.

 

I’ve also noticed that XOM and CVX have totally flipped roles. For a long time, XOM was stronger than CVX, but that has changed. On this recent pullback, XOM went right to the 200 day moving average (about -11% drop), however CVX hardly budged at all dropping just 5% from highs and getting nowhere near the 200 day ma. If I had to choose one to play on the long side, CVX is the choice, especially with nice tight stop around 112.

 

The only other name that sets up well is one I posted on last week, NOV. It got the dip under 11.80 on Thursday and there was big demand waiting under there. I didn’t take the trade, I was biased short pretty much all week. NOV closed Friday at 11.86 and I think there’s probably a good setup there if energy makes a run. Any entry under 12 would probably work with a stop safely under that 11.45 low from Thursday. You could probably even get away with a stop just under the Wednesday and Friday lows around 11.70 if you want to size up.

 

The only other names that are reasonably attractive on the long side would be PSX in the 65-67 area, LNG 101-102 area and CTRA in the 19.50-20.00 area. All three of those are very tight stops with good potential for reward.

 

Outside of energy I’ve got a few names on the microcap watchlist. BFRI was a nice winner, but UNCY was not. I’ve still got UNCY, but not happy about it. I’ve also got positions in VECT (2.87)RCRT (2.86), BJDX (2.58) and VQS (2.29). The BJDX play is my largest and favorite play. The quiet period on that IPO doesn’t end until December 20, but once there’s news I expect that it could easily move similar to BFRI and reach the 5-7 range. Very risky low float, so definitely size accordingly. Some other names on the watchlist, but no position yet: DRMA, CELZ, SQL, VIRI, VRAR, PPTA, TIVC, STRN and MCLD.

 

In summary, I’m bearish longer term, but looking for a long play short term into Christmas. I’ll be watching the action Monday looking for a nice panic capitulation type flush and if I get it, I’ll be looking for some solid structure to get long XLE. I’m really not interested in trying anything short overnight, only intraday scalps on that side if applicable. If the market opens up big Monday, I’m not chasing energy and will probably move to trading XBI or IWM.

 

It could be a very volatile week, so good luck out there and be safe.

Weekly Energy Review: Buyable Dip or Deadly Trap?

I’ve posted my bearish thoughts over the last couple of weeks and the energy sector has finally started to price in some of those items. XLE has dropped from the double top at 59.41 all the way down to close Friday at 54.83 on large volume of 46 million shares. That’s about an 8% drop. My initial target on the short position downside continues to be 53. If XLE makes a move toward that 53 target, that would be about an 11% pullback, at which point the question becomes: Is this is a buyable dip or a deadly trap?

 

It’s my opinion that any bounce off this 53-54.83 area is a trap. If XLE does find support somewhere between Friday’s close and 53, there could be a bounce back toward 57, but I think supply just pours in and overwhelms the few remaining buyers there, which should send price right back down to the early week lows, and possibly lower. If 53 doesn’t hold, there is a small level around 50, but the next major level doesn’t appear until 46-47. If price reaches the 47 level, that would be about a 20% pullback off the highs, which I’d probably cover the short play completely and get long in a big way.

 

There’s a lot of technical stuff going on in the XLE chart. In the short term, price made this latest blowoff type move starting around October 1 at 47. Price moved to 59.41 fairly quickly where it put in an almost perfect double top at 59.41 on October 26 and 59.40 nine trading days later on November 8. Patterns don’t get much more obvious and perfect than that. If the bottom of the pattern is 47 and the top is 59.41, a 50% retracement would put price right at 53, which is my initial downside target. I don’t know what happens at 53, but whatever does happen there will tell a lot about the strength of the energy sector. If price cuts through 53 easily, I’d guess that the next stop is 50. If demand shows up at 53 and price bounces strongly, I’d guess it might bounce back to 57 where another evaluation of strength/weakness would have to be made. That’s really too far into the future to make any reasonable estimation.

 

In the longer term technical picture, this inflation trade of smallcaps, banks and energy started back in early November 2020. XLE moved from 27 to 54.91, which is nearly 100%+. The 38.1% Fibonacci retracement level on that move would put price at 47, which is a major demand level on the chart. That’s where large demand should show and I think that’s probably the low for this current pullback. A 50% retracement of this entire move off the November 2020 vaccine re-opening lows would put this pullback at 43. I have no idea what happens at 47 or 43, that’s just too far in the future, but those are the points to watch.

 

While the bears have certainly taken control of the sector, I still think it’s just a bit early to take any victory lap on the short play. This market is crazy right now and I wouldn’t be surprised to see the bulls make another stand. Much of that stand will have to do with the overall market and SPY/QQQ. It feels like the overall market is in the process of making a blowoff top with more upside possible on a buying climax. But one thing to notice about XLE is that these very high volume down days like Friday have been followed by bounces over the last 6 months. May 11, June 18, July 19, August 19 and October 6 all had the highest volume days in the last six months and every time that volume put in a bottom and price bounced off those days. It will be interesting to see if this pattern of bounces off of high volume down days continues on Monday or if the pattern changes with price following through to the downside with no bounce. If that pattern of bounces after high volume selling no longer holds, that would definitely be a signal that underlying support may no longer be there in the bigger picture.

 

I’ve posted my bearish thesis, and this week has more negatives to add to that long list. There have been new lockdowns in some parts of the world and that’s not going to help the sentiment for oil. If these lockdowns spread, that’s only going to cause sentiment to get worse. Also, the US hasn’t even hit cold and flu (and Covid) season yet. I think when the winter cold and flu season hits, government officials are going to overreact again and start preaching more gloom and doom, whether that be more lockdowns, travel restrictions, mandates or business closures. The oil market priced in that Covid was basically over, but I don’t think it is. While the actual health threat probably isn’t a big deal, the optics of the government’s overreaction to it will be. And what better way to keep oil demand and prices down than to initiate more lockdowns or travel restrictions? This isn’t about health anymore, it’s about the economy, inflation and a possible resulting recession which the US can’t afford.

 

Energy investors have put themselves in a position where they are playing adverse to the larger government, and that’s just never been a good bet. The Biden administration has recently shown that it has no clue on oil and how to control it. They will continue to grasp at straws on how to attack prices. I think this recent price action in XLE is a signal that institutions now realize that and really don’t want to put money at risk against the whims of government action. I’m not saying that what the government is doing now is going to work in the long run, because it isn’t, but they can definitely cause a lot of oil price (and equity) destruction over the next six months.  If you are a longer term investor (I’m not) then this pullback toward 47 might be a gift. But the risk on that longer term investment is that all this interference causes oil prices to spike in late 2022-23, which pushes the US economy over the edge into a recession, as energy is a huge portion of the inflation problem.

 

All these factors including increasing dividends into a higher interest rate environment, increasing buybacks at these peak prices, eliminating hedges with oil at $85, limited ability to plan due to OPEC and US government action, coordinated SPR releases, a strengthening dollar, increasing capex near the oil price cycle top, more covid doom to come and increasing inflation just make this sector unattractive. That doesn’t even take into account an overall market correction, a forced FED tightening or the beginning of a recession as inflation gets out of control. And then there are the black swans that we don’t even know about. Our economy is likely one swan away from collapsing because of the recent actions taken during the covid pandemic. That’s just so much to fight against. At this point, I can’t really think of any short term positives. The technical picture is even worse. Are institutions really going to push all their chips in after a 100% sector run over the last year? Or did they just run the price up over the last month and dump all over retail who is now left holding the bag?

 

Overall Market Technical Thoughts:

SPY – 470 is the obvious level to watch. It’s setting up a little like that double top that formed in XLE. I’ve been waiting for a buying climax in SPY and QQQ and this chart is possibly setting up for that play. If price breaks 470, that could set off a Christmas rally run toward 500, where the buying climax likely puts in a top that lasts for awhile. There’s a good chance that this Christmas rally might be the last gasp for this bull run. As the calendar changes to 2022, things could change quickly as many players reset their portfolios and risk. Watch any break below 462, that would also suggest the top might be in for the short term.

 

IWM – This is the real concern for energy players. The breakout from the nearly year long range between 210 and 233 is trying to fail. 234.53 was the point to watch and price closed below it on Friday at 232.92. Look for another test of 234.53. If it fails there again, price could make a run well back into that 210-233 range. If price does get back into that range, there’s even the danger that it could head right for the lower boundary at 210. If 210 breaks and builds under, this market is in serious trouble. On the brighter side though, if price does test that 210-233 range, and price holds, it could set up a nice leg up toward 250-260. It really depends on the action of this retest of the recent IWM breakout.

 

UUP, EURO, CAD – The dollar is strengthening and that’s not a good thing for the USO. The USD/CAD pair has run from 1.2300 to 1.2650 over the last couple weeks and could run toward the peak of 1.29 that has been tested a few times during 2021. If the USD/CAD somehow breaks above that 1.29 level, that likely indicates that oil is headed for a big collapse. I posted a EUR/USD chart a couple weeks ago showing the head and shoulders breakdown and that pattern continues to develop with the pair closing Friday at its lowest point since summer of 2020, which just happens to be when the oil run started. The strengthening dollar itself isn’t really the cause, it simply reflects the underlying conditions that are causing the headwinds for oil. If the dollar continues to strengthen, that indicates that the headwinds for oil continue to get stronger.

 

GLD/GDX – I posted the GDX chart a couple weeks ago for a long play at 31 and that play did happen (I missed it), but it looks like things have stalled out for gold. It was actually surprising to me that gold did as well as it did in a rising dollar environment, but it looks like reality may now be setting in as GLD (and GDX) took a sizable dive on Friday. See if this continues this week. I’ll still be watching the 31 level this week, but honestly I’m not sure I want any part of a long play there if it comes down again. A top has clearly been put in at 35 and if inflation continues and the FED is forced to tighten and the dollar continues to climb, the GDX could break well below 31 for a much better play near those late September lows around 28-29. I think there could be a long play there, but it’s going to take some patience.

 

Trading Plan for the Week:  So enough gloom and doom bearishness, I know you guys are probably getting sick of it LOL. I’ve built my short position and this week I’ll get some good road signs to gauge the strength of that play. The first point of interest will be Friday’s low. I’m expecting a gap down on the open Monday. If price gaps down and then reclaims Friday’s low, that’s probably a sign that we are in for an early week bounce back up toward 57. I’ll hold the short position through that bounce and likely add to it as price makes a decision at 57. If price does test 57 and fails with supply pouring in, then I’ll add and look for price to come back and test the early week lows for more downside.

 

As a bear, what I’d really like to see on Monday is a gap up and failure. If XLE fails after an early week run up, that probably means that the high for the week is in and price then explores the low as we move into Wednesday and then early the following week. If price makes a run at 53, I’ll likely start taking some of the short play off and lock in some profits and then wait for a bounce to once again build the short position back to full size. If a trend develops, that becomes a pretty good environment to trade around a core position.

 

One danger this week though is that it’s a short Thanksgiving week. The market may be thin with many taking off and the moves could be exaggerated. It’s a situation where you definitely have to keep some tight stops if you are doing any intraday trading, because things can get out of hand really quickly. I’m content to hold the short swing position for now and probably won’t do much scalping this week.

 

One other warning, please take all these energy gurus on Twitter with a grain of salt. They are leading so many new energy traders to a complete slaughter. My favorite Canadian guru is still calling the XLE a “generational buying opportunity” after a 100% run to 59.41. These guys talk their book and they need a sucker to sell to and dump on at these peak prices. Don’t be that guy. I’m seeing the same old “but the fundamentals haven’t changed” posts that I saw last time the XLE topped out around 56 this summer. The fundamentals DO NOT MATTER in this current environment, especially in the short term. Please be careful with these kinds of people on Twitter. Do your own research, trust your own plan and opinion. Don’t get caught in the herd. At the very least, find someone with an opposite opinion and really ask yourself which person is correct. I see so many people get destroyed because of a confirmation bias. They only select the information that supports their long position and they ignore everything else. Many times that causes them to ignore the most important information. This game is brutal, protect yourself out there.

 

Non-energy Trading Ideas – With the energy market stuck in that 57-59.41 range for a few weeks, I stepped back into some old trading methods in the microcap market. The action there is incredible, but it also indicates that speculation in this market is reaching dangerous levels. But, sometimes the situation is so attractive that you have to go where the money is. Keep an eye on IWM and if it starts back upward after testing the range underneath, these microcaps could explode into Christmas.  I’ve got UNCY, RCRT and BFRI as lotto plays right now. DRCR, PPTA and CLIR were all nice gainers over the last few weeks. My favorite smallcap watch right now is WTTR. I’ve played this one for a few nice runs this year and it may be setting up for another opportunity in the 4-5 range.

 

I’ve got a few other microcaps on the watchlist that all fall under a consistent theme. These are very specific types of plays and very risky, so position sizing is of priority importance. Microcap list:  BJDX, KTTA, MRAI, SQL, VQS, CNTX, EZFL, PTIX, BRTX and BRDS.

 

That’s all I got for this week, strictly watching the short XLE play on a short holiday week in possibly thin action. Headed out for a couple bottles of wine today and some live music. Only thing missing is the warm sunshine. Sitting inside just isn’t the same, but I’ll make do. Good luck and have a great week.

 

Next Week’s Energy Trade Plan and Few More Bearish Thoughts on the Energy Sector

Posting a quick look today at last week’s energy trade plan and what went wrong, or more specifically what never really happened at all. The plan never got an entry as XLE opened the week at 58.04 and closed the week at 58.23. The overall move for the week suggested accumulation, but I’m still not ready to let go of this short trade plan. There’s a level developing at 58.50 which should give a very clear signal this week, just have to wait for the market to tell me which way it wants to go.

 

I posted a fairly bearish longer term view last week, and I’ve got a couple more things to add to that bearish list this week. One thing about oil companies is that while they may know their business well (much like many fundamentals gurus) they are terrible traders. They are now deciding to make huge buybacks after the XLE has already run +150%, with many individual stocks running much, much more. They really could have timed buybacks better, but I guess they don’t mind paying top dollar now. Are they buying the top? Probably not the exact top, but they may end up making these buybacks at prices they will regret in 18-24 months and that’s not going to make shareholders happy, especially when they could have extinguished debt instead.

 

This week I’ve started seeing a new issue that I think is probably way worse than doing buybacks at peak prices and/or increasing dividends near the top of the oil price cycle and into a higher rate environment. That issue is the exclusion of new hedges. Many of these companies have decided not to buy insurance against an oil price crash. They bought a huge amount of hedges at extremely low prices and many are reporting excessive losses off those hedges in recent earnings reports. But now with oil pushing $85, they aren’t going to hedge? I’m really not sure they understand how hedging works LOL. It’s just another gimmick to save money in the short term, while totally ignoring the long term health of the company and industry. Many of these stocks now have ZERO safety net. If oil prices drop significantly, these stocks are going to absolutely crater. Walking the tightrope without a safety net isn’t something that larger institutions are going to be excited about because when the fall comes (and it will) there’s no way out. Just another reason that I think longer term players will abandon these stocks.

 

It seems like every decision oil companies are making right now just screams top of the cycle. While this probably isn’t the exact top, I think they are likely going to look back and find that it was really close. Just so many decisions being made with an incredibly short term view and no regard at all to the longer term health of the industry. Maybe they expect a government bailout when it all goes bad, who knows. Or maybe they realize, just as Bill Gates recently said, that oil is a dying business and they are trying to get all they can now with no regard to the future because they already know the future, and it’s not good. Besides, who needs fossil fuels in the metaverse? LOL.

 

Another issue that’s also starting to become clear is that US shale has absolutely no ability to plan for the future. OPEC really made a statement this past week when they refused to increase output and basically said it wasn’t their problem. They have created the growing bubble of $80 oil and they know it. They also know they have the ability to open the tap and crush price whenever they want. And US shale knows it too. We’ve seen this movie before. When US shale becomes greedy and decides to overextend themselves with increased capex and production (without hedges), OPEC has the ability to pull the rug and leave US shale with expensive projects that are partially developed, new dividends that are hugely burdensome, buybacks at peak prices and no hedge safety net. Are longer term institutional players going to take that risk? Doubtful.

 

There’s also the growing possibility that OPEC lures US shale into overextending itself right into the teeth of a recession, which OPEC is helping create. As OPEC keeps blowing the oil bubble, the real pain will start to be felt at the pump by American citizens. OPEC hasn’t shown any intention of helping and I don’t think that changes in the near future. They seem to have their sights set on pushing our economy to the brink of recession with high oil prices, while at the same time enticing US shale to overextend itself. At some point, as a recession nears, oil demand will start to collapse again. It’s at that time that OPEC steps in and pulls the rug on prices. They will try to protect themselves against loss of market share and demand destruction, but it will likely be too late for the American economy as the damage will have already been done.

 

When this lowering of prices occurs, OPEC will do it under the cover of negotiations to “rescue the world” from possible recession. I have no doubt they will negotiate with the Biden administration when the time is right and totally rob us blind in a deal to lower oil prices. OPEC will simply say that they were begged to bring prices down and they will walk away from the destruction with total immunity. When oil prices drop, you then have US shale overextended right into another oil price collapse with no protection. And the worst part of it is that our government will blame US shale and not government price lowering negotiations with OPEC. I feel pretty certain the oil industry is going to get thrown under the bus, all in favor of the renewable, green energy warriors. I want no part of energy stocks in that scenario and I’m guessing institutions won’t either.

 

But maybe I’m wrong on all the above. There’s always the possibility that OPEC never has to step in and be the bad guy. The other theory is that these oil companies increase capex, borrow and spend a ton of money increasing production – and then they find that all that supply crushes price just like it did last time. Is this really any better than OPEC popping the bubble themselves? Really seems like US shale has gotten itself right back in that familiar catch-22. And again I ask, do longer term institutions really want to gamble on that risk with prices at current levels?

 

As for oil itself, the latest government response seems to be future SPR releases. Are these really going to solve anything? I know we pumped a lot of light shale oil in there back in the later Trump days, so I don’t really know what quality is in the reserve anymore. But generally, releases from our SPR (and others coordinated) aren’t great for oil prices. Just another example of government doing everything they can to bring prices down, which isn’t encouraging for oil equities/stocks. It has to be concerning for institutions to see the government working against the oil industry (and in favor of renewable?). What’s next on the short term government thinking list? We can only guess, and that lack of stability has to be concerning for oil companies. How can they plan if they don’t even know what their own government is going to do adverse to their interests?

 

Again, I hate to be so bearish on energy, but the game is playing out just as it has in past cycles. I’m not saying this is the top for energy stocks. Anyone who has been following SPY and QQQ knows this market can squeeze higher than anyone thinks. But is that kind of run sustainable for the energy sector, especially considering oil prices are totally under the control of an entity who wants to destroy it? I don’t know where the top is for energy names, but I do think we are much closer to the top than many people think. This isn’t the level to push all the chips in long. It’s a level where you start trimming back and locking up those profits. It’s a level where trades should become much shorter in duration with less exposure to market risk. It’s a level where position size should be decreasing, not increasing.

 

So enough bearishness, what’s the plan for this week? I’m still watching the 58.50 level for direction in XLE. If it breaks above that level, it has a shot at taking out the highs up at 59.41. If the SPY keeps going parabolic and enters into some type of blowoff top formation, there’s a good chance XLE could even move to the 62-64 area on a final squeeze. That would be a spot where I’d load up on the short play. If XLE keeps rising this week, I’ll be on the sideline. I might scalp a little long here and there, but I’m going to let this next rally go. I don’t want to be involved in it with any longer term plays with size because I think the trade is just too expensive with the given risk/reward structure. I don’t mind missing a move, there are plenty more out there. One particular thing to watch this week are the PPI and CPI numbers on Tuesday and Wednesday. There’s also a flood of FED speakers next week around those numbers. Trading could be volatile. Also, the infrastructure plan now looks to be done, so that market catalyst is now gone.

 

Now, if the SPY tops out this week and rolls over, I’ll be watching the 57 level in XLE. That’s the spot where a decision has to be made and it’s the spot where weakness shows. Everyone will probably see that area on the chart as a sell on any breakdown. I’d be even happier if the SPY created some topping structure with XLE in that 58.50-59.50 area for a short play, but given the weakness in energy last week, I don’t think I’ll get that lucky. Realistically, I think the short trade will be put on at the 57 level after some topping structure in SPY. I’d also like to see IWM put in some topping structure and come back to the 234.53 level. It would be an added bonus if IWM failed and fell back under that 234.53 level at the same time as any SPY topping structure.

 

The bottom line in energy is that I’m willing to do some intraday scalping on the long side, but I have no desire to put on any longer term long plays over the next couple weeks. The only longer term plays I’ll consider this week will be on the short side. But keep in mind, I’m a very short term trader and my views on the market change frequently based on new information. Good luck this week, it should be an interesting one.

 

 

 

 

 

Different Cycle, Same Gimmicks. A Bearish View of the Energy Sector

I’m starting to disconnect with the larger Twitter bullish opinion of the energy sector. I can feel it. I feel myself moving toward a bearish bias, however there’s not much factual evidence to support that position – yet. Everyone around me is bullish and every piece of information they present is bullish. But the question is this: Is all of this bullishness around me simply confirmation bias gone wild? Is it the blind leading the blind? Is it simply peer pressure between participants resulting in the fact that nobody is brave enough to be bearish and that everyone has accepted the mantra that “stonks only go up”?

 

I’ve traded this sector for a long time and I’ve seen several cycles from top to bottom. And every time it ends up being the same story. Everything looks like roses, all the information is positive, all the numbers are good. And then, on dime, it’s not. The key is knowing when things change. Sometimes knowing when things change is simply intuition, not cold hard facts. There are certain things that have happened at every top and every bottom. This week I saw one of those things and it set off my bearish alarm.

 

Almost every earnings report so far has included a company raising dividends, promoting buybacks and cutting capex. These facts seem bullish, but in the larger context, are they? Many think so, and they are buying with both hands. But, after trading this sector for several cycles and seeing things that happen at the top each time, we may be closer to the top of the cycle than many people think.

 

At this point you really have to ask yourself, is increasing dividends really the best use of (temporary?) cash flow? Probably not. Paying down debt  would be much better, especially as we head into a much higher rate environment. How about increasing capex? They aren’t doing that either. Why not? Is the oil business so bad that there’s just no use in reinvesting the money back into the business? This seems to suggest that these companies don’t believe oil prices will remain at a level that can support more investment now or in the future. If they truly thought oil prices were going to remain higher for longer, the correct path is to SLOWLY increase capex to balance increasing profits and prop oil prices. Yet they aren’t doing that because they know oil prices can’t handle it.

 

Everyone is aware of the mistakes that have been made as oil companies have underinvested. So they are choosing to continue to underinvest now and instead just give that cash away? We all know that the underinvestment is what has propped up oil prices, but is underinvestment really the best option for the longer term health of the sector and oil itself? At some point, all the underinvestment will make oil so expensive that the green energy movement wins by default. It also produces energy prices that are so high that it chokes off the demand that produced those higher prices in the first place.  High energy prices have led to more than one recession which kills demand and causes oil crashes. In the bigger picture is decreasing capex and increasing dividends really the best way to go for future health? Probably not.

 

Which leads me to this question: Why increase dividends and buybacks but refuse to increase capex or pay down debt? Paying down debt and reinvesting in your core business is clearly the better choice for the long term. The oil business has been a huge borrower in the past, and will continue to be a huge borrower again in the future. Free cash flow won’t last in this boom or bust industry, it never does. They sure aren’t doing anything to put away some cash for a rainy day or extinguish their current liabilities. Ignoring the normal oil cycle is reckless. So instead of paying off debt, they are putting themselves on the hook for MORE debt at higher rates? Not a good long term decision.

 

Increasing dividend obligations at the top of the oil price cycle is quite obviously not the best long term decision either. There have been years where companies like Exxon have had to borrow to pay the dividend. So now they are going to INCREASE that obligation into an oil price that is possibly already extended and possibly put themselves on the hook for that increased dividend borrowing to occur again, but this time in a much higher rate environment? Not smart.

 

So why are they focusing on the short term and making decisions that are so obviously incorrect in the longer term? Because it’s what Wall Street wants NOW. It’s simply a tactic to make the stocks look better today. Unload at the top of the cycle. It’s a sales gimmick that works great for the short term and it has happened in every past cycle. It’s a great sales pitch that allows current holders to unload right into an oblivious public who only sees facts and ignores the larger context.  Larger players can see the current confirmation bias. They know this class of investors from the last ten years believes “stonks only go up”, and they are taking full advantage of those biases right now. These gifts of higher dividends come with a big hidden cost. As the old saying goes, “Be cautious of those bearing gifts”.

 

So if intuition is correct and these gimmicks are the sign of the top of the cycle, the next question is where is the exact top? How long does all this short term “feel good” news last? How long to investors stay gullible? When does oil price roll over and when do these new buyers realize that their stocks have just increased their obligations right into a declining (possibly crashing?) oil price and rising interest rates? It’s a very difficult question, mostly because there’s a force at play that hasn’t been there in past cycles – a tidal wave of free money from the FED. But that could also be changing soon.

 

We’re going to get a good look at the FED this week. If there’s a  hawkish surprise, energy stocks and other commodity stocks could get hit hard. It’s no secret that inflation is rising. At some point, we will hit a tipping point where inflation will cause more harm to the economy than good, and the FED will be forced to act. The taper may start, rates may rise, the dollar may strengthen. We could go from Goldilocks to a nightmare really quickly. Keep an eye on the USD/CAD and gold this week, they will give some good clues on the dollar. If the dollar does start to strengthen, see if that corresponds to a pullback in oil, as it usually does.

 

And then there’s oil itself and the media’s portrayal of the great “energy shortage”. There’s a huge difference between a real shortage and a manufactured one. Is there really a shortage or is this a manipulated scheme orchestrated by OPEC, and supported by the media, to prop prices up? Is it a trap to entice US shale into overextending itself? At what point does OPEC pull the rug? Because they can. The oil is out there, just sitting there, and all they have to do is open the tap. It’s a shortage that could end on a single OPEC PR. Just look at the OPEC/Russia strategy and tactics of March 2020. Will you be fast enough to escape what that would do to energy stocks?

 

We’ve also got an overall market that is running hot, almost parabolic even. How long can this continue? How quickly does it correct and how severe is that going to be? When does this market have a blowoff event which leads to an extended downturn? If the economy stalls and causes a market correction, energy stocks could be one of the first classes thrown overboard. As has been the case many times in the past, energy names lead near the end of the economic cycle. As with energy, the overall market is much closer to the top than it is to the bottom. Again, when it inevitable correction comes, will you be fast enough to get out with profits intact?

 

As for the energy sector itself, I keep seeing all these people claiming the sector is so hot and outperforming. Is it really? You know where XLE was on day one of the pandemic (February 21,2020)? 58.06. You know where we are now? 57.47. The XLE is actually LOWER now than it was before the pandemic started. Ask yourself why and then look at what the rest of the market has done since February 21, 2020. Yeah, sure, every guru says they are up 1000%+, but are they really? It’s somewhat amusing how they all moved their portfolio start date to April 2020. Why do you think they did that? Is that what’s produced the “hotness” and “outperformance” that everyone is screaming about? What kind of returns do they really have, knowing that most of these guys are long term players who were holding a full portfolio just prior to February 21, 2020? Look, I know a lot of people who have made good money in energy, but don’t confuse “outperformance” with simply buying a sector as it laid cold on its deathbed. The easy money was made, now we get to find out if this is all real and if there is any future in it. I don’t think there is as much future in oil as most seem to think. Be careful of all the bullish claims and hype going on around you, most of it is the result of getting lucky catching a huge dip, because in the bigger picture, we’re right back where we started.

 

In addition, the technical picture isn’t that great, nor is the risk reward of a long trade at this XLE level. I’m not saying a long trade can’t win here, what I’m saying is that it’s an incredibly expensive proposition, and one that’s likely better left alone. I’ve posted the weekly chart going back about 10 years several times on Twitter. From April 2020 until present, we simply moved through a low liquidity area, and even that was a struggle. That struggle has only brought us back to day one of the pandemic. Compare that to where the SPY is. If you look at that weekly chart, there’s about ten years of supply sitting right overhead. The XLE stayed in a range of 60-80 from 2011 to just before the pandemic. The collapse began near 60. We are right back to that level and there could be a huge amount of holders who are just glad to get back to even. They could clog the upward price movement as they try to escape these positions. At best, the XLE has a maximum move to 80, which is about 30%. Most likely, 70 is the true upside, which is about a 15% gain. That’s your best case. What’s your worst case risk percentage loss if it all goes bad? Way more. Getting long heavily at these levels is just not that great of a risk/reward play. If anything, let it pull back some and shift the odds more in your favor.

 

Look, I’m not saying sell it all and get short here. I’m saying that we are much closer to the top than we are to the bottom. The wild bullishness we are seeing now could very well be wrong. The subtle clues are there. Now is NOT the time to be pushing all the chips in long. That opportunity has long since passed. What I’m saying is start to get a little cautious here. Tighten your stops and protect yourself. Trim some profits and lock them up. Basically, I’m saying to be aware of the confirmation bias occurring all around you. Twitter is an echo chamber for the most part. Everyone is excited, everyone is talking their book, yet very few of these people have seen multiple oil price / energy stock cycles and almost nobody will take a stance opposite the majority. Be curious. Ask yourself why these decisions are being made by oil companies. Are these decisions being made for short term greed or long term health?

 

I hate to be so negative on energy, but that’s just the way I see it right now from the longer term perspective. I’ll still be trading intraday in both directions, but as usual, I favor the small bites in this kind of environment rather than the longer term larger plays. Now it’s time to wash away all this negativity with a couple bottles of wine and some live music. Hope the rest of your weekend is great, enjoy it with some friends or family. Good luck this week.

 

 

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.