New Energy Positions and Trade Plan for Friday, July 10
Jul 9, 2020 Trading Blog
I picked up a few small energy positions Thursday and wanted to post a little longer note than what I could put on Twitter. I started positions in EOG (45.24), COP (38.74), VLO (50.97), XOM (41.54), SLB (17.34), CXO (48.00) and XLE (34.54). Each position was about 15%, which means that if the final position is to be 1000 shares, then these starting positions are only 150 shares, or about 15% of the total planned position.
The reason for the trade begins with XLE. Today it hit the 50% retracement of the move off the March lows. In the next few days, I’d like to see it establish a support point for a bounce to create an Automatic Rally point to begin a Wyckoff accumulation formation in the 34-41 range. All the other positions, except COP, were also somewhere between the 50% and 61.8% retracement range.
This 50% retracement level also gives a tight stop on the trade. If the XLE gets much below 34, then this probably isn’t a Wyckoff setup and we are probably looking at a decline to the 30-32 area. The real danger here is that the March 23 low is going to end up being the selling climax and the June 8 high might have been the Automatic Rally point, which then sets up a trading range between 23 and 47. I really doubt that is going to happen though as that wide of a range is not normal and would probably take over a year to play out. I’m hoping the actual consolidation accumulation range ends up being 34-41 which then leads to a breakout toward the June 8 highs and an extended uptrend.
I’d really like to see XLE put in a solid base point with heavy volume on Friday and finish the day green. That kind of action might lead to a reversal back toward the 36 level where I can then add to these positions and build them as the trend starts upward toward 40+. If things continue to deteriorate on Friday, I’ll just hang on to these small positions and let them establish a bottom next week and then figure out how to proceed. I definitely have no problem adding to these positions if XLE wants to take a big dip under 30. These trades provide a lot of options on which way to build them for the next couple of weeks.
I’ve already got a refiner, a service name, an integrated major, a major E&P, a major diversified shale E&P, a major Permian E&P, and an index ETF. I’ve got a few other names that I’d like to add to the list of small starting positions including: COG around 16 for a natural gas name, HP around 16 for a second service name, PSX around 56 for a second refiner/midstream, DVN near 8.50, OXY near 15, PE near 8 for a smaller Permian, and PXD near 85 for a second major Permian name.
WTI was due for a pullback and the next major point to watch on the downside is 38. I’ve been thinking oil is trying to form a head and shoulders type pattern, but it just hasn’t evolved into a clean pattern. That last “right shoulder” area that tested the 42 head area was just too strong. The pullback in WTI in the next week will be very telling. If 38 holds and this starts running back up toward 42 again, that would kill the head and shoulders idea and these energy names should also move up with it. If 38 fails, then we are probably looking at 34.5o which would probably take XLE down to the 30-32 area.
One other thing to watch is the dollar. The UUP is a rough stock estimate of the dollar index (DXY) and seems to have made a decent reversal upward on Thursday. I’d like to see that reverse back down on Friday and make a run toward the 25.88 low from June 10 and the 25.93 low from December 31 . If the dollar continues to strengthen, that’s probably going to be trouble for oil. The UUP-USO (DXY-WTI) correlation is an important one.
The other important watch for Friday is the IWM. Small caps and oil have been moving together as a reflection of US domestic business and the consumer. IWM and XLE have both shown big relative weakness to SPY and I’d like to see that change on Friday. Watch the 137.11 area in IWM to see if it holds. Any green close for IWM will probably pull XLE up with it. And of course keep watching QQQ and the FAANG stocks. Those five names are holding this entire market up. While that’s a good thing on the way up, it’s going to be an absolute killer on the way down.
It really wasn’t a great day for energy, but sometimes that’s where the opportunity is. Buying on pullbacks is difficult and never comfortable. All you can do is plan the trade out, follow the plan and hope for the best. If these positions don’t work and energy does collapse, then I’ll be more than happy to play that game and load up on the big dip as well. Keep all options open. Good luck Friday.