Weekly Energy Equities Review, Market Outlook and Trading Plan for June 15-19
Jun 14, 2020 Trading Blog
Sorry for the lack of articles and Twitter updates over the last couple of weeks. Sometimes things get really busy and I have to cut back, especially the Twitter distraction. The world has really lost its mind on some things lately and it’s frustrating to see the direction our country is going. I’m doing my best to play nice in the sandbox and keep my personal opinions off the Twitter feed. I tell you though, it’s difficult watching all this stuff happen right now and even worse seeing what many people have become. Sometimes it all gets to be too much. One simple truth that many people really need to start living by is this: If you give no respect, you get no respect in return. I guess I’ve just turned into that old guy yelling at the kids to get off his lawn.
What a ride the market has been on in the last couple of weeks. I totally missed the SPY move from 300 to 320. I didn’t have any confidence in the breakout from that 280-300 range and was looking for the market to top out around 300. It was one of those spots where I know I’m susceptible to making a big mistake on the short side and I decided to just avoid it this time, and I’m glad I did. I’m really not sure exactly what is happening in this market, but I guess the best place to start is at the highest level with the SPY and work my way down.
So I guess the biggest question for the SPY is whether this is just a pullback or a second leg down comparable to the Feb 24-Mar 23 leg down? If you scroll back through my posts, you can see that I’ve stated a few times that the bottom is in for SPY and energy, and so far that looks to be correct. However, bottoming is a process not a single price point event. I think what we are seeing right now is simply a pullback to consolidate the move off the March 23 bottom. The SPY had a buying climax move from 300 to 320 and now I think we are seeing the Automatic Rally (AR) which should take price to the 280-285 area where it will establish the AR point. Once the AR is in, then price should move sideways in an established range for several weeks. Note, the Automatic Rally is a bit of a misnomer. After a buying climax, the AR is the first pullback off that climax, so it’s actually a move down, not an actual “rally”. The term “rally” is used because it usually applies to a selling climax and the rally is the first move up from that selling climax. It’s just reversed in a buying climax, but still referred to as the automatic rally.
If price does establish the AR in the 280-285 area, then the next move will probably be upward to retest the 200 day moving average around 300. I’d expect that will probably fail and then price will move sideways in that same range we were watching from early April through mid-May, which was 278-296. That’s about as far out in time as my prediction can go. If price does form this range, then there will be clues that develop along the way showing which way the price will break out of the range. The market is a forward looking mechanism, but even the market has limits on how far out it can see, especially with things like the coronavirus and emotional/irrational humans protesting.
If price never makes it to 278, then that’s a good thing for the bulls and the market will likely continue on its way to new highs. However, the real danger is if 278 doesn’t hold. I would probably re-evaluate my entire market view if price broke down through 278. The VWAP off the March 23 bottom is also at that 278 point and breaking down below that level would shift the market balance from buyers in control to sellers in control. If 278 breaks, the next major point of interest would be 270 which is the 50% retracement point of the entire move off the March 23 lows. The 61.8% level is the next level down at 260. I doubt we see these levels again, but you never know.
The most familiar part of the market for me right now is the IWM. I’ve been daytrading it for a long time and it is sending the same directional signal as SPY, but there is one difference. The volume on this latest SPY move down is very light compared to the volume on its Feb-March move, however the volume on this latest IWM dip is higher than its Feb-March down leg. The intensity of the IWM reversal is suggesting that this overall market move down is starting with smaller names. It will be interesting to see if this spreads further into the larger cap names. IWM stopped around 134, which is right where is should have found support. If the important point for the SPY was 278, then the corresponding point for the IWM is 123.
Another clue for this market will be the financials. The FED really hurt financials with their call on rates staying at zero for possibly the next two years. Watch the 21.50-22.50 area on XLF. The GDX-XLF correlation also broke down this past week. The two sectors have been moving inversely, however they moved down together Thursday and Friday after the FED meeting. I’m not sure which one is going the wrong way (I feel like it’s probably GDX going the wrong way), but there is a clue there that will be revealed when the relationship returns to normal.
In summary, I think the overall market pulls back to the 278 level again and then spends some time consolidating in the 278-296 area and will then break out into a new trend, although I have no prediction at this point what direction that will be. I do not think we will see anything close to the March lows. It’s probably going to be some choppy trading with things such as the second wave of coronavirus, endless protests and the election on the horizon. Who knows what else will get thrown into the mix in the next few months of 2020.
Energy XLE XOP XOM CVX WTI
I was really starting to get excited again for my favorite daytrading sector, but things went south quickly over the last few days with the XLE falling from 47 to 39. In daytrading, you need a certain amount of price range to be profitable and most of the energy stocks have fallen to such low prices that the needed intraday price range just isn’t there. I really hope the sector finds solid demand in this 38 area and can establish a floor and another leg up so I can resume daytrading multiple energy names.
In the bigger picture, the XLE seems to be developing the same Wyckoff formation as SPY. It had a nice trend up which ended in a buying climax blowoff from 38 to 47. The buying climax led to an AR back down to 39, but I don’t think that’s going to be the final AR point. I think we probably get a move to the 35-36 area and then a move back up to 39-40 which will be rejected and then evolve into a sideways range between 35 and 40 for several weeks. It would really be encouraging if the AR point was created on Friday around 39, but that might be wishful thinking. In summary, I still think energy has bottomed and won’t get anywhere near the XLE 23 lows, but the real question is the same for XLE as it is for SPY, where does this latest pullback stop?
The XLE-WTI relationship still seems a bit out of touch. It feels like the rally in energy stocks should have been larger (or at least should have held in the XLE high 40’s) compared to the WTI price move, and even larger if you throw in the SPY move for support. I’m really not sure where WTI is going from here. The run off the bottom has been massive and it may have overshot fair value on the upside. I could still see a WTI pullback to $30 in the coming weeks, especially if there is a second wave of lockdowns and closures. Things get even more confusing when you throw in Brent trading only a couple bucks higher at $39. The actual commodity space is really dislocated right now and I don’t know which way it’s going to resolve.
I’m definitely encouraged by the action in XOM and CVX. Both stocks held right to the 50 day moving average and got bounces Friday. It will be important for both to hold the 50ma in the coming week. For XOM that point is 44.75 and for CVX it’s 89.75. BP and RDSA also closed right on their 50ma. There’s some solid structure being created by larger players in these majors. The BP/RDSA early morning signal has really been working well for energy stocks this past week. The price level on these two around 4am EST has been a great predictor of XOM/CVX for the rest of the trading day.
The services names have been outperforming and are one reason why the XLE has been able to hold farther above the 50ma than the majors would suggest. SLB had a perfect base breakout running from 19 to 24, but then failed completely right back to the breakout point. I think there is a great trade here on the long side. An entry in the 18-19 range could be stopped for about a dollar with an upside return of 4-5 dollars. That’s a great risk/reward trade that I’ll take anytime. The same trade shows in NOV around the $12 level. BKR and HAL have more established uptrends, so the structure for the stop loss isn’t really there for those two. I don’t like SLB any better than HAL, it’s just that the trade structure is better for controlling risk in SLB than it is in HAL. The choice for SLB over HAL is merely the quality of the technical setup, not based on the quality of the companies.
The biggest losers this week were the refiners. MPC dropped from 44 to 36, VLO from 77 to 61 and PSX from 90 to 75. I feel like there might be a good trade in PSX around the 75 level with a tight stop. There’s also a nice long setup in VLO around 58. I’m watching MPC around 34 for a long setup. These definitely require some caution and good entries if you try these trades. If things start down in SPY, the refiners could be the first to fall in the energy sector. Be cautious, but don’t be so tight that you let good opportunities slip away.
The natural gas names continue to confuse me. I just can’t get a handle on these. EQT has been stuck in a range for the past month with no sign of wanting to break out. COG is much the same, but had a big failure on an upside breakout attempt. AR, RRC and SWN also had failed breaks to the upside. I’m avoiding these for now, but I’m watching because of their outsized effect on the XOP. The natural gas names still occupy about a third of the ETF, with gas names holding the top spots.
One other group that had a really bad week was the midstream names including KMI, WMB, OKE and ENB. I don’t follow these names closely and I’m not really sure what the reason was for the losses, however I just noticed the charts had some big declines on them. OKE had about a 30% decline, KMI 15% and WMB about 18%. Those are some very large declines on such low volatility stocks and definitely not a help to the XLE, as they make up about 10% of the index.
The last group to mention is the “trash group”. Retail traders and the Robinhood crowd seem to love this group of CDEV, WLL, OAS, CPE, and XOG. Just say no on these, they are probably all bankruptcy cases just waiting to happen. Bankruptcy seems to be working out well for HTZ, but that’s a totally different rant. One other stock that I keep seeing pop up on my Twitter feed is NOG. I have no idea what the fascination is with this stock or if this recommendation is just some kind of private joke with the parody EFT accounts, but just avoid that one too.
If you guys have any questions about stocks that I don’t mention here, just post in the Twitter thread and I’ll take a look at the technical picture for any name. Remember, I’m strictly a technical trader, so I don’t dig too deeply into the fundamentals of these stocks and I won’t have much to offer from that point of view. There are many accounts on Twitter who know way more than I do about the fundamentals of the sector and individual energy stocks.
Trading Plan for the Week – I feel like this is going to be a big red week for the overall market and energy might get pulled down with it. This might be an energy buying opportunity in the larger picture, but patience is going to be required to let things settle out and make some type of defined and tradable bottom. For the XLE, the most important points this week are going to be 38.71 and 37.00. If the market opens Monday extremely weak or if things go south quickly, then all the following trades are off the table. I’m not shorting anything in energy this week. If the market looks soft, then I’ll be shorting the IWM in very quick scalp trades. This isn’t a market where I want to try and carry short positions over multiple days, as there could be some huge spikes and gaps up in this type of environment.
On a very short term timeframe, if the SPY opens relatively flat on Monday, I’ll be looking to get long XLE near 38.71. Ideally, I’d like to see a moderate gap down and then a reclaim trade setup off of the Thursday/Friday lows for a long attempt. Watch the Monday morning low and wait to pull the trigger when price reclaims 38.71 from below and then put the stop just under the morning’s low. The upside for the trade is 41 with the possibility that it takes that out and gets back into that 43 gap. It’s definitely worth the risk. Don’t try to anticipate or guess on a reclaim trade, let price actually reclaim the entry point before pulling the trigger. If price gaps up on Monday, I’ll move to the sidelines on any XLE trade.
SLB is my second choice for a long trade Monday if the market stabilizes. I’d like to have the same reclaim trade setup at 18.44, but I might also just do a simple long trade on the open depending on how the overall market looks. I think this is one where you could enter long around 18.50 and be fine stopping it at 17.50. There could be at least $2 worth of reward for the $1 of risk. NOV also sets up the same trade in the 12-12.25 area with an 11.50 stop and a similar 2:1 return.
I’m also watching XOM and CVX for long trades Monday. I’d like to play XOM long off of 44.50 and CVX long off of 89. I’d prefer the CVX trade because it has a more defined structure for a concrete stop and risk management.
I’m still watching the casino stocks and waiting for a pullback to enter these long again. I had a nice trade in MGM that I exited a little early, but it was still a good winner. I’m hoping MGM will pullback to the 14-15 area for another attempt on the long side. PENN is my other favorite, but I don’t think it’s going to pullback far enough to enter long. I’d need to see it around 22-23 to take another shot long.
As for the IWM, I’ve spent most of my time over the last few weeks trading this one. It’s probably the best daytrading vehicle in the entire market. It moves smoothly with a very small spread and follows a fairly defined volatility pattern. I’m watching 134.15 on the Monday open for a long reclaim trade. If that reclaim trade fails or if it never develops, then I’ll be looking to scalp to the short side. If the 134.15 reclaim trade does appear, there’s room on the long side to 141 and then 144 for a longer swing hold.
The only swing holding I have right now is WIMI. I’m in from $3.50 and it’s a total lotto play based on a few things. First, the low float China names have been exploding this week. It started with JFIN and moved through CTIB, HGSH, CHNR, LYL, KBSF and few others. WIMI has about a 5 million share float, so any pressure is going to produce at least a double on the play. Second, the company really does have some substance and some buzzworthy concepts including holographic technology and a 5G element. It’s very risky so only play with what you can afford to lose. It’s also not a long term hold. If it pops, sell it immediately, take the money and run.
A few other random long setups:
WBA long off 40
MRK long off 76
WFC long off 26
INTC long off 56
SBUX long off 71
The main thing to remember this week is to stay patient. It’s probably going to be a very volatile week and sometimes less trading is better. Use stops and be cautious. Hope everyone has a great trading week. The wineries in Virginia are finally opening so it’s time for an afternoon with a couple bottles and some live music. Good to see things are getting back to normal. Not sure how much I’ll be around on Twitter this week, but feel free to DM if you have any questions.