Weekly Energy Equities Review, Market Outlook and Trading Plan for September 21-25
Sep 20, 2020 Trading Blog
This could be a big week for the bulls. The SPY got a much needed washout below the range to clear the weak longs and then managed to bounce just enough to regain the range, which now sets things up for another run on 342.50. There may have also been some shorts who took the bait on the washout and those guys will need to cover, which may add more fuel to a rally this week. I took the safe play on Friday and avoided getting long in order to keep the powder dry, but I’ll be getting long on some things if we get a low volume dip to that 325-328 area. The only position I took on Friday was a 20% long position in AAPL at 106.47. I’d really like to see a dip toward 100 to scale in for a full position.
SPY – I posted on Twitter a rough estimate of a possible SPY path over the next few weeks. Price has been contained in a fairly tight range between 331 and 343 for the last 9 trading sessions and the issue for me has been trying to decide if this is an accumulation formation or a distribution formation. Friday’s move supports the case for an accumulation. If this was a distribution formation, there likely would have been no bounce on Friday and SPY would have finished at the lows for the day, probably around 325. However, there was big demand down there and buyers stepped in quickly and pushed price right back into the current range. The case could be made that Friday’s move was a Wyckoff spring. I’ll be watching for a retest of Friday’s lows on low volume to confirm that possibility. If price takes out the 328 low on very heavy volume, then the probability shifts back to this being a distribution formation with further downside. It really all depends on the volume this week.
Ideally, I’d like to see Monday open with a small gap down and then explore the 328 area on low volume, hold that level and then start a sharp rally to take out last week’s VWAP at 337. Above that, the next important level is 339 and then the top of the range at 342.50. Any close this week in the 339-343 area would probably be a success for the bulls. Anything higher than that would be a bonus. I’ve been predicting a run to 380-400 and I stick with that, especially if price can form a spring here and take out the current range at 342.50. The thing that would change my mind right now would be if price took out 325-328 on very heavy volume. If that were to happen, the next major level really doesn’t appear until the 300 area. There will be some games played with the stock market as this election approaches, so let’s see which side has the most firepower to control the market until then.
IWM – I use the IWM more than the SPY for decisions on the energy sector. If you look at last week’s relative performance between IWM and SPY, it’s clear that IWM outperformed in a big way, which is a great signal for energy. IWM managed to close right at VWAP and there was big demand on Friday’s dip. I’m watching the 149-150 area on the downside and 157-158 on the upside. There’s a good chance the IWM might be my biggest trade this week if it dips down near 151 on the Monday open.
QQQ – This is where the market problems are showing the clearest. The FANG names are still seeing some money draining out and rotating to other sectors. The encouraging thing is that Friday’s dip was nowhere near as destructive as the last few QQQ dips. Seems like the sellers might be feeling some exhaustion. The most important market signal this week will come from tech. I’d like to see Friday’s lows hold, but the bottom for QQQ might be closer to the 250-252 area. On the upside, the first level to watch this week is 267 and any move back over 274 puts the bulls back in control. I picked up some AAPL on Friday and I’d like to buy more on any pullback toward 100. Watch the liquidity gap area from 98-108, it could fill fast if the tech selling continues.
XLF – The financials have been giving some great correlation signals with energy over the past few weeks. It seems like a large amount of the money that drained from tech is being put to work in banks. This rotation suggests that what we are seeing in the market isn’t a crash, but rather a shift. It’s money flowing toward underperformers, and energy definitely fits the description of underperformer. This rotation is the reason that energy has stayed basically flat since September 8. Keep an eye on the financials, if they start moving down again, that’s probably a red flag for energy.
GLD, UUP, TLT – While other equity sectors and indices have provided some good clues for the energy sector, the biggest correlation has been with the dollar. Just like XLE, the UUP has been in a tight range since September 8 and could be getting ready to breakout to the upside if it can take out 25.30. There is good support in the 25-25.05 area. If it does break to the upside, that’s probably going to be a negative signal for USO and energy stocks. GLD has also been showing a tight range and could be waiting for the UUP to make a decision. If UUP breaks to the upside, GLD could make a run on 179 for a short. Keep an eye on the 185 level on the top and 179 on the bottom for dollar/oil clues. TLT shows the same consolidation, watch the 165 level on top, 162 on the bottom.
In summary, the thing to notice about all the items listed above is that they have ALL been stuck in fairly tight ranges over the last few weeks. When everything goes into consolidation at the same time, it’s usually a sign that the coming breakout is going to be a big one which will likely extend for months rather than weeks. There may be some great opportunities for trend followers.
Energy Big Picture
Overall, it was a pretty good week for energy with a gently upward sloping trend. The XLE made the expected retest of 34.50 from below and didn’t totally fail. Sometimes just not failing can be a success. Wednesday’s big run at 34.50 was only met with mild selling on Thursday and Friday and price managed to close above the week’s VWAP of 33.42. The XLE performed very much like the IWM. The bigger picture points to watch this week are the highs around 34.50 and the low area of 32.25-32.50. The selling that started back in mid-August seems to have exhausted and now the sector needs to complete an accumulation base to soak up the remaining supply before it can reverse upward. It’s possible that the XLE mostly stays in the 32.25-34.50 range this week with maybe a few probes outside the upper boundary. Much of the action in energy will depend on the larger market picture. If the overall market bounces hard, there’s definitely a chance that price could take out 34.50 and trend upward. I really don’t see price getting too far below the 32.25 level this week, there’s just too much demand sitting there.
Individual Names
Majors – There were some extreme divergences between the majors and the rest of the sector. BP and RDSA continued to fall to new lows. XOM and CVX had a big divergence day on Tuesday with both making new lows while the XLE made a higher low. I’m not really sure what’s causing the divergence between the majors, but one possibility that looms is the dividend cut rumor. There are others in the sector that would also likely cut, but the holders of those smaller names aren’t playing them for dividend income. There’s a huge portion of XOM, CVX, BP and RDSA investors that hold these names (and have held them for decades) strictly for the dividend income. If those dividends get cut, those long time holders, even the ones that held through 2016, might finally throw in the towel. If the cuts happen, I’ll be a buyer on the capitulation.
In the short term, there are some good trades in these names. I’m watching the 36-36.50 area for a long in XOM this week. I’m looking for the same trade in CVX at the 76 level. If there’s a gap down Monday morning, I’ll be looking for long reclaim trades in both names. I’m avoiding BP and RDSA right now, although I’d really like to scoop some BP for a longer term trade if it falls another dollar or two. One other thing on BP and RDSA, the dependable premarket signals they usually send haven’t been working over the last couple weeks. They seem to be diverging from the US based names.
E&P – COP had a good week and I’m watching the 37 area for clues on the other E&P names. If COP can get above that level, it has a chance to make a run back to 42 and take the smaller names with it. EOG was decent, but it seems to have hit a wall at the 41.75 area which was the level where big selling stepped in on September 10. Just as COP needs to take out 37, EOG needs to take out 42.50 to get things moving to the upside. The surprise of the week was OXY, which added about 20% going from a low of 9.93 to a high of 12.09. You can hate these companies and their fundamentals all you want, but if you are a short term trader the moves in these names are hugely profitable. Energy has turned into a trading game, not an investing game.
My favorite E&P setup for Monday is HES. I’m looking for a gap down below the 42.75 level and then a reclaim long entry at 42.77 with an add at Friday’s 42.98 low. The stop on the trade is the Monday morning low prior to the reclaim entry point. It’s a dangerous trade and you have to exit immediately if that low gets taken out. As always, do not anticipate on this reclaim trade, wait for price to get above the reclaim point before entering.
The Permian names all had a good week. The problem this week with this group is that they are all running right back up into overhead supply. The only one with a high chance of breaking out is PXD. If it can take out 100, there’s room to 106. The only catch is that the downside could be a quick fall back to 91, so the risk/reward isn’t great for the setup. Same story for CXO, FANG, PE and MTDR. I’d prefer to wait on long setups for these names as they retest the lows rather than trying to play breakouts of the upper range boundary, there’s just too much downside and not enough reward.
The group of APA, DVN, CLR, MRO, NBL just doesn’t show any tradable setups. The only other E&P name that I might take a look at this week is CNQ at the 17.50 level. It’s similar to the HES trade setup described above. Let it gap down and enter long on the 17.50 reclaim. Depending on the sector action on Monday, I might also just put on a straight long trade on CNQ using 17.35 as the stop. It’s a decent 20 cent risk for $1.50 of reward.
Services – I just don’t like any of these names for trades this week. All of them are just so rangebound that there isn’t much reward and the money likely gets tied up longer than I want. Any trades in this subsector are probably just a waste of commissions and mental energy. The only name that I’d watch is NOV. It’s probably got the most defined range and I’d be interested in getting long if it put in a Wyckoff spring down around 10.75, but that’s probably a longer term trade rather than a short term one.
Refiners – This is still my favorite group for trades. PSX probably has the best setup if it can get a low volume pullback to the 56-57 area with a stop placed sufficiently under the 55 low. I’ll try to squeeze the entry as close to 55 as possible, but 56 is probably going to be the spot. There’s easily 10% upside in it. MPC and VLO have similar setups and I’ll be watching 30.50 in MPC and 46.50 in VLO. Stops on those two go safely below the September 11 lows. I also like HFC, but it’s the most risky of the group. I’d like to wait on that one until the 20.75 area. I rarely drop down to the PBF level, but keep an eye on that one too as it declines toward those March lows.
Natural Gas – I still don’t like these, especially with UNG giving up most of the August gains. I’d probably get interested in COG at the 17.50 area and EQT around 12.50, but I have no desire to try to play a breakout in these names with weak NG prices. If UNG gets a big reversal day, my opinion on these names might change.
Coal – I know you guys laughed when I pointed these out a couple weeks ago. CTRA has doubled in the last 5 trading sessions. CEIX has put on almost 50% in just the last 8 trading sessions. ARCH has run from 30 to 53 in the last couple months. BTU has run from 2.25 to 4.07 in just the last month. Traders are making a move to inflation influenced commodities and these names were just beaten down beyond belief. I wouldn’t chase them here, but definitely add them to the watchlist for trades as they pullback, base and then resume the upward trend.
Trading Plan for the Week – As usual, everything starts with the Sunday night open. The clues tonight will be the 331 SPY level, the 40-41 level in WTI, and the 1.32 level in the USD/CAD pair. My primary watch for Monday is a small gap down open and then long reclaim energy trades that I set out above. My primary target for Monday is probably going to be any IWM gap down and reclaim. Second trading choice will be reclaim longs in the financials (XLF). If the market opens flat or a big gap up, I’ll be on the sideline for the first hour or so until I see if the gap is going to hold or if it’s just a fake pump to start an all day dump. I’m looking for a positive market week, but if I’m wrong I definitely don’t want to get caught in a downdraft because it could be very sharp. Monday’s aim will be safety and keeping the powder dry, while not chasing.
Energy plays are described in the individual name sections above, but I’ve also got a list of non-energy plays. Watch the SPY for these trades, if it rolls over then most of these trades are not going to work and should be avoided. These are very short term plays.
GS – Looking for a reclaim long trade off the 192 area. Give it $2-3 on the stop and look for a move back to 205. Risky trade, if it fails get out quickly and don’t ignore the stop. MS at 50 also presents a nice setup.
Banks – Long entry in JPM at the 97-97.50 area for a $5 bounce. Stop at 96. Same trade on BAC at 25 with a 24.50 stop. If the banks get some momentum, then WFC also becomes a good breakout play. I’d like to try it at 23.75, but I doubt it pulls back much. Maybe play it off the 24.75 level and hope it takes out 26.25. I’m a little cautious on C, but there could also be a great reclaim long trade for Monday only at 44.62.
INTC – Long entry at 48.75 for a $2 bounce. Stop at 48.50.
AMCR – I’m not a big fan of breakout trades, but this name could move higher this week and the risk is easily controlled at $11.
EMR – Reclaim long 67.50, reward 71, stop 66.50.
LVS – I doubt this happens, but I’d really like a pullback to the 43 level to get long. This one got hit hard last week and there may be some follow through this week. Also on the radar: MGM 20.50 and WYNN 70.
MSFT – I gave AAPL a starter on Friday and almost pulled the trigger on a MSFT starter on the break below 200. If this one dips again and there’s a market bounce, I’ll probably try to pick some up under 200. These are the only two FANG names that I’m interested in.
TAP – Long in the 33-34 range with a $1 stop. Strictly a play trying to pick the bottom in a consumer name on this one. Risky.
TWTR – This is one I’d really like to own long term if it dropped back toward 36. However, there’s also a nice short term setup off the 38.50 level with a 38 stop. It’s a cheap spot to try a longer term trade. If it fails, I’m out 50 cents. If it holds there’s always a chance that this could run a long way. Also, if it fails there’s always the chance to add at 36.
That’s about it for this week. It’s mostly going to be IWM, financials and energy plays for me this week. I think this market is about to rip to the upside, but there’s always a chance that I’m totally wrong and this thing tanks. Play safe, keep the positions small and try to scale in when possible. And while you never want to ignore a stop, doing so in this area can absolutely kill you. Be safe.