Weekly Energy Equities Review, Market Outlook and Trading Plan for October 12 -16
Oct 11, 2020 Trading Blog
There’s about three weeks until the election and the SPY is performing well and gaining momentum for the run toward that 380-400 area. It closed the week about 347, so it’s now less than 10% from the target. The market should continue to run into the November 3rd election, but I’m not really sure what election result the market is hoping for. The election seems to be leaning toward a Biden victory and the market seems to be fine with that. I expect that there will be an election rally into December, but I think that might be the top as reality sets in, especially with a Biden victory. The market is surviving on stimulus right now, but once the longer term view shifts toward Democrat policies on tax increases, government regulations and spending, things could change quickly. I have this nagging concern right now that this current SPY run is election manipulation and the larger players creating their exit from the market at top dollar prices, leaving the common man holding the bag. I’m not interested in putting any non-energy longer term long trades on during this environment of uncertainty.
SPY – The market took out the important 342.50 level and looks like it wants to make a run at the early September highs around 359 this week. I think the bigger players are going to push as hard as they can for a parabolic run into the election and they could get that 380 level in the next couple months. If so, FOMO will set in with the retail crowd and they will pile in chasing this run. I want none of it. The bears have been waiting years for their big chance and I think they are about to get it after the election. I will be shorting this market soon, but the price action has to be perfect. I think the clue this week will be the Monday action, do we get a pullback to retest the breakout point of 342.50 or do the bulls just gap it up Monday morning and rip it right to 360? If I was a bull, I’d much rather see the SPY back and fill a little to 342.50 and then go on a run. If they gap this up Monday morning with no pullback, it’s probably the beginning of a parabolic run to 380 and the end of this bull market.
QQQ – Tech also had a big breakout with the QQQ taking out the 281 level. There’s a really good chance that tech has a monster run this week that pushes the QQQ past 300. Traders want to keep money working, but they also want some degree of safety going into the election and lately tech has been the safe haven when things get uncertain. I honestly don’t know where the top is for QQQ, but I’m guessing it could be a lot higher than many people think. It’s probably going to be a parabolic run that we haven’t seen since 2000. The interesting thing about tech is that traders are starting to pile more into the second tier names other than the usual FANGMAN names. When both first and second tier names start running, things will get wild. One name to keep an eye on is MSFT and the 217 level. A failure there could be an early warning for tech.
IWM – Small caps are hot right now and this is where the speculative money is going. This will be my short target when the time is right. There’s a big area coming up soon around 170 that should be the entry point to start scaling into my short trade. I honestly don’t know why small caps are running right now other than speculative money just pumping an underperformer. The IWM usually provides a good clue for energy and I suppose I should have seen this latest six day energy bounce coming given the spike up in the IWM that started eleven days ago. I’m not sure why the XLE lagged by five days, but I wrote about that divergence last week, however I just didn’t trust it enough to get long with bigger size. Watch for the IWM to top out, as that will be an important clue for calling the near term top in the XLE bounce.
XLF – I’ve also been watching the financials over the last month or so for clues about rotation from overperformers (tech) to underperformers (banks, energy, smallcaps). Higher rates (lower TLT) have been providing some help for the financials so it will be interesting to see if TLT continues down. I expected the financials to possibly top out last week, but the consolidation in the sector continues. The banks were strong over the last eleven days and this was another clue that an energy bounce was coming. As with the IWM, watch for the XLF to top out around 26 and provide a clue for the end of this latest XLE bounce. Keep an eye on the TLT for clues of an XLF top and reversal.
USO, UUP, GLD, TLT, USD/CAD – It looks like the dollar breakout is failing, which is a big help to the USO and energy names. As the dollar weakened, GLD bounced back nicely and could be setting up for a run to 190 if the UUP breaks below 25. Also, watch the USD/CAD 1.30 level this week. If it breaks below that point, the USO could make a run at 29.50 for a breakout toward the 31 level. Let’s hope the dollar continues to weaken and provide support for the energy sector. If the dollar reverses and strengthens for any reason this week, I will be out of energy names until the dollar bounce resolves.
In summary, there’s a really good environment this week for energy names. The UUP is coming down, GLD up, IWM up, XLF up and USD/CAD down. If those macro elements continue, the situation for the XLE will be positive and the bounce should continue. If that macro situation reverses, get out of energy as quickly as possible as the final washout could be coming.
Big Picture Energy
The XLE has had a nice six day run off the 28.20 bottom, but I’m still cautious. There’s a good chance that the XLE has just been swept along with a very positive larger macro picture and it’s very possible that the near term lows are not in yet. There’s room in the bigger picture for the XLE to continue up and test the 34.50 level from below this week, but that will probably require the macro picture described above to be absolutely perfect. I think there’s a possibility that this latest bounce ends around 32.50 and then starts down again, especially if the larger market fails for some reason. If you really back out to a higher timeframe view, we have a SPY running for all time highs, yet the XLE sits very near all time lows, with many individual energy names still sitting near those March lows.
The bottom line in energy is that with the absolutely perfect larger picture macro, energy should be running more, but it’s not and that’s a concern. I think the sector really needs that one final panic and fear based washout to cleanse things and get new longer term money involved. The sector needs a new group of investors that understand the current bankruptcies, well declines, capex and production cuts as being the factors that will eventually set oil prices on a sharp upward trajectory. That is the group of investors that will drive this sector, but the prices aren’t good enough yet to get them involved. I think they have an eye on the sector, but they want to see it completely die first so their risk is small and the reward becomes so huge that it justifies a risky play.
Majors – I put on a handful of long trades on Thursday, October 1, which was the day before this latest six day rally started, but I cut those on Tuesday on the big gap up. At the end of the week, the final close wasn’t really too far above that Tuesday morning gap up point, so I didn’t miss much with those exits. My real mistake though is that I should have re-entered those trades Wednesday morning but I just didn’t think the SPY could break that 342.50 level and didn’t want to take the risk. When I go back in long, the four majors are going to be my primary targets.
XOM hit supply right where it should have at 36 and it was the same with CVX at 76. The question now is how far do these pullback? I’m watching 34 on XOM and 71 on CVX for clues. Those two points would be good short term long opportunities if the macro picture remains positive. BP should drift back to 16.75 and RDSA back to 25 for possible short term bounce plays. If those four names pullback lower than those points, then we probably get the complete washout in the sector and they can be bought at much lower prices. If the group gaps up and runs this week, then I think you just have to let them go and wait for the overall market to hit its high point for the larger pullback. I just don’t want to get in trouble chasing these energy names since I don’t feel that the final low is in yet.
E&P – COP hit supply at 36 and I don’t plan on chasing it above that level. The only long play I would make would be a breakout of the 36 level and then a pullback to test the breakout point where I might try a long with a fairly tight stop. Otherwise, I’m content to wait for COP to pullback to the bottom of the range around 32.50 for another try long. Same general picture for EOG and CXO. EOG seems to have hit the top of the range around 31.50 and could pullback to 29.75 for a buy. CXO is hitting supply around 46 and could pullback to 43 for a buy. Much like COP, I might try a short term long with CXO and EOG on any breakout and pullback to test the breakout point with a tight stop. I’m still watching HES for a long, but it seems weaker than the rest of the group for some reason. I may get interested in it if it drops back to 36.50. PXD is still on the radar, but it’s kind of trading in no man’s land right now without a concrete place for a stop. I’d probably get interested again around 84.50. I still don’t have much interest in the second tier names of APA, CLR, DVN, FANG, MRO or XEC.
Services – The services names just aren’t set up very well for trades. SLB is my favorite name, but it’s sitting so close to overhead supply that there’s just no reward there. HAL probably has a decent reward available, but the risk on that one is too large since there just isn’t any level to play off of. NOV and HP could become playable with another fall toward the March lows. I like the companies and those four are the top quality names, but the group just doesn’t offer good trade setups right now.
Refiners – This is still my favorite opportunity in the energy sector and I’d really like to see one more wave down in this group to take some longer term positions. PSX is still the favorite of the group with the refining/midstream combo. I’d like to see it drop back under 50 to get interested long. I’m not going to chase it since there is some heavy supply sitting right around 60, and the risk reward on these need to be fairly large to justify the risk. I’m watching MPC around 27, VLO around 39 and HFC around 19. I wouldn’t move into the lower tier names like PBF, DK or CVI just yet. And much like the rest of the sector, if these gap up Monday and start running, then just let them go. You can get in a really bad spot with these names if they turn against you and your risk becomes larger than the available reward.
Natural Gas E&P – These still aren’t doing much and there really isn’t any larger term trend in the subsector. UNG made a nice bounce off the 11.25 level and I’ve seen many suggesting an inverted head and shoulders in the commodity, but I’m out of these names until UNG shows it has enough strength to take out the 15 level. COG and EQT both had nice bounces this week with the rest of the sector, but those bounces were simply right back into the fair value area where all the latest trading has been taking place. Just too much directionless chop there. One small name to keep an eye on is GDP. If it can take out 10 and UNG can bounce, there might be a small long trade there. The smaller names like AR, SWN and RRC are just too risky these days and the volatility is large.
Midstream/Pipelines – I don’t follow these closely, but the technical picture on some of them has been interesting. WMB showed solid demand at the 18.50 level and I might give that a look if price falls back down to that level again. The upside on WMB is around 21. Same for ENB in that 28.50-29.50 area with an upside target around 34.
Coal – Putting these back on the watchlist was probably wishful thinking. Most of them seem to be giving up all the gains and it looks like those moves were just fast money pumping up a very beaten down sector. The pattern for BTU is interesting, but I just don’t have the risk appetite for that one right now with all the other stuff going on in the sector. Probably best to let these sit until after the election.
Renewable Energy – I’ve been seeing a lot of hype around these ETF’s which include TAN, ICLN and QCLN. I wouldn’t touch them. The only play I would even consider on these is a short on a parabolic blowoff. The solar companies are simply the flavor of the day and are being pumped by every daytrading room around. They are also counting on a Democrat win, which may or may not happen. There’s really just no long term value in any of these. These “clean” companies have always been a pipe dream and they get popular every time climate becomes an issue. Go back and look at their charts over the last 10 years, they spike at random for awhile and then quietly fade into nothing. Being green is a plus, but at the end of the day, everything comes down to money and cost. These renewable sources are simply too expensive, especially as oil and natural gas continue to fall in price. The solar and wind stocks are fun to speculate with, but the long term value just isn’t there at these current prices, avoid them.
Trading Plan for the Week – I’d really like to see a Monday pullback in XLE to the bottom of the range around 29.75 for a long play. Unfortunately, I think we probably get a big gap up in the 31.50-32 range, which I have no desire to chase. If the XLE does gap up, the only available trade might be a quick long if it drifts back to test the 31.25 breakout area on the close of any Monday gap up. Other than that, the only thing to do is let this 29.75-31.25 range continue to build for a genuine larger picture breakout. One curious thing is that the XOP showed some relative strength compared to the XLE, so keep an eye on the 44 level for a possible quick long play on a soft Monday morning pullback. If the 44 level fails in XOP, then I’ll be watching 41.50 for a chance to get long. The XOP used to be one of my favorite trading vehicles and I’ve been watching it over the last few weeks as the components have rebalanced back into a nice blend and overall representation of the the sector.
A quick run through of the downside levels I’m watching to start scale in trades for my longer term energy targets:
XLE 28.50
XOP 40
XOM 32.50
CVX 70
BP 16.50
RDSA 25
COP 32
EOG 34
CXO 42.50
PXD 83.50
HES 36.50
MPC 27
VLO 39
PSX 50
Non-energy plays
CMCSA – As the world moves more and more to online life, the internet providers and media suppliers should continue to thrive. CMCSA has tested the 47.50 area a few times and if it can break through that, there’s only blue sky above. I like a play off 44.50-45 with a stop of 43 for a target breakout to 50.
Casino Stocks – MGM long off of 21.25 with 20.50 stop, target 24. LVS could be played long off of 45 or 43 for a larger sized trade. WYNN long off 70.
Consumer Staples – There are a lot of charts in this sector that are setup for short plays. PM short 80, KHC short 31.75, CAG short 38.
FISV – This one has been building for awhile and likely moves up to test 110 this week for a possible breakout toward 115. Enter 104-105 and use 102-103 area as the stop.
CSX – Long 79.50 for a breakout of 81 and blue sky. Use 76 as the stop. UNP already broke to new highs, so CSX should follow. NSC could also be a nice breakout play.
CERN – Long 72.50, breakout, stop 71, 78 target.
AJG – 109 breakout.