Weekly Energy Equities Review, Market Outlook and Trading Plan for May 4-8
May 3, 2020 Trading Blog
Sometimes the market offers very clear signals and is easy to evaluate. It doesn’t require any fancy software or genius technical indicators. It doesn’t require knowing the key insiders or having million dollar fundamental research. All you have to do is look at what the majority is doing and saying, and then realize they are usually wrong. They aren’t always wrong, but they are normally wrong just enough of the time to provide an edge. I think we are in one of those situations right now. Almost 100% of my Twitter timeline is traders trying to call a top and pointing out how horrible the economy is and how it’s all just a FED bubble, just as they have been doing for the last 11 years. Nothing has changed with them. Those guys have been trending wrong for 11 years and the odds say they are probably wrong this time as well. Trends don’t just apply to charts, they apply to people too. Trade the trend.
The financial world just can’t seem to accept the fact that the stock market isn’t what it used to be, and they simply won’t change their thought process to acknowledge the change. It’s not that the fundamentals don’t matter, because they do, it’s just that they don’t matter right now. At some point, maybe this market will move back to trading on economic numbers, job numbers, earnings reports, oil prices, etc., but currently none of that matters. Right now, the only thing that matters is the guy behind the curtain. He’s running the show and he’s NOT going to fail. He’s got unlimited ammunition. He’s not concerned with details and he’s not concerned about the future. His only concern is immediate survival. All options are on the table when your only concern is immediate survival. And you don’t fight against someone who has been backed into a corner and is fighting for their life.
I posted my position on the SPY last week and I’m sticking with that position until the market sends me a signal that I’m wrong. We have reached a bottom. The question now, as it was with calling the energy bottom, is what does this particular bottoming process look like? I don’t think of a bottom in the market as a single price point, it’s more of a process. The bottom in the SPY could very well take the common shape of a typical sideways Wyckoff Re-Accumulation pattern. If it does take that shape, the real key will be distinguishing an accumulation from a distribution over the next few months. I posted about a distribution leading to a bear market back in January when we were in that parabolic buying climax that started in October 2019. The coronavirus event interrupted that natural pattern, but it could have accelerated it as well. A bear market is usually a slow exchange of stock from weak to strong hands, however the virus event may have hyper-accelerated that transfer to the degree that a bear market may not be necessary to effect the complete transfer and begin the next bull phase. The only thing that might be required for the next big bull run will be a sideways accumulation over the next few months to soak up the last remaining shares that weren’t transferred in the 35% panic drop in March. Only time will tell and all we can do is watch the developing pattern to see if it becomes an accumulation or distribution.
As for the actual virus itself, the market doesn’t care anymore. The market has moved on, and as traders we should do likewise. It’s like I posted on Twitter when this whole virus thing started, once the unknown becomes known, the fear then disappears. It isn’t the virus that people are actually scared of, they are scared of the unknown. People have voluntarily accepted the flu and the 60,000 deaths that come every year. Now, as you can see lately with all the protests and people getting back to life, people have learned the true facts about coronavirus and they will accept the 60,000 deaths that come with it. It’s all a matter of knowing the facts so you can decide if you want to accept the risk. Now that the coronavirus true facts are coming out, people are showing that they are more than ready to accept the risks, and therefore life goes on. The market knows this, which is why we are on day 32 of an uptrend that has taken us almost 33% to the upside. Don’t get stuck in the past. Respect the virus, but don’t become paralyzed by it in life or in trading.
Overall Market SPY IWM XLF GDX
The SPY had a good technical week and ran right to the 61.8% retracement level from the February breakdown point. It was due for a pullback at that level and we saw that begin on Friday. Now we have to see how far back it retraces (if it retraces) to determine the underlying market strength. By reacting right at the 61.8% level, the market is telling you that it wants to follow that pattern. The logical thing to do is continue using those same retracement levels on this pullback. Those levels suggest that the SPY should be headed for the 248-255 area on this pullback. If the market is truly strong, then the pullback could stop around 264-266. The volume on the move will also be important. SPY needs to see lower volume on this retracement than it had on the March pullback from the 300 level. The major points of interest this week for SPY will be 288 and 295 on the upside, while 281.50 and 272 are important on the downside.
The IWM also had an impressive week as it managed to grind past the 50% level and top out almost exactly between the 50 and 61.8 levels. The reversal was a bit disappointing, but it did manage to close above that 125 breakout point, which was roughly the 38% retracement level. It also stayed above the prior week’s range. The uptrend off the bottom is still intact, but could be in danger if price gets much below 120. It was nice to see the IWM outperform the SPY for once. Important points of interest this week will be 123 and the 115-117 area on the downside, while 130, 133 and 137 mark the upside.
The financials were my best trades last week and the sector strength was extremely helpful in allowing the SPY to hit highs. The XLF broke out from about 21.50 and had a big run Monday through Wednesday, but reversed and pulled back to ~22 on Thursday/Friday. The 21 level is going to be important this week for XLF. If it can hold that level, then the SPY will likely hold up as well. JPM is still making a very defined upward sloping consolidation pattern and the next move toward 100 will be telling. I’d also keep an eye on the 42-43 level for C. I like AXP in the financial sector as well. The entire sector is still consolidating and the overall market will likely follow the breakout direction of this sector.
I’m still watching the GDX. As I posted last week, the miners should have pulled back when the financials surged higher, but they didn’t. That’s a signal that the breakout in financials might be suspect. GDX did breakdown a little, but just as the financials drifted back down to their breakout point, the GDX drifted back up to its breakout point to close the week. Keep an eye on 34 on the upside and 31 on the downside, as a break in either direction will be an important market signal.
The most disturbing move of the week was the HYG collapse on Friday. It managed to hold the week’s low, but not by much. The action was very strange with two very strong runs on Wednesday and Thursday, but a total collapse on Friday. There was no flow or logic at all to the action. The 77-78 range will be important this week. LQD also had a breakdown late Thursday afternoon and a sharp gap down Friday. The interesting move was Thursday when the HYG was ripping higher, yet the LQD was going in the opposite direction. When things are being manipulated behind the scenes, there is no logical pattern. I guess you could say the illogical moves are the clue that indicates the manipulation. The FED is involved in these, so using technicals is difficult.
Energy XLE XOM CVX WTI
The energy sector followed last week’s writeup fairly closely. The SPY broke to the upside and pulled the XLE out of that 36-37 range top and into the March 6 gap area. The exploration into the gap topped out around 39, but did reach 40.50 premarket on Thursday. The gap from March 6 did not close. I see the move outside the range as a sign of strength in the bottoming process, but a failure in the shorter term for the sector. Friday’s close back inside the prior week’s range at 35.79 also points to a short term failure. As I’ve stated for several weeks, energy stocks have likely bottomed, but that bottom is probably going to be a Wyckoff accumulation range for a few months and not a “V” shaped bottom. The XLE went up and tested the top of the range and now looks poised to drop back down into the range and consolidate for awhile longer. There is solid demand around 34 and there should be a major demand area near 31. I don’t see XLE dropping too far below the 28-30 area during this SPY pullback. If it does, I’ll definitely be a buyer.
XOM and CVX both had earnings on Friday and XOM got hit much harder than CVX. Exxon finished the day down about 7%, while Chevron finished the day down only about 2.7%. I think the most important thing for most investors was the freeze of the XOM dividend. I can only imagine the results if they would have cut the dividend like RDSA did. Speaking of Shell, it is down 18% since reporting earnings and the dividend cut. There’s a large group of investors that hold these stocks only for the dividend yield. These companies will even borrow the money to pay these dividends, which shows how worried they are about that group of investors fleeing the stocks. I personally think borrowing to pay a dividend is one of the worst mistakes management can make, but I guess they feel like the alternative is worse.
As for the technicals, XOM and CVX both perfectly closed that March 6 gap before pulling back. It is curious that they were able to run these stocks to that point exactly on earnings release. The trend in both is still up, but that could change this week. XOM seems to have solid demand around 42.50 and 39, while CVX shows demand at 87 and 80. I expect that both will test an area in between those levels this week. I’m interested in getting back in XOM if it dips back to that 38-39 level. I’m interested in CVX in the 78-80 level. I’d like to see both of these stocks dip under those bottom levels of demand and then reclaim the level to start another leg up. If those levels break, then I would either avoid both and/or stop out any positions taken at 38-39 and 78-80.
WTI had a pretty good uptrend this past week and closed near 20, but I don’t think there’s much more room to the upside. It was a nice bounce after all the negative oil price confusion, but I think it was probably just a standard relief rally. The only way this continues upward to the 25 area is if the SPY breaks to the upside again and passes 300. There could also be another divergence between oil and energy stocks this week. I wouldn’t be surprised to see oil continue to rise while energy stocks pull back. I removed USO from my screen last week. That ETF has totally lost track of the actual commodity. There were a lot of inexperienced traders who were very angry last week when oil had its big run while USO went nowhere. Can’t blame anyone but yourself if you trade these things without understanding how they actually work. Avoid USO and all the 3x ETFs.
The most surprising group in energy was the refiners. This group has been a great indicator for the sector and all signs were pointing up last week. I posted that most of the refiners were showing rising wedges, but all of those patterns broke sharply to the upside, which is just another signal that energy stocks have likely bottomed. The refiners could be setting up for some nice long trades as price comes back down to retest the upside breakout points. MPC gets interesting in the 26-27 range.
The services names are a mixed bag. I like the action in HAL, but the action in SLB is disappointing. BKR is closer to the HAL type positive action, yet NOV is following SLB. I’m not interested in playing around in any of these service stocks right now. I still like SLB as my recommended stock for the group, but the action there just hasn’t been that good and I think it can probably be picked up down under 15 for the next run up. The ideal trade there would be a long on any break under 14.
I still don’t like the natural gas names and think they are probably nearing the end of their run. Much like the service names, these natural gas E&P’s are also a mixed group. COG and EQT seem to be topping out, yet the smaller names like RRC, SWN and AR are still moving up. I’m avoiding the group, they are just too expensive.
COP is still my top choice for the E&P’s. It had a huge run this week going from lows near 35 to almost 44. That’s a 25% run in three days. There’s an interesting spot around 37.25 where I might take a shot long this week with a very tight stop. EOG has been my second choice, but I haven’t been impressed with the action there. This third wave up seems to be weaker than the two prior moves and it’s running out of steam. I still like it, but I’m cautious. The Permian names seem to be the shale winners so far. CXO, PXD, FANG, PE and MTDR have all had nice runs with very few pullbacks. Every retracement meets strong buying. Definitely keep an eye on the next retracements that coincide with any SPY pullback. The only one in the group that I would stay away from is MTDR. A couple of daytrading rooms pumped up the small cap and it could pull back harder than the rest as inexperienced traders panic. That could also be a great opportunity if they overreact.
I still don’t like OXY and I’m avoiding it for now. The pattern could be tempting down in the 10-11 area, but I think there’s just so much debt and so much internal struggle going on there that any trade could get hit with a monster gap down at any time. It just isn’t worth the risk. I think traders have missed some good trades in E&P’s that have significant natural gas exposure, including HES, XEC and NBL. If you want to see a chart with every pullback getting bought hard, look at XEC. I probably wouldn’t buy them at these prices, but waiting for a real pullback could keep you out of them. It’s a tough decision on these kind of charts.
One thing that I’m seeing that will end badly is a mass of inexperienced traders playing around in things like OAS, WLL, CPE, CDEV, DNR, XOG, etc. There’s no excuse to buy any of this trash. CPE did 54 million shares on Friday, while OAS did 51 million. This kind of action is simply penny stock daytraders scalping, however I think many inexperienced traders will get left holding the bag on these bankruptcy lottery tickets. Just say no.
I also disagree with the guys recommending shipping stocks and tankers like FRO and NAT. It might have been a great trade a month ago, but it’s gone now. Don’t be the guy that cashes the profitable traders out. These are the worst stock investments of all time. The oil storage hype will eventually calm down and this group will collapse as they always do. Avoid them on the long side.
Wish List for a Major Market Pullback
I’m 100% cash in my long term account right now, but I’m probably going to ease back into some energy names (and some non-energy names) if the SPY gets a pullback to the 250 area. These are the names and prices I’m hoping for:
Energy: XOM 36, CVX 73, SLB 13, COP 31, EOG 35, MPC 23.
Financials: AXP 75, JPM 82, KRE 31
Metals: AA 6, CLF 3.50, FCX 6.50, SCCO 27, XME 16
Consumer Oriented: DIS 90, LVS 37, MGM 11, PENN 10, WYNN 60, TGT 92, SBUX 62, V 150
This Week’s Trading Plan – Everything depends on the SPY this week and where it opens Sunday night. My primary goal is to be patient and see how big the pullback is in the overall market and energy. I have no desire to short XLE or any energy stocks this week, there’s just too much underlying strength in this market. The first trade on Monday will probably be a long scalp for XLE to run back into the 36-37 area. I’m thinking we open down just a little in the 35.50 area, maybe even below Friday’s 35.41 low. The ideal trade would be an open in the 35-35.25 area for a long play when price reclaims the 35.41 Friday low. It could be a quick scalp, but there’s also the chance that it could break past 37 and give last week’s high a look. The trade could probably get away with a stop around 35 if it’s wrong for a decent 3:1 return.
If XLE opens up on Monday, then I’m probably on the sideline until it tests last week’s VWAP at 36.90. If it fails there, then I’ll probably stay out of energy for the day. If price manages to take out 36.90, then there should be a good long setup somewhere to see if price can reach last week’s highs around 39. I’d use the 36.90 VWAP as a stop on any long attempt.
If for some reason XLE gaps down big on Monday, I’ll just watch and see how far it falls. There’s just not much structure to play off of between 35 and 33.50. There’s a bit of a liquidity gap there from the Monday-Tuesday run which could cause price to fall really quickly. There’s also nothing in that area to use as a concrete stop.
While the financials and casinos were great trades last week, the clearest trading setups were in the IWM. Monday and Wednesday were completely one way action days where all you had to do was buy the open and ride the rest of the day. I’m looking for a similar trade this Monday. The 123-125 level was an important breakout point and I believe the IWM will drop down and test 123.29 on Monday for a long trade. An even better setup would be a gap down open around 122.75-123.00 and then a reclaim of 123.29 for a long trade. Enter when price reclaims last week’s range and put the stop just below the lowest price point prior to the reclaim. The target on the trade is 129.50. It’s one of those opportunities for a huge 10:1 trade. It will probably be my largest trade of the week.
My next trade watch will be financials. I love the pattern in JPM right now. I’ll be looking to get long in the 90-91 area for another run toward 100. I’d also like to get a pullback in AXP to the 83 area for another long, but I don’t think that one’s going to give me that opportunity this week.
I had some great trades in PENN and MGM last week and actually managed to cut those at highs after hours on Wednesday. I was in PENN at 13.60 and sold 19. I was in MGM at 13.60 and sold 17.50. I’m definitely wanting to give those another ride this week. I’m going to start back into MGM and PENN both in the 14.50 area this week. It will probably be a slow scale in because these are two stocks that I’d love to get in big at lower prices if the SPY gets back toward 250. I had planned on the first casino trades to be longer term holds, but getting almost 50% in a few days was just too much to pass up. I’m definitely giving them another run this week, I just don’t want to be too early with too much size. I’m also watching LVS at 43. I also like WYNN, but it’s a tricky one and I don’t feel comfortable with it at this level, but would give it a shot down under 70.
One interesting personal thing, I actually signed up to take a coronavirus antibody test on Tuesday morning. I travel a good bit and my wife travels almost weekly, so I figured why not check it to see if we might have been infected. I spent a week in Las Vegas in late February for my wife’s corporate meeting and we were exposed to about a thousand company employees from every corner of the country. I must have shaken hands at least a couple hundred times. I did have a couple days of feeling sluggish after returning from Vegas, but that was also about the time when oil stocks crashed in early March and I was getting up at 3:45 am every day, so who knows. She’s also traveled to Dallas, Chicago, North Carolina, Washington DC and Arizona in February. I’ve heard stories of people being infected and not having symptoms, so I guess it’s possible. I also thought if we both take the test, then the odds of both of us getting a false signal at the same time are probably zero. It will be interesting to see the results. I also signed up for an NIH antibody serum study in Bethesda, but I don’t think that study ever got off the ground. After the antibody studies in California and New York, they quietly let that NIH study fizzle out. Curious. I think they said results take 5-7 days, so I’ll post next week.
Also, I apologize for disappearing from Twitter last week. I had too many trades going on and it was just too distracting. I love Twitter on slow weeks, but sometimes it all just gets to be too much. I should be around more this week. Also, even if I’m not around during the day, I do check it before and after market hours and DM’s are always open. Good luck this week.