Weekly Energy Equities Review, Market Outlook and Trading Plan for August 24-28
Aug 23, 2020 Trading Blog
It wasn’t a great week for energy and definitely not a very productive trading week in the sector. The SPY was green for the week and closed at a new all time high, yet the XLE had five straight red days. The relative weakness between both SPY/XLE and XLE/USO is extreme right now. Is the energy sector reflecting the real economy and potentially signalling a downturn in the overall market? Or has the sector, at just 2.8% of the SPY, simply become so small and irrelevant that it just doesn’t matter anymore?
This was the first week in a long time where my morning trading plan in energy was wrong all five days. With WTI holding firm above 40, I kept looking for a setup to play energy names long for a bounce, but it just never appeared and every trade I took scratched out breakeven. The only thing that saved the week was the healthcare sector which provided some great plays. I think there is still some room to run in healthcare, specifically the major pharma companies JNJ, MRK, PFE and ABT.
So where does energy go from here? About a month ago I posted the head and shoulders setup on the XLE and it now looks like that pattern has evolved to the point where it might test the neckline down at 34-34.50 for a big decision. When the right shoulder reached about 5 weeks of development, I pushed that head and shoulders idea to the back burner and went with more of an accumulation pattern in the form of a rough cup and handle. The right shoulder just took so long to form that it changed my mind on the larger pattern. After the failure on August 11, I switched to thinking that a rough cup and handle type pattern might be in play, but after a nine day handle collapse that pattern has been broken. Once that pattern broke, it’s back to the head and shoulders theme. That August 11 high up near 40 was probably the right shoulder and was the failure that set this next leg down in motion. Easy to see in hindsight, but I was fooled by how long the right shoulder took to form.
There are two important XLE areas to watch this week. The first is a minor level from the July 31 low at 35.29. The next level down from that is the really important one. The major level to watch is the dual lows at 34.24 (July 10) and 34.30 (May 14) which form the neckline of the larger head and shoulders pattern. If you look left on the chart, this neckline level runs right through the price range on the Monday, March 9 energy massacre day which closed at 33.94. If the neckline area around 34-34.50 fails, there really isn’t anything to stop the sector from falling back toward the 28-30 area, or worse.
At this point, I’m really not sure which way the XLE is going to go. Does it hold the neckline at 34.50 or does it fail and collapse? I don’t really know the answer to that, but I do know where the profitable setups are. My gut says that price takes a shot at that 34.50 level for a possible Wyckoff spring setup and a nice long trade. I posted this setup last week on XOM and it looks like the XLE is going to present the same opportunity. Prediction is impossible in trading, but math and odds are not. If price does test 34.50, the correct move is to get long and use about a dollar stop on the trade. If this major level at 34 holds, price should bounce back toward 40. The risk on the Wyckoff spring trade is about a dollar, but should produce about a six dollar reward. I only have to get that trade right about 15% of the time to break even. And if I can get that trade right even 30% of the time in the long run, I get very rich. Trading is all about payoff odds and winning probabilities, not predictions. Trading is not about being right or wrong, it’s about taking bets where you have an edge and then letting that edge play out over time. Like I said, I have no idea whether 34 holds, but I do know I get paid very well trading that situation with proper risk management.
Overall Market
SPY – It just keeps grinding higher and likely keeps hanging around up here near the highs, especially considering the Republican Convention starts this week. Trump is going to do his very best to pump things and then use the stock market to make himself look good. Keep an eye on 339.08.
IWM – I’ve been watching this 158-160 area and it continues to fail here. The SPY and QQQ have both broken to new ATH, yet small caps continue to lag and show relative weakness. Domestic small cap names reflect the American consumer and economy, just as energy does, and the signal they are sending is that the economy continues to be weak. If IWM and XLE both tank, that’s a red flag that the actual economy might be overtaking the Wall Street economy.
XLF – The financials looked a lot like the energy sector this past week. Financials continue to lag the overall market, mostly because of low rates and a weaker dollar. If the SPY is going to get much past these new recent highs, the financials will have to participate. The FAANGs will hit a ceiling and other groups will have to take over if this market wants to go higher. I really like C, JPM and AXP this week for long plays. C in the 48.50-49 area is my favorite play. JPM needs to get closer to 94.50 and AXP needs 93 to put on a long trade. I’m also interested in the KRE around 36.50-37.
UUP, GLD and GDX – I’ve missed the entire gold move and I’m not interested in jumping in at these levels. I think GLD could be ready for a consolidation for a few weeks, especially with the dollar finally finding some demand. I’m watching the 25.35 upside level in UUP this week and also the 25.00 level on the downside. If the UUP can carve out a bottom over the next couple weeks, gold could be done with its run.
TLT, HYG and LQD – The TLT found some demand around 163 after possibly double topping up around 171. I’m watching the 168 level this week to see if supply steps in and starts another leg down. Same idea on LQD, see if last week’s bear flag follows through with another leg down. Watch the correlation between TLT and XLF.
Energy
XOM, CVX, BP, RDSA – The majors really need to show some demand this week. All four names are sitting right on significant support and could be Wyckoff spring long plays soon. BP seems to be the weakest of the group with seven straight red days. Watch 21.20 on BP. I posted the XOM Wyckoff spring setup on Twitter last week and I’m watching 40.71 for a signal on this long play. I’m looking for the same long play on CVX around 82. I’ll be playing these as they develop this week, so trading plans could change quickly on them. I’ll update on Twitter as the plays develop.
COP, EOG, PXD, CXO, HES – These are my E&P targets for the week. I’m not really liking this group for intraday trades, but I’m definitely interested if they have big pullbacks on any XLE collapse under 34.50.
VLO, MPC, PSX – This group is my favorite trade target this week. All three names are setup similarly. VLO is the primary target with a long play around 50. I’ll be playing PSX around 59-60 and MPC in the 34 area. This group could turn into a longer term swing play if these levels hold and the sector turns around. When they finally turn upward, the run could be very fast and go further than many think.
SLB, HP, WTTR – I’m watching for a long in SLB around 17.50 and HP around 16. WTTR is an interesting name that I’m starting to like more and more. If the election goes to the Dems, protecting the water supply is going to be a huge issue with fracking. WTTR has very little debt and nice little $1.02 per share cash cushion. I’m watching the 4.25 area to get involved.
KMI – I don’t follow midstream and pipelines very closely, but KMI is setup for a nice long trade in this 14 area. I almost took this trade on Friday, but got discouraged and wanted to start fresh Monday. I may take this one Monday.
Also, if you are new to reading me, know that I’m a very short term trader basing all my plays on technicals only. Just because I don’t mention a company that doesn’t mean I don’t like it, it just means that it’s not set up well technically for a short term play. There are several companies that I really like, but the technicals just aren’t setup correctly for trades.
Trading Plan for the Week – Primary goal this week is the XLE play down at 34.50. I may try a small intraday long play at the first XLE level at 35.29, but the larger size trade will be long at 34-34.50. The most likely situation has me on the sideline in energy for Monday and Tuesday as price makes its way toward the neckline decision point. I’ll be watching all the listed names above, but I’ll be waiting for the XLE level before I get into most of those. It’s really just a wait and see type of week in energy. I do like a few non-energy trades this week though.
C – I’m looking for a long reclaim trade around 48.50-49 on this one.
WBA – Watching for some type of reversal signal in the 38-39 area for a long play into the fall/winter cold and flu season. Hoping any Covid vaccine is distributed through CVS/WBA. I might also get interested in a CVS play at 61-62.
TSN – Watching for a long setup around 62. Have you seen chicken prices lately? These guys have to be making some good money, especially if any type of predicted food shortage actually happens.
WKEY – I finally gave in and started a position at 10.25. Not a huge starter, but enough to be meaningful if it runs. Would really like to see this drop back to the 8-9 area for a larger sized play.
PEP – I took a couple shots at this one last week but mostly scratched out on them. Watching for a pullback Monday to get long using the 50 day ma at 134 as the stop. PEP is working on a four month base and could be a prime longer term play if the market rolls and money moves toward defensive names.
JNJ, MRK, PFE, ABT – Looking for breakouts in all of these names.
ONCT, OIIM, VRME – A few lotto tickets.