Weekly Energy Equities Review, Market Outlook and Trading Plan for October 5-9
Oct 4, 2020 Trading Blog
Just when I thought the toxic hate of social media couldn’t get any worse, Friday demonstrated otherwise. I’m off Twitter for awhile, I just can’t take the negativity. I’ll be back, just need a break so it doesn’t disturb my mental peace or harm my trading.
SPY – Good week for the SPY as it found solid demand around the 331 level. The market had every chance to take that demand out with Friday’s Trump news, but it impressively held firm. I’d like to see that tested early Monday and hold for a reversal and push up to the 342.50 level for a test and possible breakout there. If 331 doesn’t hold, then price probably drops down and tests the 320 lows. After last week’s action, I’m starting to notice that this 320-339 area could evolve into a consolidation range that lasts through the election. However, my long term view hasn’t changed, I still think the SPY is headed to the 380-400 area in the next few months.
QQQ – Tech showed some relative weakness on Friday, but to be fair, Monday through Thursday did produce a 4% move up, so maybe Friday was just normal digestion. The QQQ should find solid support around 268-270. I don’t normally trade tech, but if the QQQ gets down 265-267, I might take a shot long.
IWM – This was where the strength was this week and it was a great thing to see for energy. The IWM put on about 4% and the only concern I could find was that it stopped right at those June 8 highs which sets up what some may see as a head and shoulders type pattern. I don’t really see it, but traders will use that June 8 high to evaluate this latest move up. If the IWM fails there, claims for a head and shoulders will grow. I’d like to see a smooth pullback to the 150 level this week and then another run at 155. If 150 gets taken out, then watch that 142-144 area near the 200 day moving average. This is the first week in a long time that the IWM and XLE have diverged this much and I’m not sure which instrument is telling the truth. Either the IWM is getting ready to reverse down or the XLE is overextended to the downside and ready for a reversal upward. When correlations break, there’s usually a reason.
XLF – The XLE/XLF correlation was also somewhat broken this week. The two sectors had been moving together, likely a result of rotation from overperformers to underperformers. XLF grinded sideways and managed to closes near the highs of the week, but I’m concerned that the 24.50 level will stop the upward movement and send the sector down soon. If financials roll over, then energy probably follows. The correlation isn’t concrete, so these can change at any time. It’s just a useful clue, not an absolute, so use this relationship carefully because the underlying cause (rotation) can stop which leaves the correlation permanently broken. If I had to pick a sector to short on a market pullback, financials would probably be my choice. C in the 44.25 area with a tight 75 cent stop could be a possible short.
UUP, GLD, CAD, TLT – The most important correlation to break this week was the UUP/USO relationship. The dollar was fairly soft, yet the USO still moved down. The UUP down/USO up correlation diverged much like the IWM up/XLE up correlation did. Again, either the UUP or USO is going the wrong way and should reverse soon to regress back to the normal relationship. The UUP/GLD relationship held constant this week, so the likely culprit is USO going the wrong way and headed for a reversal soon. Correlations are useful, but be aware that they can change and they can diverge for weeks at a time.
In summary, there are a lot of broken correlations right now that need to get resolved. Are these new correlations permanent or just a temporary divergence? Watch all sides for clues.
Energy Big Picture
The energy sector maxed out at ~20% down from the important break of 34.50, bottoming out at 28.20 on the Friday open. The sector was due for a bounce on Friday. The question now is how far does this bounce continue, if at all, before it starts down again? The 29.50-30 area should offer the first clues on the upside. The XLE failed on Friday at 29.56, which was right at the low of the prior week’s range of 29.54. The prior week’s range was rejected and price closed below it, suggesting that the bounce ran out of steam and the auction back into the range failed. If the XLE opens with another test of 29.50-30 on Monday and fails again, then price will likely test the demand it found down near 28. I still don’t think we test the March lows in the 22-23 area, but I also don’t really know where the bottom may be between current price and that March low.
I did take a few positions on Thursday and I really thought those positions had a chance for a bounce, but the Trump virus news short circuited that idea and really hurt those trades. I ended the week green on most of the positions, but I will probably dump them if the 29.50-30 area fails on Monday. Given the overall market action on Friday, I’m probably early on my entry anyway. I can always put these starters back on at better prices if the XLE fails Monday. If I’m surprised and the market cuts through 30 on the upside, then I’ll continue to ride the current positions until there’s a clear failure at a higher level.
Majors – I took positions in all four majors on Thursday. I think you have to stick with quality for any long term plays in energy. Yes, the dividends will probably get cut, in fact I think the market is already pricing this in. There will probably be an overreaction when it does happen and I’ll be happy to keep some powder dry for that, but how much further can these names really fall on that kind of news?
XOM is my favorite major and it’s now a mere 10% off the March lows. I really never thought I’d get a chance to buy into this name near the March 23 low, but here we are and I can’t pass up the deal. Can it go lower? Certainly. But with a longer term outlook, I think you have to give this one a try. BP and RDSA are really getting hit harder than XOM and CVX. The latest reports out of BP/RDSA suggest that they are shifting their business mix toward renewables and that may have investors worried. BP and RDSA have both said they will cut oil and gas production, which should be a benefit to XOM and CVX, which have shown no signs of moving away from their core business. I get the feeling that investors are worried that BP and RDSA will stray too far from their core competencies and never be able to find their way back. There’s a big difference between trying to be an oil and gas company and trying to be an electric utility. Again, we keep running into this same theme of production cuts and shifting business models. When demand returns, there will be a supply crunch and price spike. It’s a matter of when, not if.
E&P – COP remains the quality of the E&P subsector and seems to have found more stable demand than the other names. The 32 level held well, but I think the 28 area might be the final low. I’d be really surprised if COP got anywhere near the March low of 20.84. EOG is my second favorite E&P name, but the shale producer has been getting hit harder than some of the other larger names. It is a lot closer to the March low than COP. I think there might be another 10% down for EOG, so I’ll be adding around 30. Permian names PXD and CXO are holding up well and I’d like to pick up more CXO in the 38-40 area and PXD around 78-81. I really like HES also and would like to see it hit the 33-35 area for a long term play.
I’m still not interested in the second tier names like DVN, APA, CLR, NBL, MRO, FANG, XEC, PE and MTDR for long term plays. It’s not that I dislike these names, I just think the quality names are better for long term plays. I’ll still make some smaller bets on these second tier names for short term trades.
I saw a few daytrading rooms hit the microcap energy names this week and I hope nobody got caught in those pumps. A lot of inexperienced traders lost a lot of money in things like USEG, which opened around 19 and closed the week near 5. I’ve decided to just eliminate the small and microcap energy names from my watchlist. There’s just too much risk with these. There will be more bankruptcies. Stay away from the CDEV, WLL, OVV, LPI, SM, CPE, etc. type trash. They may have some big up days, but overall they are probably doomed.
Refiners – The refiners got hit the hardest of any energy subsector. The EV hype is causing some damage, as well as a possible second round of lockdowns. I posted in last week’s writeup that I didn’t think the possibility of more lengthy lockdowns was likely, but I’d have to change that view if something serious were to happen to Trump or any other high level figure. If a second round of lockdowns does develop, I’d steer clear of the refiners until the situation resolved. However, if Trump bounces back quickly, I’ll be very interested in the refiners. The sentiment in this group is way overdone to the downside. PSX is my favorite this week as the midstream portion of their business makes them a little safer than MPC or VLO. My second choice in refiners is MPC, with VLO being the third choice. VLO had the roughest week of the refiners, getting hit with a downgrade on Thursday which really knocked the stock down. I’d also throw HFC into the mix as it tests the March lows. It’s extremely volatile and makes a great instrument to capture the upside in the subsector.
Services – The only name here that interests me is SLB for a longer term play. I think you have to stick with quality for any longer term recovery. HAL is a decent play, but it could still fall a long way from the current price, while SLB is close to pushing a retest of the lows. The risk control in SLB is better than HAL. The other two names I like are NOV and HP. Both of those names could be played for short term trades against the March lows.
Natural Gas E&P – The only two names that I would consider here are COG and EQT. Neither is showing much direction, but both are holding up better than UNG. If UNG can reverse back to the upside, these two names could see nice bounces.
Coal – I posted these a couple of weeks ago as a watchlist possibility, but I’m still trying to determine if the latest moves were just fast money looking for a play in a beaten down commodity. They might bounce back if commodities recover, but I think I’ll keep them on the back burner for now. BTU probably has the most interesting chart from a Wyckoff point of view. There’s a chance that the most recent move down near 2.00 was a spring and this could recover quickly and make a run back to 4. It’s risky though. ARLP shows a similar pattern.
Trading Plan for the Week – I’m still focusing on the long term picture in energy and I doubt I’ll be doing much short term trading this week. The primary plan is to monitor the Monday open for an opportunity to scale in heavier to XLE. I’d like to see price retest the 28.25 level to continue the scale in. The current plan on XLE is to scale in starting at 29 to complete the position with an average price in the 26-27 range on a full position. If the XLE gaps up or moves up for a test of 30, I’ll make a decision on the current positions, including the current XLE position. With the current Trump status, there’s a good chance I may sell all positions for a decent profit and just wait for the sector to start down again to reload all positions. I really don’t think we’ve had that much needed high volume capitulation in energy yet. Let’s see if the SPY tests 320 and XLE tests 28 at the same time. Other energy targets for adds or new positions if current one’s are exited at XLE 30:
XOM 32
CVX 68
BP 16
RDSA 23.50
COP 31
EOG 33
CXO 40
SLB 14
MPC 26
VLO 38
PSX 48
XOP 38.50
Even though I’ve switched to a longer term view for energy names, I’m still doing some shorter term trading outside the sector. Some non-energy targets for Monday:
AAPL – Looking for an early test of 111-112 for a long play back to 117, probably a 110 stop.
ABC – Long off of 94, 98 target, 92 stop.
AMGN – Long off 240, 237 stop, 253 target.
Casinos – Keep an eye on this group for a possible big dip this week if fall/winter lockdowns become a more serious issue. I’ve stayed out of this group because of this, but I’d be willing to go in long if the lockdowns do happen and this group overreacts to the downside. My targets here are WYNN, LVS and MGM. Favorite is probably WYNN off that 70 level. These trades would be longer term plays.
FTNT – A rare short pick. Short the 120-121 area, 123 stop, 110 target.
JPM – Long off the 94-95 area, $1 stop, target 98. Be extra careful with this one because the financial sector could rollover this week.
MOS – Long off the 17-17.25 area, stop 16.50, target is a breakout of 18.75 to the 22 area. Longer term play.
NEM – Another short pick. If the dollar continues to strengthen, gold will continue to decline. There’s a solid level 64-65 to play short off of with a $1-2 stop. Target a complete breakdown of the recent 59 low. You could also put this same exact short trade on with GDX in the 39.50-40.50 area.
PG – Long off of 136-137 for a breakout of the 140 level, stop 134.
V – Long off of 200, 197 stop, 206 target.
Utilities – I had these on the list last week for a breakout and missed the entry in a couple individual names. XLU is sitting right on the upper range and could be getting ready to breakout too. If there’s any pullback toward 59 I’ll give this a long with a 57 stop and a target of a 62 breakout. AEP and SO had nice moves for the week and both have more room to run. If you can find a safe entry on any individual electric utility, there could be a decent trend to the upside for a few weeks.
It’s absolutely beautiful here today and it’s definitely going to be a two bottle day. For anyone stressing or being consumed by politics, turn it all off and replace it with something you enjoy in life. Life is way too short to waste a second on things that are totally out of your control. And for all the people blaming politics or government for your life’s problems, you are on the wrong track. Look within.