Weekly Energy Equities Review, Market Outlook and Trading Plan for October 26-30
Oct 25, 2020 Trading Blog
The XLE had a decent week and remains in that 29.75-31.25 range that began back in mid-September. It was encouraging to see that big gap down on Thursday get bought right back up into the range and nearly make a run all the way across the range for a look at the top. There’s still no clear breakout direction, but the longer things consolidate after that big fall from 39, the more it suggests that this is an accumulation (and a likely reversal upward) rather than a distribution (and more selling). However, I do still think the sector needs that one final shakeout before turning up. If this range continues to evolve, there should be a Wyckoff spring associated with the pattern sometime in the future, possibly after the post-election rally which may run through December. Things are looking good in energy, just need to let the pattern play out and then jump on the resulting trend.
As for the overall market, the SPY created a nice range this past week between 341-346 which seems to be the final pause before the election. It probably sits in this 340-350 range until the election and then breaks out the top once the outcome is known. It would be a success if the SPY could close this week in that 351-359 area. I expect that the SPY will likely run for a few weeks on the clarification of the election uncertainty and top out sometime in December around SPY 380-400. After that, reality may set in and this market could be ready for a big reset, especially if it’s a Biden win. Jubilation for a new candidate and new hope always occurs, until people realize that the new guy is just like the old guy and nothing will change. Being born with Lyndon Johnson in office, I’ve seen a lot of presidents and nothing ever really changes, it’s all just a show and pageantry as big government steamrolls on.
One thing I would also keep an eye on this week is the stimulus plan. If they are going to pass it, then I think they will probably do so next weekend so the news hits the market the day ahead of elections. A 500-700 point up day on November 2nd is probably what the Republicans want. If it does hit this week, you don’t want to be short, but you don’t want to chase it on the long side into the election either.
There’s a beautiful setup this week in the QQQ. I don’t often play tech, but I’ll be putting on a long trade Monday using 279 as a stop. The slow consolidation has pulled back exactly to the 281 breakout point and there’s a good chance traders may move to safety this week in the megacap tech names. There could be an easy ten points in the trade to the 290-295 area ahead of the election. Although this is a great trade, it’s probably not what you want to see if you are in banks or energy. The rotation out of tech and into banks/energy has been going on for the last few weeks and that could reverse sending energy down. Keep an eye on the QQQ this week for rotation clues in energy. Also, if anyone takes a long on energy names, a long in QQQ is a great hedge for that energy trade.
The most important indicator for energy this week is once again the IWM. The small caps put in a failure at 164 early last week and that put a cap on energy. It did find solid support right where it should have in the 159 area and the Thursday morning bounce back to 163 was encouraging. The key this week will be another test of 164. If the IWM breaks out of the 159-164 range, then I expect energy will also break out of its 29.75-31.25 range. However, the more likely outcome this week is that the IWM stays in this 159-164 area ahead of the election uncertainty, so buying any breakout is going to be a very risky trade. Technically, I’m going to be watching 161.50 for a long trade early in the week. Price should find solid demand at last week’s VWAP before making a run at 164.
The UUP and USO correlation was confusing last week. The dollar continues to sit near range lows, yet oil also remained near its range lows. The inverse relationship just wasn’t there recently. The bigger range for the UUP has run from about 24.95 to 25.35, with Friday’s close at 25.03. The bigger range for USO is 27.75 to 29.30, with Friday’s close at 27.89. One of these two is temporarily moving in the wrong direction. The key to the puzzle might be the GLD. Gold normally moves up with a weak dollar, yet it also closed the week near the lows of its current 177-181 range. Both commodities were weak with a falling dollar, which hasn’t been the normal correlation. The missing link could be the TLT, which has been getting crushed. A falling TLT means higher rates. These higher rates have pushed the bank stocks upward, but rising rates usually have a detrimental effect on commodities at some future point. The stronger correlation right now seems to be an inverse rates/commodities one rather than the recent inverse dollar/commodities correlation. See if that continues this week.
In summary, the key takeaway from the above analysis is to recognize that there are several forces competing against each other, which might explain why markets remain in a consolidation over the last month or so. The market needs these correlations to all start moving in the same direction to break out of this current balance. For energy, the ideal macro would likely be a falling UUP, rising USO, rising GLD, rising TLT, rising IWM.
Energy Big Picture
I know this week’s writeup is kind boring and a partial repeat of last week, but nothing has really changed lately in energy. The XLE started its big fall on August 11 from about 39 and that trend bottomed out in late September. Once that trend ended, prices moved into a sideways consolidation which is where we still sit. This consolidation is healthy, but unfortunately it needs to keep evolving for a few more weeks in order to reverse the downtrend. It’s not much fun trying to trade a sector in a choppy consolidation. As I’ve said over the last few weeks, I still don’t think the lows are in for energy and we need that one final washout to shift the balance in supply to longer term holders. However, things don’t always go according to a set plan and there’s always the possibility that a new uptrend starts without a washout, so be careful if you are playing around short in the energy sector. Energy can surprise and the moves can be very unexpected and very large.
Majors – XOM and CVX make up about 45% of the XLE, so their charts are very similar to the XLE sector chart. Both are in consolidation ranges, XOM from 33-36 and CVX from 71-75. I’m interested in trying to establish a longer term (1-3 months) XOM position on the next dip toward the bottom of the range. I’m going to start in long on any break of 33 and continue to scale in as it moves to a test of the March lows around 30. XOM is my favorite long term energy pick right now. CVX is probably my second favorite pick and I’ll start a long position at the bottom of the range around 71, but I probably won’t scale into that one as quickly as XOM, since it’s still pretty far from the March lows. There’s just no real stop to play off of in CVX, so the position probably needs to be smaller. RDSA is probably third best of the majors and BP drags up the rear in fourth place. There just doesn’t seem to be a bottom in BP at all.
Also, earnings for XOM and CVX hit Friday, which probably couldn’t be a worse time for earnings on the weekend ahead of the election. I won’t be holding either through earnings unless there’s a huge dip before Friday. However, if the earnings are bad, that could present a big opportunity if traders exit the sector with earnings disappointment and the fear of a Biden win. You have to be ready to go in strong if the opportunity presents itself Friday. Have a plan ahead of time. Figure out where you want to enter and stick to that plan.
E&P – It was a strange week for COP. After the purchase of CXO, there has been a good bit of selling weakness that I wouldn’t have expected. I probably made a mistake on this one and should have been long term buying down under 31, but I got greedy and wanted to see if it could take out 30 for a larger position. I did scalp a few small moves, but I regret passing up the longer term play. The 32.50 level will be important this week and I’ll be looking for both a short term and longer term trade if it drops back toward the 30.50 low. PXD also behaved a little strangely after its purchase of PE. While a dip in the acquirer is common, it probably shouldn’t have been so large in these COP and PXD moves. Watch the 35-38 range in EOG and the 37-40 range in HES for opportunity. I still don’t like OXY as a company, but might be willing to give it a smaller play under 9.50.
At some point, the second tier names are going to be longer term plays. Most are setup with very clear support which enables great setups with tight risk control. I don’t think they are plays yet, but might be getting close. APA has nice demand at 9, DVN at 8.50, FANG 29 and CLR around 12.50. I still prefer the higher quality names for longer term plays, but another big dip and the second tier names will be attractive. I’m seeing traders also mention trying to make buyout trade plays, but the lack of real premium on these recent deals really makes that approach a high risk, low reward strategy.
Natural Gas E&P – These are still too choppy with no direction, but may be setting up for a breakout attempt soon. COG at the 21 level and EQT around 17 could present some opportunity if breakout trades are your thing. I’m starting to like EQT more, especially after the CNX rumors. Much like the oil E&P sector, the NG portion could also consolidate into a few remaining giants. Eventually, I think there will only be two, maybe three, COG and EQT, and then some combination of the remaining players. I’ve got these on the back burner for now to see if they do breakout, at which point I’ll probably make a play as they fall back down to the breakout points for a retest from above.
Services – HAL still looks like the best play in services with a good breakout of the 13 level after earnings. There’s a possible trade there if price falls back toward 12.75, with a 12.25 stop. SLB still looks a little weak as it continues to consolidate after earnings took it down about 8%. There’s now a couple levels of supply overhead and it seems trapped between 14.90 and 15.80 for now. There’s also a level at 16.50 which would further cap any upside. NOV might be my favorite setup. There’s a strong level to play off of at 9 for a possible 9.50 breakout and move back toward 11. Worst case on the downside is probably 8.50, at which point I’d probably add and turn it into a longer term play since I’d buy 8.50 anyway. HP is also showing some strength, but that trade is probably too expensive since a 14 stop is probably needed on any position and the reward is probably capped short term around 17. If it drops back toward 14.50, I’ll probably give it a look.
Refiners – This has been the absolutely most difficult subsector to time right lately. I’ve been looking to get in long term positions in MPC, VLO and PSX, but every time it dips price shoots right back up before I get my full position. I took a small starter in PSX Thursday and sold it on the Friday open, but really missed an opportunity for more. I’m watching 48 in PSX, 39 in VLO and 27.75 in MPC to start scaling in longer term (1-3 month) plays.
Trading Plan for the Week – One curious pattern over the last few months has been selling in energy on Monday, Tuesday and Wednesday and strong buying on Thursday/Friday. The last few Thursdays have been great days to establish long positions for quick moves. Maybe that pattern continues this week. For me, I’m probably on the sideline or playing small if I do play this week. This choppy range between 29.75 and 31.25 has not been productive at all and the month has been really slow. I’m mostly willing to just watch from the sideline until the election is done. The primary plan for the week in energy is to simply wait for the next big dip to start a few longer term positions. My attention is going to be on trading the QQQ and IWM, and possibly a move in AAPL.
The only thing that might get me interested in energy would be a first 30 min Monday dip in the XLE back to the 29.50-29.75 area for a short term intraday bounce long. If price instead breaks to the upside, I’m not interested in chasing it and I’ll just watch energy for the week and wait for it to come back down and retest the upside range breakout point from above and then decide if I want a position long.
My two main trades for Monday are long QQQ for a bounce off of 280-281 with a $1-2 stop and a long in IWM off of 161.50 for a breakout of 164.
Other possible non-energy plays:
AAPL – If the QQQ does what I expect, then AAPL should be a great long play off of last week’s low around 114.50. Ideally, I’d like to see a gap down and reclaim of Friday’s low for a long entry. The target on that trade could be anywhere from 118 to 120.
KO – Boring, I know. I’m watching 50.50 for a long entry, tight 25 cent stop, target a breakout of 51.50 to blue sky. Same general trade on PEP off the 139 level.
Financials – JPM is hitting the top of the range, as are the smaller regional banks represented by the KRE. If the UUP and TLT both bounce, then banks could roll over for nice short plays. I’m not excited about any short in this market, but if the situation sets up perfectly, it’s worth a play. On the other side of this, I’m watching C on any big dip for a long play. Would like to see it reach 40-41 for a try.
Casinos – I’ve had these on the last few writeups and missed the long trade on Thursday with the huge gap up. I knew it was coming, I just didn’t want to take the risk of getting hit with a lockdown surprise. The better play was to enter on any lockdown overreaction. Keep an eye on these for a pullback.
Homebuilders – I had this as a short pick last week and it remains a short play. If the TLT is going to keep falling and pushing rates higher, homebuilders will eventually suffer. This latest pullback from all time highs might just be the beginning.
Chemicals – DD and DOW both approaching highs for breakouts. Could probably throw in HUN and LYB into this same trade setup. Worth a shot if the whole group shows enough demand to execute the breakout. If one or two lag, then I wouldn’t take the trade in any.
EMR – Long 70, stop 69, target 72 breakout.
BSX – Long off 37, 40 target, 36.50 stop.
CME – long off 163, target 171, stop 161.
OMC – Nice consolidation pattern with a spring and retest should lead to a test of the top of the range at 57 and a possible breakout. Enter as close to 51 as possible, use a 50 stop.
KSS – Nice setup for the breakout traders out there at the 24 level. If this one consolidates sideways around 24 for a few days and creates some structure to play safely off of, I might give it a try.
Again, sorry for rehashing much of last week’s writeup, but things just haven’t changed much with this tight consolidation range. It’s probably going to be another very boring rangebound week, but this is also where surprises can happen, so have a plan for the surprise.
I’m so looking forward to all the political crap being over. I can’t believe how people have let themselves be consumed by this shitshow. Time to move on people. If your guy wins, don’t gloat; if your guy loses, don’t complain. Just quietly move on and let’s get back to normal life without politics.