Weekly Energy Equities Review, Market Outlook and Trading Plan for November 9-13
Nov 8, 2020 Trading Blog
It’s going to be a short writeup, just not enough hours in the weekend. I’m probably on the sideline this week, still just too much overall market uncertainty and energy looks horrible. The conspiracy theorist in the back of my head is also screaming again, and he says that there may be people who would like to punish the election winner by handing him a totally broken stock market to ruin his victory party. Even without crazy conspiracy theories, there’s still the election contest, new Covid waves and a very unpredictable Trump. Does this market rally hard Monday or is it a sell the news event? I have no idea. The only thing you can do is have a plan for both situations and follow it. My plan this week in energy is to get out of the way and hope this thing collapses for some great entry prices on longer term plays. I have no desire to daytrade this week in energy. Here’s a quick look at what I’m watching:
SPY – My view in these writeups over the last few months is that the SPY is headed to the 380-400 level. Price closed at 351 on Friday, so a 7-10% run on the election celebration and early Christmas rally isn’t out of the question. Once that target is hit, a whole new evaluation will have to be done, especially after we get the chance to hear how Biden wants to put his cabinet and advisors together. The market could have some interesting reactions to his new choices for important financial positions. I could see the SPY gapping to the 355-360 area Sunday night, but I have no desire to chase it. A market reset is coming, it’s all a matter of timing it right. Don’t get caught in a blowoff top, avoid FOMO.
QQQ – Same view on tech, it should take out the 300 level and be off and running. I have no idea where the top is in tech, but it could be higher than many think possible.
IWM – Small caps have been incredibly valuable in leading my energy decisions. As SPY and QQQ continued to run to new highs, small caps struggled to break above 164. That failure and rejection in small caps transferred right to energy with the XLE closing down 2%. I expect a big gap up on Monday for the IWM, but the real information will be the way it handles 164 again from above. If it breaks out and fails again, it’s likely coming down hard and that’s a signal that the XLE is headed for new lows.
UUP, GLD, USD/CAD, USO – I didn’t like the political uncertainty in the market last week, but that wasn’t the main thing that kept me out. The primary reason I stayed out was that the bigger picture macro suggested that oil and energy should be running big, yet it wasn’t. Something is holding energy back. The divergence was very strong and that’s too much of a red flag to ignore. Specifically, the dollar was incredibly weak and GLD was opposingly just as strong. The USD/CAD was so weak it broke below a major level at 1.300. Yet with all those positive tailwinds, energy did nothing and XLE finished the week below where it opened on Monday pre-election. Something is broken right now in energy, but I just don’t know what it is. Some would say it was just a reaction to the Biden win, but I really don’t think that’s the case. At least most of the positions that I sold for profits on Monday morning actually closed lower than where I sold them, which at least makes me feel better. If oil names can’t make a run on a weak dollar, then what’s going to happen when the dollar bounces soon? Is a dollar bounce going to be the ultimate cause of an energy selloff?
XLF – My writing time has been cut short because I’ve spent a lot of time this weekend researching the financial sector. My short term trading has been suffering because energy just doesn’t offer enough individual names with enough range to provide sufficient opportunity. I need another sector to fill in the gaps and provide daytrading opportunity. I’m going to be posting more on the financials over the next couple months, but I’ll try to keep it in check because you follow for energy, not banks. Energy and Financials have been moving similarly, so transitioning to adding them isn’t too hard. I’ll post financial sector trades when I see them.
Big Picture Energy
Last week was mostly a continuation of the consolidation which started back in late September. We had one dip on October 29, but most of the action over the last six weeks has remained between 29 and 31. How long does this continue? But more importantly, how does it end? It has been my opinion that it needs to end with an extreme volume washout and I still feel that’s the case. I was really hoping that a Biden win would cause a kneejerk reaction down and chase out the last sellers and cause a big dip for an entry, but so far that hasn’t happened. I’m really not sure what the catalyst for a selloff would be at this point. Without the final shift in shares to strong long term hands, this sector will just drift around on short term news with no real longer term trend.
Majors – Like I said to start today’s writeup, I’m only looking for longer term (1-3 month) buys this week, no short term trades. My favorite target is still XOM and it’s possible that there could be an opportunity for a 30-31 entry soon. 32.50 is the line in the sand this week, so see if that holds that early in the week. If it does, then there could be a bounce to 34.50. I also want CVX, but I need to see that one down around 65. Watch CVX 69 for clues. RDSA has moved too far up to get a good play, however I still like BP for a play if it moves back to 15.
E&P – The play in this group is COP. I’ll be starting a scale in position in the 28-28.50 area this week, with the hope that it completely breaks down for a 25-26 entry. Second choice is EOG and the 31-32 level. I have no plans to do any short term trading this week, but if I do, the primary play will be a PXD long off of 77. Great risk/reward setup on that one with an $8 reward on the risk of a buck or two. I still have HES on the radar under 36. One small cap that is getting back on the radar is MTDR. It has refused to drop much since the June 8 highs, but the last week or two have started to wear on it with a close Friday of 6.48. This is the kind of stock that can absolutely tank in a selloff and I’d have no problem loading up if it went under 5. I’m still not interested in any of the second tier names. The only other one I liked was DVN, but it jumped way out of the buy zone.
Services – My only energy holding to close the week was WTTR at an average price of 2.97. There was a great opportunity early in the week to build this one on a subpar Tuesday earnings report. If it drops back under 3, I’ll build the position even more. The big services names including SLB, HAL, NOV and HP just aren’t in very good trading positions from a risk/reward point of view. I’d need to see a pretty big fall to get interested in these. The only short term play that I can see here is an HP long off of 15 for a 16.25 breakout and run to 18. Could probably get away with a 50 cent stop. I still have LBRT on the radar for any move under 6 for a long play.
Natural Gas – I still have no interest in this group. UNG just refuses to show any dependable trend or longer term strength, so I’m out of this group.
Refiners – This is still my favorite group and the primary focus of my attention this week on a dip. MPC is by far the strongest of the group, but it really isn’t giving much of a long term play. I’d have to buy 31+ and there’s no concrete stop until 26-27. I could justify a short term play this week off of 31.25 to try and catch that 32.75 breakout, using a 30.75 stop. VLO and PSX offer much better long term setups. PSX is my favorite and I’m watching 43-44 to start in. On VLO, I’m watching 35-36. I’ll also be putting money in HFC under 17. This group is where I’ll have my largest energy bets and the largest portion of my overall account over the next 1-3 months.
Trading Plan for the Week – Pretty simple plan, just get out of the way and hope there’s a big washout this week and then swoop in for some longer term buys. I’m not going to be daytrading energy this week and I’ll probably be a little scarce on Twitter if there’s no selloff. If I miss a rally, then so be it. Sometimes you just have to be patient and get the deal you want. Avoid FOMO.
Technically, I’m watching the 28.57-28.77 area to see what kind of demand is available for the week. If that level breaks, then price is probably headed to the October lows for a test. The volume on that test will be important. I’d really like to see a high volume move on a test of the lows, which would then be followed by a low volume retest of the new lows for a resulting buy signal. On the upside, 30.28 is the spot to watch. If price can get above that, there might be another dollar of upside to 31.25. Also, be sure to check the XLE moves against the IWM moves. Notice any divergences between the two. It’s a much safer trade if both are confirming each other, along with the dollar.
Outside of energy, I have only a single play that I’m watching. That’s a short on the IWM. The plan there is to get short on any move above 170. If the market can breakout above 164 early in the week, this trade could setup by late Wednesday or early Thursday. I’ll be using a scale in approach in pieces, but I’ll definitely post them to Twitter when I start in.
Again, sorry for the short writeup this week, but luckily it’s one of those weeks where there really isn’t much to do but sit back and wait for your pitch. Also, I feel like I’m getting burned out on all the political Twitter, but I’ll pop in to post my trades if I make any next week. There’s no shame in minimizing risk and staying on the sideline if you can’t find any plays you like this week. There’s still much uncertainty out there, so keep the powder dry for the BIG opportunity. Good luck.