Weekly Energy Review, Market Outlook and Trading Plan for February 1-5
Jan 31, 2021 Trading Blog
Sorry for the lack of articles this month. Sometimes things move so fast in the market that all my trading is simply scalping and there isn’t much to write about. It’s probably going to be more of the same this week, but I thought I’d pop in and give some thoughts on the crazy action last week, as well as a quick look at the macro picture.
In my last post, I wrote that this market would likely give us a catalyst for the larger macro picture turn. The events of last week could very well be that catalyst. The media went absolutely nuts over the action in things like GME and AMC, which brought all eyes on the market. Everybody is looking to buy in now, and that’s probably the beginning of the end of this bull run. Things can go a little further as the frenzy reaches a climax, but the turn down is coming soon. Also, in my last post I wrote that shorting would emerge as a viable trading strategy this year and that’s looking like a good call. Almost all my trades last week were on the short side and it was one of my best weeks in a long time. There’s just so much dumb money out there and it’s creating pockets of mania where shorting is very profitable.
As for all the “traders” out there playing this insane speculation, all I can say is be careful. The Reddit/Robinhood crowd is gambling, they aren’t trading. Every trader in GME was just given that first hit of crack cocaine. For free. That’s what good dealers do. The market knows they will return again and again and again looking for that first hit high. And these Reddit traders will keep coming back, always looking for the next ‘short squeeze play’, yet they will lose each time until they give everything back and much, much more. The market just isn’t that easy. There was a mispricing or inefficiency and the crowd was lucky enough to find it. It’s a one time occurrence, not the basis of a trading career. The market will adjust and eliminate the short squeeze angle and then the gamblers will be left with nothing to play. But they will keep trying to repeat it and they will continue to lose until they give back everything.
While a few may have been very lucky in GME, it’s simply not trading, and it’s not repeatable. It’s a ONE TIME opportunity. The sad thing is that these gamblers will think what they have done is trading, not gambling. If I could give one piece of advice to all the people lucky enough to make some money in this market topping event it would be to take most of the money and put it in savings. If you really want to learn how to trade, then take 25% of your profits (after you’ve paid your taxes, of course) and really start studying. I can’t convey strongly enough that last week’s win was NOT trading, it was gambling. To be a trader, you need a standardized, and repeatable, plan. You also need money management rules. I guess my point is that anyone who won (or lost) last week really needs to realize that it was luck, not trading ability, that produced the gains. You can’t expect to make a career out of luck. Sorry for the rant, but this is something that I really wish I would have had someone tell me back in 2000. It would have saved me a lot of heartache, mental scars and damaged trading psychology that probably stunted my trading journey by several years.
Having said that, let’s take a look at the market and where things might go from here. The question on everyone’s mind now likely centers around where the top might be in this market. Do we make another run or was last week the catalyst for a turn and extended move down? My opinion is that there is so much cash still out there in the system that we probably get one more blowoff spike to the upside in the next couple weeks. After that, we’re probably headed down, and likely down a lot. Let’s go through each market one by one.
SPY – Last week was a fairly significant move down, going from ~386 to ~368. That’s about a 5% pullback, but the funny thing is that I don’t think anyone even noticed with all the other insanity going on. I’m looking for the SPY to test the 363-366 area, as there is a VWAP sitting there which is anchored from October 30. If that level doesn’t hold, then the market probably tests 353. If 363-366 holds early in the week, then there’s a good chance the SPY could take out the 386 high in the very near future. The volatility is increasing, which can often signal a larger turning point.
QQQ – Tech is probably headed for 300. The charts on all the FAANGs have topped out and could be rolling over. As you guys know, I’m not a big fan of canned chart formations, but the best descriptor that I can think of to convey what might be happening is a head and shoulders type formation. The market in many areas could have just put in (or is in the process of putting in) the ‘head’ on this theoretical pattern. This is especially true for energy, which I’ll cover. As for QQQ, there is a similar VWAP sitting around 303-306 which likely gets tested early this week. If it holds, then look for price to take out 330 on a blowoff spike. I think there’s more chance of seeing a spike in SPY or IWM though, so tech may lead things down and not be the best way to play a blowoff.
IWM – Small caps are the real worry in this market and my preferred short target. Last week’s action could have been a change of character move for this index. I’m looking for IWM to make a move down and test the 192-195 area soon. Ideally though, I’d really like to see this make one more move up to the 220-225 for a huge short play. The market speculation right now is in small caps and that’s where the blowoff could be the largest. IWM is one of my primary watches for next week for a short play on any blowoff move.
TLT – Rates are still in an uptrend, but things have stabilized over the last couple weeks in TLT. If the equity markets run into trouble, there’s a good chance TLT and GLD could turn upward and break out of the downward channels that started back in August. Keep an eye on the 155 level in TLT for clues.
GLD/GDX – The next retail target is supposedly going to happen in silver. I doubt it succeeds. The market has had too much time to get ahead of any possible short squeeze. I’d guess most positions were already stealthily covered, or hedged, last week in preparation for the obvious attack. There’s also a good chance that any attack on precious metals is going to run right into the teeth of a turn upward in the dollar, which would be a huge headwind. Any squeeze in silver or gold which occurred during a rising dollar would likely be met with larger holders dumping their positions to the speculators (bagholders). While I could be way wrong, I have no desire to chase any run in silver or gold, or the miners, right now. The only way I’d consider it would be if the dollar tumbled at the same time.
XLE/XOP – This is the area where the head and shoulders formation is the most obvious. There’s a clear left shoulder in XLE at 42 and head at 45. Price is quickly moving down to that 38 neckline. If it bounces, watch the price action at 42 for the formation of a right shoulder and subsequent move down. Also, just as SPY and QQQ have October 30 VWAPs near, so too does the XLE at 37-38. Watch the demand there for clues. The same pattern sets up in XOP with a left shoulder at 64 and head at 72. The neckline should be 58-59, with an October 30 VWAP also sitting right in that area. Watch the action at 59 this week. However, also watch the action at 64 early Monday morning. There could be a long trade there if demand shows up. I could see demand stepping in there if there’s one last blowoff spike in the sector. That last spike could take the XOP up near 78.
One last sector to keep an eye on is XRT. This was a trading goldmine last week. This thing has provided some of the best shorting opportunities that I’ve seen in the entire market in at least a year. I’m hoping there’s a Monday morning spike in the Reddit/RH crowd for one more run up in XRT for a HUGE short play. I’d like to see something near 100 to start scaling in on the short side, although I wouldn’t hesitate to put on some smaller trades in the 94-96 area. Give yourself enough wiggle room for some drawdown on your position sizing and be willing to sit for awhile to collect the reward.
Like I said earlier, sorry for the lack of articles, as well as the lack of Twitter posts. Given all the political idiots and now the Reddit/RH stock market ‘experts’, I just can’t do social media anymore. It has just turned into a cesspool of useless information, which is truly a shame because there’s a lot of guys I miss conversing with. I’ll be back once things settle down a bit, but for now focus on trading is more important. Good luck this week, keep an eye on the bigger picture and don’t get sucked in to the insanity.