Oil Stock Trader

My Pre-Market Process for Energy Trading

Aug 7, 2022 Trading Blog

I’ve been updating my pre-market routine this week after returning from the trip and figured I’d share. It gives a fairly comprehensive view of everything I’m using to formulate my trades for the day. While this seems like a long list or process, it really isn’t. Most of the items only take a minute or two to cover and the more you work with them the easier they get to manage. The key here is to avoid getting bogged down in the details. Have you ever seen one of those artists who takes scrap clippings and arranges them into a collage portrait? The individual scraps really have no detail, but the larger picture that emerges when all those scraps are combined is very detailed and useful. That’s how I’d describe this pre-market routine. None of the individual pieces are overly important, but taken as a group they paint a useful picture. I do the following steps in the order they are listed:

Overnight Equity Markets – I use a 24 hour SPY, QQQ and IWM chart to examine the overnight price action. I just want to know the high and low and the general direction of the action, as well as the total change from the prior day’s 4pm EST close. If you don’t have a real time futures feed, you can set up a free portfolio on Investing.com. Delayed quotes are fine, all you are really looking for here is the general overnight action. In addition, I’ll check foreign markets including CAC, FTSE, DAX, NIKKEI, SHANGHAI and also many of the smaller ones. You can get a really quick overall picture of these markets at https://markets.businessinsider.com/indices (all links open in separate tabs). Again, don’t get too caught up in details here, just get a feel for whether stocks are negative or positive as trading swings back to the US markets.

Prior Day Equities Review – I use two things here, the market internals and the SPY sector map. You can find a good internals review here: https://www.wsj.com/market-data/stocks/marketsdiary. The SPY sector map is found here: https://finviz.com/map.ashx?t=sec. I use Google Chrome as my browser and it’s easy to set up an ordered list of all these websites for the routine. You can put them in any order you find useful, I’m just giving the order that works for me. I’m looking to see if the underlying numbers match up with the headline moves in the markets. For example, if the NYSE internals don’t align with and support the prior day’s SPY move, that’s a warning.

Today’s Important Economic Events – I’m looking for events that I want to avoid or trade off of. I use the ForexFactory Calendar which can be found here: https://www.forexfactory.com/calendar. I never want to be caught in a trade when some important economic number gets released. Do what you can to at least avoid the landmines that are pre-announced. I also look through general news articles for other things that might not be on the ForexFactory calendar. I want to include anything that can hurt me or potentially offer me a good trade opportunity. Don’t dig too deep on these, just hit the highlights.

Today’s Earnings Reports – I’m mostly looking for energy names on this list, but I’ll also pay attention to some of the megacap names like AAPL, TSLA or anything that could move the larger market or change the tone of trading sentiment for the day. When I find energy names on the list, I’ll spend a couple minutes researching for the whisper numbers on earnings and what the market is expecting. The actual earnings numbers are often misleading, the important thing is how they match up with what the market expects. Many times great earnings are met with a stock decline because the market was actually expecting more. Many sites have this information, but I find BarChart the most useful. You can find it here: https://www.barchart.com/stocks/earnings-dividends

Today’s Upgrades and Downgrades – Again, I’m looking for individual energy names, but I’m also paying attention to the megacap names that can move the overall market. I don’t put too much faith in these analyst actions, but I do want to know what everyone else is trading off of and how the analysts might be trying to persuade the public with these upgrades or downgrades. I like MarketWatch for this information, you can find it here: https://www.marketwatch.com/tools/upgrades-downgrades

Macro Market Big Picture and Correlations Review – I’m a huge fan of John Murphy and his Intermarket Technical Analysis books. I’ve used this method for over 20 years and I really don’t know how anyone trades without it. It’s a way to get a big picture view of the market, as well as measure the relative strength/weakness of each of the pieces. In trading, you have to align yourself with the larger market and I’ve found this to be the best method. The basic pieces of the puzzle are Equities, Bonds, Commodities and Currencies. You want to measure how these pieces are working in relation to each other. Which are strong, which are weak. Are they all moving in their normal relationships, if not then what is causing that dislocation? To do this I use SPY, QQQ and IWM for equities, as well as the major sector ETFs like XLF, XBI, etc. I use TLT, 2/10/30 year rates, and curve steepness for Bonds. I use GLD, XME, USO, XLB and some of the agricultural names for Commodities. I use UUP, DXY for the overall dollar and CAD, AUD for commodity currencies. BarChart offers a great service for free that let’s you build a portfolio of these items. It’s delayed quotes, but that’s fine for what we are trying to do here. All we want is a general picture, not details. For more details on how this process works, give the Murphy books a look.

Sentiment Backdrop – This one is a bit subjective. What I’m doing here is trying to figure out the sentiment of the overall market and whether the day is likely to be risk on or risk off. To do this, I scan the front pages of sites like the Wall Street Journal, Bloomberg, CNBC, etc. and try to pick out 5-6 of the major news stories of the day and how that affects sentiment. For example, the Pelosi trip to Taiwan, Ukraine info, Inflation info, etc. I’m basically just trying to get a feel for the mood of traders and whether they are going to be active today, and which way that activity is likely to go. It’s a very vague process and mostly just an attempt to match the sentiment to the other items I listed above. I want all of them to align in the same direction.

Energy Prices – Ok, so now we have created a top down, larger picture view with the above items and now it’s time to narrow the focus to energy. First stop, review the overnight price action for WTI, Brent, NatGas, Gasoline and Diesel. How much have they changed from yesterday’s 4pm EST close? You can find these in many places. Again, I like the BarChart futures numbers since this is just a general view of direction and amount of price change. You can also use spot prices if you want more detail.

Intermarket Correlation Review (Oil versus Macro Picture) – Once I have the energy prices, the next step is to compare those energy prices to the other parts of the Intermarket Macro big picture from above. The dollar, rates and equities have a big effect on energy prices (and other commodities). Are energy prices moving in relation to these larger market pieces like they normally do? If not, something is wrong. Are other commodities moving up while oil is moving down? How is the gold/oil correlation? Are energy prices and the dollar holding their normal relationship? How is USO moving in relation to SPY? There are so many clues out there if you just compare relationships and determine relative strength and weakness of each of the pieces. I see so many people who get tunnel vision and only focus on energy. They attempt to operate on the micro level without giving the macro level any thought at all, which is just crazy to me. You need the wind to your back. Align your energy trading with the larger market.

Oil versus Oil Equities Review – After reviewing whether the strength/weakness in energy prices is consistent with the larger market action, the next step is to narrow even further to the relationship between energy prices and energy equities. Are USO and XLE (or XOP if you use that one) moving together? If not, that’s a significant clue that something is wrong and it’s probably a good idea to start digging to figure out why. Are UNG and NatGas names moving together? Next step is to check BP and SHEL. Those two stocks, which have been trading for a few hours ahead of the US markets, offer the first real clue of how things could go for US names during the upcoming day. Are they moving with or against USO? If they are significantly green, it’s likely going to be a green day for US names. Compare those two names to XLE (and XOM, CVX) and see if they are trading together. The majors rarely diverge from each other. If not, research why and then monitor the pre-market action to see if they start balancing out, and in which direction.

Sector News and Individual Names – After reviewing the above relationships and correlations, now it’s time to get even more narrow and start reviewing sector news and individual names. I’ve got a list of oil related websites that I scan, but the best tool that I’ve found is FinViz.com.  That site allows you to create free portfolios and I’ve put together a few for energy names. The great thing is that you can create separate lists for E&P, Refiners, NatGas, etc. The site tracks performance, but more importantly it aggregates news for the names you have in each portfolio. It provides a really quick way to scan all the days headlines in the energy sector. Combine that with the earnings and upgrades/downgrades listed above and you have a fairly clear picture of what is going on in the sector. Also, it’s a great idea to check in on OPEC and EIA each day. There’s so much great information on the EIA.gov website. I also have a list of Twitter names that I check each day. Twitter is dangerous though because there is so much bad information out there, although it does provide a great measure on sentiment, both novice and expert. Be critical of the names you follow and trust on Twitter. As you scan these various websites, try to develop a feel for the sentiment of the day in energy, just like I listed above for the general market sentiment backdrop. Is it a risk on or risk off day in energy?

Energy Chart Updates – After I have a good handle on energy prices and how they are moving versus the bigger picture, as well as the sector/stock news and sentiment of the day, it’s time to update my energy charts. I do this for each of the Macro items (SPY, QQQ, IWM, TLT, UUP, GLD, USO, UNG), the sectors (XLE, XOP, XLF, JETS, XBI, XME), and the individual energy components (majors: XOM, CVX, BP, SHEL), (refiners: MPC, VLO, PSX), (E&P: COP, PXD, EOG, OXY, HES, DVN, APA), (natural gas: EQT, AR), (services: SLB, HAL, NOV, HP), and (midstream: WMB, KMI). These aren’t the only stocks I trade, but they are the only ones I chart consistently. On each chart I’m marking the prior day’s high(red), low(green), close(yellow dotted) and VWAP(purple), prior week’s high/low (light blue) and VWAP (gold), today’s open (dark blue dotted) and VWAP (purple curved). That’s my battlefield and price action is measured against those points. Those are also my trading locations. I rarely trade at locations that aren’t at one of those points because those where the larger players are usually focused and making their decisions. I’m simply looking to follow them. The market has memory at those points and the action isn’t as random.

Hypotheses and Trade Setups for the Day – Ok, almost done. Once I have all the information above and have my charts marked up, I’m creating a few possible price paths for the day in SPY, IWM and XLE (and XBI the last couple months). I’ll sometimes do this for other pieces that might offer clues for the day. These are usually the charts you see me post on Twitter. What do I think the market is going to do today? Which chart battlefield points will offer the most information? Which pieces of the macro will offer important clues? If the market takes a certain path, how (and where) am I going to trade that path? How do I expect the sector to react to certain news (i.e. Wednesday Inventory or FED announcements)? Basically, I want to take all the information gathered in the premarket routine to create a trading plan. I want to know what I’m looking for ahead of time. I want to know WHERE I’m going to be trading. I want to be able to judge the market’s direction and momentum against a consistent set of anchor points that I’m familiar with. I mostly scalp trade XLE intraday (<30 minutes), but I’m also looking at some longer term trades (hours) in individual components. I’m measuring these components against the XLE, as well as against each other, to gauge their relative strength/weakness and then using the marked chart points for entries. For example, is there a significantly weak service name or E&P name in the group? If so, and the sector and overall market are negative, then that’s my short target. That’s the plan.

And then the market opens, and most of the plan goes straight to hell LOL. Just kidding, kind of. Many days the market can throw a curveball, but with a solid plan you can account for this. If the market does something completely different than what you expect, that in itself is a hugely valuable piece of information. At that point, I can adjust on the fly using the points I have pre-marked on my charts to create trades for XLE. These curveball days rarely offer much for longer term trades though. Or, if I don’t like anything or if the market is just totally off the rails and away from any of my significant chart points, then I just sit it out. There’s absolutely no rule that says we have to trade. Our advantage of being retail nobodies is that we don’t have to trade if we don’t want to. We don’t have to answer to clients.

Also, throw some exercise in there somewhere and a good diet with plenty of water, as well as a few minutes of quiet time every couple hours to recharge the brain. Anyway, hope this helps explain how I go about formulating my sector view and trades. I know it seems like a lot, but it gets much easier and quicker the more you do it. As always, if you have any questions, feel free to DM. Good luck this week.

Energy Trading Plan for February 7-11 and some trading thoughts from the sportsbetting world

Feb 6, 2022 Trading Blog

I’m going to separate this week’s post into two sections. The first section is some thoughts on how I view trading and why I make some of the calls I do based on an analogy to sportsbetting. The second part of the post will be my technical thoughts on the energy sector and this week’s trading plan on the XLE short.

Before I got into trading around 1998, I was seriously into sportsbetting. Surprisingly, trading and sportsbetting are very similar. I had the same problems with my early sportsbetting as I did in my early days of trading. The biggest problem I had in sportsbetting was that I thought the endeavor was about being right. I thought it was about being smart enough to determine which team was going to win the game. Similarly, in trading I always thought it was about being right in predicting which way the market would go. Both of those approaches were absolutely wrong.

When I started betting, my method was to find the biggest mismatch on the board and bet that game. If the greatest pitcher in the world (usually Greg Maddux) was pitching against the worst team in the league, that was my bet. I was great at it, usually hitting that bet around 65-68% of the time. If you know anything about the sportsbetting world, the elite handicappers run around 58-60% correct on their picks. I was going to be rich. But after a few months of getting most of the game picks right, I hadn’t made a penny, in fact, I had less in my bankroll than I started with. How was this possible? How was I this good at picking winners, yet I was losing money?

I wasn’t making money because I had ignored (or simply didn’t know) that the game wasn’t about being right. The game was about risk and what you won when you were right versus what you lost when you were wrong. Simply put, the price of the bet. I was betting the most expensive games on the board, most of which had odds of about -300, which means I was betting $3 to win $1. I had to hit 75% of my bets just to break even. My 65-68% win rate looked like I was very good at what I was doing, but the bottom line math said I was a loser.

So what was the solution to my sportsbetting (and trading) problem? I had to stop worrying about being right. I had to be willing to bet on something that I was fully aware would probably lose more than it won. I had to let go of the ego and be willing to be wrong, A LOT. So, instead of betting on that favorite at -300, I searched for situations where the underdog wasn’t such an underdog. If I could find a situation where the underdog had at least a 30-35% chance of winning, I would make a nice profit at the -300 price. Yes, I was going to lose twice as many bets as I won, and that makes you look kind of stupid, but that was the profitable way to approach sportsbetting (and trading). You can’t be in it to be right, you have to be in it to make money. Set the ego aside and be willing to lose a lot in order to show a profit on the bottom line.

So how does this apply to trading? I see so many traders wanting to be right all the time, some because of pure ego and some because they just haven’t given the underlying math much thought. They jump on uptrends or downtrends very late because that’s what everyone else is betting on. These established trends are much like the -300 favorites in baseball. They do this much for the same reason that I would bet on huge favorites, because they think trading is about being right. But, they never give much thought to how much their bet/trade really costs. They don’t consider how much they win when they are right versus how much they lose when they are wrong. Simply put, they never consider the price of the bet/trade they are making.

The basis of any trade should should never simply be “which way do I predict the market will go?”. Much like the winner of the mismatched baseball game, that simple market direction question is usually very easy to answer correctly. However, you always have to go one step deeper. The basis of any trade should always be “how much will I win if the market goes as predicted and how much will I lose if it doesn’t?”. This line of thinking will often put you adverse to the current trend and the crowd. You have to be willing to be comfortable with that, just as I had to accept being wrong a lot by taking underdogs that would probably lose more times than they won. The only thing that matters is the bottom line profit. Don’t be in the game to be right, be in the game to make money.

So applying those thoughts to the current XLE situation, I see many simply thinking, “the trend in XLE is up, I’m going long!”. They want to be right. But they never stop for a second and think about how far that trend will go up AND if it doesn’t go up then how far will it go down? They are essentially betting the -300 favorite and they win for the most part, but they don’t profit over the long haul years. The smarter bettors/traders analyze the predicted direction of the trend, but they also analyze the potential reward and the potential loss. Many times the result of that analysis is to take the other side of the trade from what the crowd is taking. Simply put, sometimes the correct trade is to take the underdog, which will be wrong many times, because that’s where the superior risk/reward and resulting profits are.

In summary, trading isn’t about being right. Trading isn’t a place to feed your ego about how smart you think you are or how you look to others. Trading is about making profits. Many times, once the math is figured in, the more profitable trade is the one that has a higher chance of losing than it does winning. Many times the more profitable trade is the one that goes against the current trend and crowd. Sometimes you just have to bet against Greg Maddux.

This Week’s Trading Plan

As most of you know, I tried the XLE short at 61 and covered it at 60.70 for basically a breakeven scratch. I had estimated a couple months ago that there would be a peak around 60-62, and I waited patiently on that level, but I was wrong. I don’t think this incorrect trade was because of my view of the sector and its fundamentals.  The factor that I didn’t incorporate was one that didn’t really exist at the time I set that 60-62 short area. That factor was the geopolitical situation with Russia. If I had to select one driver of this market right now, this is it. Oil is getting pushed to very overextended levels due to anxiety over a possible conflict. It could keep getting pushed higher the longer this potential conflict exists. Actually, I hope it does get pushed higher based on this because once that situation is resolved, there’s going to be very little to hold this market at these lofty levels. When things fall from very extended levels, the downside momentum can be huge as everyone heads for the door.

Just like other conflicts such as the early 90’s Kuwait situation, there’s always a runup in oil price as the conflict comes to a head. It’s a buy the rumor situation. This time the buy the rumor situation just happens to be occurring in the later stages of an already existing market trend. But as we’ve seen with almost every other conflict, once that first shot is fired and resolution approaches, oil price crashes. This time it could crash from a very high level and produce an overreaction to the downside as everyone heads for the exit at the same time. I’d estimate over half the traders in oil right now are in it because of this geopolitical situation. The remainder are in it for an inflation play. When the geopolitical calms, will those traders stick with their oil bets, especially as rates are expected to rise to levels that will likely also cure the inflation problem?

In addition, can this economy withstand an oil price spike right now? Oil prices have often been a major factor in producing recession conditions. Will the government torpedo oil prices with a quick resolution of this Russia issue? Never waste a good crisis, right? There’s much at stake right now and the government will be forced to be on the opposite side of the oil bulls. Do you really want to fight government forces at these oil price levels?

As I’ve posted a few times recently on Twitter, I’m not saying the sector can’t go higher. But, going back to the baseball analogy above, how much profit is left in the market versus how much downside risk exists if the geopolitical situation resolves? Are traders mostly late to the party at this level? Is establishing a position after such a huge extended run (built atop an existing uptrend) based on geopolitical tensions really such a good play when you consider the downside risk? I don’t think so, which is why I started in short again last week.

My current short position in XLE is 68.67. I’m scaling in slowly on this one and have about 30% of what I want. I’d like to see XLE spike somewhere toward that 73-75 level, which is about another 10% up. There are a few things that I think could get it there. First, I think this government is fairly incompetent when it comes to diplomacy and resolving conflict. There’s the potential for them to really screw this whole Russia thing up badly and that could spike oil prices. Hate to see it, but that’s what I need for a great short play. The second factor is something I’ve been watching for awhile, IWM. I still think it has a chance of spiking upward, which would likely take XLE and KRE up with it. Maybe we even get the perfect storm of all of this happening in sync.

I think the primary question you have to ask on any long play up here (or short play) is how long can oil prices stay this high? How long before it becomes an economic issue? How long before the government gets on the other side of your long play and targets high oil prices? How long before high oil prices cure high oil prices? How long until the geopolitical situation resolves? How long until the next covid scare? So many possibilities that make a long play up here very risky and a short play much more rewarding.

Anyway, that’s just some thoughts on where I’m at right now with energy and the XLE play. I’m still trading other areas of the market, some with success (XME, GDX, KRE and ITB), some with not so much success (microcaps). I hope the sportsbetting analogy was helpful to understand why I so often take trades that appear to be against the crowd. I know many times my trades look like losing propositions, and many times they are, but it’s not the winning percentage that matters, it’s what you make when you win versus what you lose when you are wrong. Good luck this week and definitely protect those profits in this crazy energy market.

Energy Sector Trading Plan for January 24-28

Jan 22, 2022 Trading Blog

What a wild market. I think it’s finally starting to hit people that we are in the dangerous part of the larger cycle. But I’ll admit, energy is definitely being stubborn and trying to hang in there. Will it last? I’m not sure. I was looking for a 60-62 top, yet it managed to make it to the 65-66 level. There was more euphoria at this top than I expected. But I’m still trusting and being patient with my thesis and even though the top was the 65-66 area, the market did finally break down a little finishing the week just above that 60-62 area at 62.45. Where does it go from here, what clues are out there to help show the way, and what’s the best way to trade it?

It’s been a couple weeks since my last post, so it’s probably best to take a step back and start with the bigger picture and how it has changed. The starting point for me is smallcaps and IWM. This is the area that has been sending the loudest signal. I’ve been saying for weeks that it’s concerning that the index of 2000 of the best small domestic US businesses is rolling over. When small business starts declining, what does that say about the health of the US consumer? What does it say about the effect that higher actual and expected rates are having with regard to financing costs? If small businesses and the consumer are weakening, can oil be too far behind?

IWM had a technical breakdown this week. That 208-235 range that had been in place for the last year clearly failed. It’s a classic Wyckoff distribution pattern. Larger players ran it up in late 2020 and early 2021 and then distributed. That distribution lasted for almost nine months. In November, IWM attempted a breakout, but that ended up being a textbook upthrust pattern (and likely a place where larger players got very short). The distribution was further confirmed with the late December bounce which ended up putting the Wyckoff last point of supply (LPS) in place at 227. From there it’s been straight down, breaking through the lower boundary (ICE) with no resistance at all. The ultimate target on this breakdown is 170, which just happens to be a 50% retracement of this entire run that started at the covid lows in April 2020. It’s also the area of that 2018 IWM top and where IWM was when covid hit in early 2020, which of course created the 170 breakout point on that November 9, 2020 vaccine announcement. 170 is the perfect point of retest for the larger picture.

So now that we know the larger IWM picture, what happens in the shorter term? My best guess is that we soon see a bounce in IWM that takes it back up to test that 210-212 point where the range broke down. It’s a similar concept to a head and shoulders pattern where price breaks down below the neckline and then bounces back up to test the neckline from below. If it regains the range, then a continuation pattern is likely to evolve and we could see IWM make a run back at 225. But, if price tests from below and fails at that lower range boundary around 210-212, that’s where a lot of traders will start shorting this market and things could break down quickly toward 170. IWM is already down about 20% from the highs, so a move to 170 would make the entire correction about 30%, which could probably be considered an average and normal correction (and a healthy thing).

Now, if IWM collapses, that’s a strong signal that the rest of the market will follow in the next few weeks. I could see the SPY going 380-400 which would be a medium correction, which again is a fairly healthy thing. A correction gets rid of all the bubble talk and creates a more healthy uptrend. Don’t fear this pullback, embrace it. So if IWM and SPY pull back, what should we expect from oil and energy stocks? Can they continue to diverge and defy the overall market correction? Will they continue to lead the market or was their leading a very clear signal that this market is late in the game and possibly topping?

I posted a larger macro type rotation chart on Twitter earlier in the week. When energy, materials and staples lead, that’s often been a signal that the larger cycle may be peaking. Given last week’s SPY, QQQ and IWM action, that chart is looking fairly prescient. That chart post was met with criticism. The main complaint was that the chart hadn’t described the last couple cycles. And in fairness, it really hasn’t. But, taking a step back, you have to ask why it hasn’t described the last few market cycles. The reason is interest rates and inflation. The FED has entirely altered the traditional market cycle with their approach to QE and rates. They have had the option during the last few market tops to lower rates and pump money into the system. Do they have that choice this time? Inflation is much higher than the last few cycle tops. I don’t think the FED has the ammunition to alter the traditional macro cycle this time, therefore the posted chart could very well be accurate this go around. It would probably take a new crisis to justify more QE and lower rates at this point. We already used the initial covid scam and then the variant scam. Is it now time for the super megavariant scam? I’m just kidding, kind of. But, it’s going to take something large to get the FED to reverse course now and continue a loosening stance because inflation combined with already near zero rates has them boxed in.

One other thing that suggests that IWM and the overall market may be getting ready for a bounce in the next week or two is sentiment. Twitter is the ultimate sentiment tool. When the bears come crawling out of the woodwork and hyping up the ‘bear market’ that’s usually when things are stretched and the bounces happen. Twitter is at doomsday level right now. Everyone is claiming they are going to cash, claiming to sell the pops, and putting out crazy price targets for their five minutes of fame. There’s no way that many people being on one side can possibly be correct. Trading just isn’t that easy. I’ll fade that group every day. Will they be right one day? Possibly. But that hasn’t been the norm. Any time people start getting emotional like they are now, that’s usually a signal that the market may be getting unbalanced. However the market will seek balance again. Could this be an initiative move to a new balance area? Possibly. But right now, I’m betting we first see a responsive move back to existing balance in IWM before the real move appears.

As for the actual fundamentals of the oil market, just stop. It doesn’t matter. The recent equity sector move had nothing to do with oil fundamentals. And the next one won’t either. The move in the actual oil commodity market itself likely had nothing to do with actual supply/demand fundamentals, so why should the equities? This sector is getting pushed around as a result of what’s happening in the larger market picture. If you are trading (not investing) on fundamentals, you are constantly going to be a step behind. If you are a trader and you are quoting fundamentals, you are simply looking for a confirmation bias of your existing market position. Let it go.

Trading Plan for the Week:

So having gone through the larger market cycle picture and the possibility that this market may be at a top, where does that leave XLE and how do we trade it? The thesis of my XLE short has been based on IWM rolling over and taking the larger market with it, and it’s been correct for the most part. But, I also expect that IWM will bounce soon to test that 210-212 area. So the question now is this: Do I hold the XLE short position through that IWM bounce OR do I scratch the XLE short position near breakeven, let the IWM bounce happen and gauge the strength of that 210-212 test and then re-short XLE at a higher level? Honestly, XLE has shown great strength, and more than I expected during this IWM pullback, so what happens to XLE when IWM starts showing strength too? I think there may be enough residual strength in XLE to bounce it back to 65-67 for a double top on any IWM bounce back toward 210-212. It’s a great place to put the short on again, because let’s admit it, the 61 entry on the first half of the short position wasn’t that great.

I’m naturally a short term trader at heart, so I’m more than likely going to cover this XLE 1/2 position short on the dip early in the week if IWM shows signs of bouncing. However, if IWM continues to slide early in the week, then I’ll continue to hold the short play, looking for that IWM bounce point to possibly cover, hopefully at a profit. The next move will then be to put the XLE short trade back on at a higher level. I have absolutely zero desire to get long XLE anywhere above 55 right now. This in and out strategy on the XLE short is an extremely risky one and I wouldn’t do it if my initial entry had been better, say 64-65 or so. If you are a longer term player and not much of a short term trader, then just holding the short play through the IWM bounce is probably the safe way to go. You lose some ability to avoid a possible loss if IWM bounces and starts a new uptrend taking XLE with it, but you also take the chance of giving up the XLE short position and then watching the bottom fall out, thereby missing the reward of the short trade altogether. It’s a sticky situation. Given my smallish position, I’m willing to risk missing the trade for a much better entry price that I can size up confidently.

I’ve seen some traders hyping earnings season as a reason to get long XLE and it’s components. I don’t think this is the way to go. I think good earnings have already been priced in with this XLE run from 52 to 66. Expecting pops in these names on news that is mostly already known isn’t a good strategy. Look at what happened to SLB on Friday, excellent earnings and finished the day down 2%. As I’ve stated several times over the last six months, fundamentals just don’t matter, the macro picture and forces are in total control. I’m sure some will make the excuse that SLB would have gone up on earnings but it just got caught up in the overall market on Friday, but that’s my entire point. It doesn’t matter how good your earnings are if the larger market is positioned against you like it is right now.

One other point about market corrections, when they do happen and traders get themselves in tight spots with margin or overleverage, often times it’s the winners that get sold to cover those losses. And right now, energy is the winning sector. Don’t be surprised if this dynamic contributes to a class of stocks with good earnings getting sold off. It isn’t individual forces that matter right now, it’s the larger picture. This is especially true for the oil commodity itself. There’s some games being played there currently, mostly because of the current geopolitical situation. It’s an area that traders are pushing easily, almost to the point of a squeeze and euphoria. Who’s going to short oil with this geopolitical environment? Sometimes when every other sector of the market is bad, good traders will find an area and congregate there which makes that area stronger than it would normally be. That’s what I think we’re seeing in USO right now. Throw in a sketchy geopolitical environment and it makes oil really attractive for short term traders. But when the market settles and the geopolitical storm passes, those short term traders can quickly decide to move on leaving pure destruction in their wake.

We’ve also got a FED meeting this week. That’s another reason I may cover this XLE short and try to put it back on higher. Given the market decline since the start of the year, does anyone really think the FED is going to cause further damage? If anything, they may go out of their way to calm the market and throw them a bone to get things moving back up again. If that happens, being short oil (or other commodities) is NOT the place you want to be. I could see a positive FED result leading to an easy test of the highs for XLE. Again, I think I’m right in my larger picture thesis, but my initial play in the shorter term just hasn’t been that accurate, I was too early. I’m leaning toward exiting and giving the play another try at a higher level. I can accept missing the move, because with a position of 61 I don’t think there’s that much profit that I’d be giving up if I miss it. I also think there would be ample opportunity to at least put the trade back on 59-60 if I see that exiting was the wrong choice. That’s sacrificing a dollar or so, which is probably well worth the gain of putting the trade back on 5-6+ dollars higher. Trading is a dynamic game, things change, so you have to change your plans with it.

If things start strong on Monday and IWM, SPY and XLE start moving straight up, then I’ll just hold the short play. I’ve still got half to put on, so putting that half on up in the 66-67 area takes the average trade price to the 64 area, which I can live with. And if XLE just keeps going up to the 69-70, then I don’t have to add anything if I don’t want to. The greatest trading plans give you multiple options to move with the market without being locked in.

I’m not really watching any individual energy names right now. My shorter term trading focus has been on trading some other areas of the market, mainly smaller cap names. With energy, I’m content to try and capture the overall sector trend with XLE. I’ll get interested in individual names again when the time comes to take the XLE short play off, hopefully at much lower levels. I have no desire to get caught in single stock risk right now in energy.

One other energy point, I really wish I had given the XOP vs XLE more thought when I put on the initial short trade plan. I should have realized that XOP correlated more closely with IWM than XLE does. However, I had been trading XLE for months and had been ignoring XOP. I simply had a better feel for XLE and stuck with it. XOP never got the breakout and put in an almost perfect double top. If I exit the XLE short, I may give some serious thought to putting a small portion of the money in a short XOP play, in addition to XLE. It’s got a very clear level around 112-113 to play off of, just as XLE has a clear level around 65-66. The key now though is that XLE is clearly the more overextended of the two and therefore the better short risk/reward. Also, if this IWM breakdown leads to a SPY breakdown, then XLE is the better correlated approach to tracking the SPY pullback. Just some thoughts for you guys who trade XOP instead of XLE.

Outside of energy, I’ve been finding some success in very small cap IPO plays. With this larger market pullback, especially in IWM small/micro caps, there’s some incredible swing type trades out there right now in the 1-6 week range. I’ve still got UNCY, BJDX and DRMA. Others on the watchlist are getting close to buy points: BEAT, CING, NRSN, NEXI, INKT, RCRT, VQS, SQL, TIVC, MRAI, HILS, BLBX, NXGL, CYN, CGTX, FEMY, GANX, LUCD, INAB, MIRO. This type of trading is very risky, but it’s basically where I learned how to trade many years ago. Sometimes the weirdest areas can provide the best opportunities. I’ve never been too proud to drop down and slum in the microcaps when the opportunity presents itself LOL.

I’m also seeing a lot of traders hyping GLD and GDX. I’m just not sure about that one. GDX is one of my favorite things to trade, but there’s just no existing trend there and no definable future trend outlook there right now. If the FED follows through with their higher rate threats, then that should strengthen the dollar and put a cap on GLD (as well as oil, copper, etc). Gold just seems completely random right now and there’s really no decent risk/reward. At some point, interest rates (or at least the threat of such) will curb inflation. I don’t know how far we are from that point, but if we reach it, that puts a top in commodities and banks since inflation and rate expectations to cure that inflation seems to be the source of their uptrends.

So that’s my larger market view and where the XLE short play stands now. Things could change quickly. I’ve been scarce on Twitter lately and will probably try to avoid it for awhile. I go through this love/hate relationship with Twitter. You guys can always DM me if you have questions or comments. Good luck this week and protect yourselves. Now it’s time for some wine, music and a warm fire.

Weekly Energy Sector Review and Trading Plan for December 6-10

Dec 5, 2021 Trading Blog

In my last post on November 21, I debated whether the XLE drop down to 54.50 was a buying opportunity or a trap. It was my opinion that it was likely going to be a trap. Well, two weeks have gone by and price is still sitting right around 54.50. It hasn’t turned out to be the trap I expected, but it really hasn’t been much of a buyable dip either. Things are just stuck in a range, but I think there might be some resolution coming this week.

I’m still leaning bearish, but I have to admit that I’ve been impressed with the resilience that XLE has shown with all the bad news that’s been thrown at the market over the last two weeks. The omicron covid news hit full force out after my article from two weeks ago, and if you would have told me XLE would still be above 54.50 after that news, I’d say that’s definitely some strength. If I was around 85% bearish back then, I’d say I’m somewhere around 70% bearish now. Still not bullish, but definitely not as doom and gloom as I was two weeks ago. There are some buyers under there. Who knows how long they last, but they are there.

Not going to lie though, this has been a difficult two weeks of trading in energy. I’ve been pinned to the sideline for most of it. There’s absolutely no way to swing anything overnight with these random 2% gaps. It makes risk control almost impossible. I tried the XLE short twice and scratched them both breakeven. All I’ve been able to do is some intraday scalps. Out of a five point fall from 59.50 to 54.50, I’ve caught maybe 1.5 points of that move. Not great, especially when I had the bearish thesis all set up. Many times making directional calls is easy on Twitter, but once you figure in the risk control and stops, things become untradeable.

So where does XLE go now? I trade a lot of other things besides energy, however I don’t post much of that stuff because readers aren’t interested in those, they are reading for energy. But, from what I can see from the other sectors of the market, I think there may be one big dip coming and then a reversal upward into the end of the year. That big dip could come early this week. I’ve been looking short, but if you aren’t already short, I don’t think this is the place to start a short play. I’m sure many will try to short the coming breakdown, but I get the feeling they may end up trapped and squeezed into the holidays. I know this probably sounds crazy coming from the guy who is bearish on energy, but the next decent play is likely going to be to the long side this week. I’m not talking long term though, I’m just looking at the next 2-3 weeks.

For me, the key to this market is IWM. Smallcaps sat in that 210-235 area for about nine months, took a shot at breaking out of the top of that range and failed. Price has now fallen back into the range and seems to want to test the lower boundary of that previous nine month range. I get the feeling that price is going to make a run at the 207-210 area soon and then we’ll see what kind of demand is there. This pattern likely ends up being very similar to a head and shoulders type situation where the bearish pattern is perfect, price breaks below the neckline and then buyers rush in. What should have been a perfect reversal pattern quickly turns into a bullish continuation pattern. That’s my guess anyway. If IWM finds demand around 207-210, then it likely makes a quick move back toward the top of the range (or at least the middle) over then next couple weeks. Who knows where it goes after that, but finding demand underneath that nine month range strongly suggests some short term bullishness.

That’s the best case scenario. The worst case would be if IWM takes a look at that 207-210 area and totally fails there finding absolutely no demand. If that happens, that opens up 170 fairly quickly. I don’t think this happens. There should be enough demand underneath to at least stop price above 200, at which point it probably bounces back up and tests 210 from below. If price fails to get back into the range at 210, then that probably starts the waterfall to 170. There should be plenty of time to get out of longs if this happens. I see many calling for an absolute crash soon, but I just don’t see it, there’s still way too much money floating around out there.

One specific area to watch this week is XBI. If IWM is an important clue for energy direction, then biotechs are important because they make up a large portion of IWM. I posted on Friday to watch the 102-107 area for major support in XBI. I expect that it will test that level early in the week and if it holds that could help produce a nice bounce in IWM. I’ll be looking for some solid structure to get long XBI within that area of demand.

The other area to watch is the smaller regional banks, KRE (as well as XLF). Banks, smallcaps and energy have been benefitting from the inflation play. These smaller financials also make up a large portion of the IWM. One thing to notice is that both KRE and XLE are very close to testing their 200 day moving averages. They should both test at the same time, and I think that test might come early this week on a panic dip in the market. If KRE holds, then XLE should probably also hold. Use all the clues you can get.

Now, to take a step back up the macro ladder, the TLT and UUP are a concern. The TLT broke that 152-153 level to the upside on Friday, which suggests that banks should probably roll over here. Given the banks/energy/smallcaps correlation, that’s bad news for energy and smallcaps. I’m not sure I trust the move in bonds though, seems like much of this move was caused by the new covid variant stuff, which I think is totally wrong and off base. The government is doing all they can to convince people this latest variant is dangerous, but all the evidence just doesn’t back that up. When the market does finally wake up to the fact that the latest variant is a complete dilution of covid, I think the market reverses back to the upside, with bonds falling quickly, especially if the inflation/taper issue comes into focus again. I could see TLT being a short play in the 156-157 area soon.

UUP is still a problem, but it seems like it might have topped out around the 26 level. The strength in the dollar usually isn’t a good thing for oil, gold and other commodities. I use the USD/CAD pair for dollar strength related more to oil and it is pressed right up against that 1.29 area which has been resistance throughout all of 2021. Even if it does break to the upside, there’s an even bigger level sitting just overhead at 1.30-1.31. The dollar strength might be running into some headwinds soon and if it tops out, that could provide some support for oil prices.

Given the strength in the UUP, gold and the miners have been crushed over the last few weeks. I pointed out in the last blog post that GDX was probably maxed out at 35 (200 ma) and that seems to be correct. It closed Friday at 30.79. The 31 area in GDX has been major support, but I think that support is slowly weakening the more times it’s tested. I liked the long GDX at 31 last time it came down here, but I’m not interested in trying that trade this time. I think GDX could make a run down and test the late September low around 28.83. I’d definitely be interested in looking for a trade down at that level, but it really depends on where the dollar tops out on this run. If TLT reverses back down (rates up), that could spike the dollar upward and GLD/GDX down, so it’s a tricky trade entry. One other thing to watch on gold is the AUD/USD pair. It’s coming right into support around .6900, so see if that holds for a nice bounce in the Australian dollar (and GLD).

Industrial metals (XME) is also another possible trade setup if the dollar tops out and inflation hits the radar again. There’s a great long setup in the 39 area which has been building since March. The only negative is that XME has already broken down below the 200 day moving average, but a short term bounce back up to the 50 day around 44 isn’t out of the question if this market has a Christmas rally. The trade can easily use about a dollar stop for a $4-$5 gain.

One other sector to watch is the homebuilders (ITB). It really has nothing to do with energy, but it could present a nice short play. With bonds ripping upward, that has put downward pressure on rates, which is definitely a help when buying a house. If that TLT trend (and specifically the 10 Year) tops out and moves down quickly, that could put a top in ITB. Much like the XME play, it’s another trade where you can get away with a fairly small stop for a sizable gain.

Trading Plan for the Week – My ideal situation for Monday would be a sizable gap down in IWM and the overall market for a long play. If IWM tests that 207-210 area and holds, I want to get long XLE. I’m not playing any individual energy names, just trying to catch the overall sector move with XLE. The area to focus on in the XLE trade is 54.00-54.50. If I can structure the trade around that area, then the trade can probably be sized up with some confidence.

I’ve gotten away from XOP over the last few months, but there’s also some good opportunity there. One thing to notice is that XOP went right to the 50% retracement of that run which started in August down at 72. That provides a good point to play off of early next week. It also has the 200 day ma just under that pullback point for some added support.

I’ve also noticed that XOM and CVX have totally flipped roles. For a long time, XOM was stronger than CVX, but that has changed. On this recent pullback, XOM went right to the 200 day moving average (about -11% drop), however CVX hardly budged at all dropping just 5% from highs and getting nowhere near the 200 day ma. If I had to choose one to play on the long side, CVX is the choice, especially with nice tight stop around 112.

The only other name that sets up well is one I posted on last week, NOV. It got the dip under 11.80 on Thursday and there was big demand waiting under there. I didn’t take the trade, I was biased short pretty much all week. NOV closed Friday at 11.86 and I think there’s probably a good setup there if energy makes a run. Any entry under 12 would probably work with a stop safely under that 11.45 low from Thursday. You could probably even get away with a stop just under the Wednesday and Friday lows around 11.70 if you want to size up.

The only other names that are reasonably attractive on the long side would be PSX in the 65-67 area, LNG 101-102 area and CTRA in the 19.50-20.00 area. All three of those are very tight stops with good potential for reward.

Outside of energy I’ve got a few names on the microcap watchlist. BFRI was a nice winner, but UNCY was not. I’ve still got UNCY, but not happy about it. I’ve also got positions in VECT (2.87), RCRT (2.86), BJDX (2.58) and VQS (2.29). The BJDX play is my largest and favorite play. The quiet period on that IPO doesn’t end until December 20, but once there’s news I expect that it could easily move similar to BFRI and reach the 5-7 range. Very risky low float, so definitely size accordingly. Some other names on the watchlist, but no position yet: DRMA, CELZ, SQL, VIRI, VRAR, PPTA, TIVC, STRN and MCLD.

In summary, I’m bearish longer term, but looking for a long play short term into Christmas. I’ll be watching the action Monday looking for a nice panic capitulation type flush and if I get it, I’ll be looking for some solid structure to get long XLE. I’m really not interested in trying anything short overnight, only intraday scalps on that side if applicable. If the market opens up big Monday, I’m not chasing energy and will probably move to trading XBI or IWM.

It could be a very volatile week, so good luck out there and be safe.

Weekly Energy Review: Buyable Dip or Deadly Trap?

Nov 21, 2021 Trading Blog

I’ve posted my bearish thoughts over the last couple of weeks and the energy sector has finally started to price in some of those items. XLE has dropped from the double top at 59.41 all the way down to close Friday at 54.83 on large volume of 46 million shares. That’s about an 8% drop. My initial target on the short position downside continues to be 53. If XLE makes a move toward that 53 target, that would be about an 11% pullback, at which point the question becomes: Is this is a buyable dip or a deadly trap?

It’s my opinion that any bounce off this 53-54.83 area is a trap. If XLE does find support somewhere between Friday’s close and 53, there could be a bounce back toward 57, but I think supply just pours in and overwhelms the few remaining buyers there, which should send price right back down to the early week lows, and possibly lower. If 53 doesn’t hold, there is a small level around 50, but the next major level doesn’t appear until 46-47. If price reaches the 47 level, that would be about a 20% pullback off the highs, which I’d probably cover the short play completely and get long in a big way.

There’s a lot of technical stuff going on in the XLE chart. In the short term, price made this latest blowoff type move starting around October 1 at 47. Price moved to 59.41 fairly quickly where it put in an almost perfect double top at 59.41 on October 26 and 59.40 nine trading days later on November 8. Patterns don’t get much more obvious and perfect than that. If the bottom of the pattern is 47 and the top is 59.41, a 50% retracement would put price right at 53, which is my initial downside target. I don’t know what happens at 53, but whatever does happen there will tell a lot about the strength of the energy sector. If price cuts through 53 easily, I’d guess that the next stop is 50. If demand shows up at 53 and price bounces strongly, I’d guess it might bounce back to 57 where another evaluation of strength/weakness would have to be made. That’s really too far into the future to make any reasonable estimation.

In the longer term technical picture, this inflation trade of smallcaps, banks and energy started back in early November 2020. XLE moved from 27 to 54.91, which is nearly 100%+. The 38.1% Fibonacci retracement level on that move would put price at 47, which is a major demand level on the chart. That’s where large demand should show and I think that’s probably the low for this current pullback. A 50% retracement of this entire move off the November 2020 vaccine re-opening lows would put this pullback at 43. I have no idea what happens at 47 or 43, that’s just too far in the future, but those are the points to watch.

While the bears have certainly taken control of the sector, I still think it’s just a bit early to take any victory lap on the short play. This market is crazy right now and I wouldn’t be surprised to see the bulls make another stand. Much of that stand will have to do with the overall market and SPY/QQQ. It feels like the overall market is in the process of making a blowoff top with more upside possible on a buying climax. But one thing to notice about XLE is that these very high volume down days like Friday have been followed by bounces over the last 6 months. May 11, June 18, July 19, August 19 and October 6 all had the highest volume days in the last six months and every time that volume put in a bottom and price bounced off those days. It will be interesting to see if this pattern of bounces off of high volume down days continues on Monday or if the pattern changes with price following through to the downside with no bounce. If that pattern of bounces after high volume selling no longer holds, that would definitely be a signal that underlying support may no longer be there in the bigger picture.

I’ve posted my bearish thesis, and this week has more negatives to add to that long list. There have been new lockdowns in some parts of the world and that’s not going to help the sentiment for oil. If these lockdowns spread, that’s only going to cause sentiment to get worse. Also, the US hasn’t even hit cold and flu (and Covid) season yet. I think when the winter cold and flu season hits, government officials are going to overreact again and start preaching more gloom and doom, whether that be more lockdowns, travel restrictions, mandates or business closures. The oil market priced in that Covid was basically over, but I don’t think it is. While the actual health threat probably isn’t a big deal, the optics of the government’s overreaction to it will be. And what better way to keep oil demand and prices down than to initiate more lockdowns or travel restrictions? This isn’t about health anymore, it’s about the economy, inflation and a possible resulting recession which the US can’t afford.

Energy investors have put themselves in a position where they are playing adverse to the larger government, and that’s just never been a good bet. The Biden administration has recently shown that it has no clue on oil and how to control it. They will continue to grasp at straws on how to attack prices. I think this recent price action in XLE is a signal that institutions now realize that and really don’t want to put money at risk against the whims of government action. I’m not saying that what the government is doing now is going to work in the long run, because it isn’t, but they can definitely cause a lot of oil price (and equity) destruction over the next six months.  If you are a longer term investor (I’m not) then this pullback toward 47 might be a gift. But the risk on that longer term investment is that all this interference causes oil prices to spike in late 2022-23, which pushes the US economy over the edge into a recession, as energy is a huge portion of the inflation problem.

All these factors including increasing dividends into a higher interest rate environment, increasing buybacks at these peak prices, eliminating hedges with oil at $85, limited ability to plan due to OPEC and US government action, coordinated SPR releases, a strengthening dollar, increasing capex near the oil price cycle top, more covid doom to come and increasing inflation just make this sector unattractive. That doesn’t even take into account an overall market correction, a forced FED tightening or the beginning of a recession as inflation gets out of control. And then there are the black swans that we don’t even know about. Our economy is likely one swan away from collapsing because of the recent actions taken during the covid pandemic. That’s just so much to fight against. At this point, I can’t really think of any short term positives. The technical picture is even worse. Are institutions really going to push all their chips in after a 100% sector run over the last year? Or did they just run the price up over the last month and dump all over retail who is now left holding the bag?

Overall Market Technical Thoughts:

SPY – 470 is the obvious level to watch. It’s setting up a little like that double top that formed in XLE. I’ve been waiting for a buying climax in SPY and QQQ and this chart is possibly setting up for that play. If price breaks 470, that could set off a Christmas rally run toward 500, where the buying climax likely puts in a top that lasts for awhile. There’s a good chance that this Christmas rally might be the last gasp for this bull run. As the calendar changes to 2022, things could change quickly as many players reset their portfolios and risk. Watch any break below 462, that would also suggest the top might be in for the short term.

IWM – This is the real concern for energy players. The breakout from the nearly year long range between 210 and 233 is trying to fail. 234.53 was the point to watch and price closed below it on Friday at 232.92. Look for another test of 234.53. If it fails there again, price could make a run well back into that 210-233 range. If price does get back into that range, there’s even the danger that it could head right for the lower boundary at 210. If 210 breaks and builds under, this market is in serious trouble. On the brighter side though, if price does test that 210-233 range, and price holds, it could set up a nice leg up toward 250-260. It really depends on the action of this retest of the recent IWM breakout.

UUP, EURO, CAD – The dollar is strengthening and that’s not a good thing for the USO. The USD/CAD pair has run from 1.2300 to 1.2650 over the last couple weeks and could run toward the peak of 1.29 that has been tested a few times during 2021. If the USD/CAD somehow breaks above that 1.29 level, that likely indicates that oil is headed for a big collapse. I posted a EUR/USD chart a couple weeks ago showing the head and shoulders breakdown and that pattern continues to develop with the pair closing Friday at its lowest point since summer of 2020, which just happens to be when the oil run started. The strengthening dollar itself isn’t really the cause, it simply reflects the underlying conditions that are causing the headwinds for oil. If the dollar continues to strengthen, that indicates that the headwinds for oil continue to get stronger.

GLD/GDX – I posted the GDX chart a couple weeks ago for a long play at 31 and that play did happen (I missed it), but it looks like things have stalled out for gold. It was actually surprising to me that gold did as well as it did in a rising dollar environment, but it looks like reality may now be setting in as GLD (and GDX) took a sizable dive on Friday. See if this continues this week. I’ll still be watching the 31 level this week, but honestly I’m not sure I want any part of a long play there if it comes down again. A top has clearly been put in at 35 and if inflation continues and the FED is forced to tighten and the dollar continues to climb, the GDX could break well below 31 for a much better play near those late September lows around 28-29. I think there could be a long play there, but it’s going to take some patience.

Trading Plan for the Week:  So enough gloom and doom bearishness, I know you guys are probably getting sick of it LOL. I’ve built my short position and this week I’ll get some good road signs to gauge the strength of that play. The first point of interest will be Friday’s low. I’m expecting a gap down on the open Monday. If price gaps down and then reclaims Friday’s low, that’s probably a sign that we are in for an early week bounce back up toward 57. I’ll hold the short position through that bounce and likely add to it as price makes a decision at 57. If price does test 57 and fails with supply pouring in, then I’ll add and look for price to come back and test the early week lows for more downside.

As a bear, what I’d really like to see on Monday is a gap up and failure. If XLE fails after an early week run up, that probably means that the high for the week is in and price then explores the low as we move into Wednesday and then early the following week. If price makes a run at 53, I’ll likely start taking some of the short play off and lock in some profits and then wait for a bounce to once again build the short position back to full size. If a trend develops, that becomes a pretty good environment to trade around a core position.

One danger this week though is that it’s a short Thanksgiving week. The market may be thin with many taking off and the moves could be exaggerated. It’s a situation where you definitely have to keep some tight stops if you are doing any intraday trading, because things can get out of hand really quickly. I’m content to hold the short swing position for now and probably won’t do much scalping this week.

One other warning, please take all these energy gurus on Twitter with a grain of salt. They are leading so many new energy traders to a complete slaughter. My favorite Canadian guru is still calling the XLE a “generational buying opportunity” after a 100% run to 59.41. These guys talk their book and they need a sucker to sell to and dump on at these peak prices. Don’t be that guy. I’m seeing the same old “but the fundamentals haven’t changed” posts that I saw last time the XLE topped out around 56 this summer. The fundamentals DO NOT MATTER in this current environment, especially in the short term. Please be careful with these kinds of people on Twitter. Do your own research, trust your own plan and opinion. Don’t get caught in the herd. At the very least, find someone with an opposite opinion and really ask yourself which person is correct. I see so many people get destroyed because of a confirmation bias. They only select the information that supports their long position and they ignore everything else. Many times that causes them to ignore the most important information. This game is brutal, protect yourself out there.

Non-energy Trading Ideas – With the energy market stuck in that 57-59.41 range for a few weeks, I stepped back into some old trading methods in the microcap market. The action there is incredible, but it also indicates that speculation in this market is reaching dangerous levels. But, sometimes the situation is so attractive that you have to go where the money is. Keep an eye on IWM and if it starts back upward after testing the range underneath, these microcaps could explode into Christmas.  I’ve got UNCY, RCRT and BFRI as lotto plays right now. DRCR, PPTA and CLIR were all nice gainers over the last few weeks. My favorite smallcap watch right now is WTTR. I’ve played this one for a few nice runs this year and it may be setting up for another opportunity in the 4-5 range.

I’ve got a few other microcaps on the watchlist that all fall under a consistent theme. These are very specific types of plays and very risky, so position sizing is of priority importance. Microcap list:  BJDX, KTTA, MRAI, SQL, VQS, CNTX, EZFL, PTIX, BRTX and BRDS.

That’s all I got for this week, strictly watching the short XLE play on a short holiday week in possibly thin action. Headed out for a couple bottles of wine today and some live music. Only thing missing is the warm sunshine. Sitting inside just isn’t the same, but I’ll make do. Good luck and have a great week.

Next Week’s Energy Trade Plan and Few More Bearish Thoughts on the Energy Sector

Nov 7, 2021 Trading Blog

Posting a quick look today at last week’s energy trade plan and what went wrong, or more specifically what never really happened at all. The plan never got an entry as XLE opened the week at 58.04 and closed the week at 58.23. The overall move for the week suggested accumulation, but I’m still not ready to let go of this short trade plan. There’s a level developing at 58.50 which should give a very clear signal this week, just have to wait for the market to tell me which way it wants to go.

I posted a fairly bearish longer term view last week, and I’ve got a couple more things to add to that bearish list this week. One thing about oil companies is that while they may know their business well (much like many fundamentals gurus) they are terrible traders. They are now deciding to make huge buybacks after the XLE has already run +150%, with many individual stocks running much, much more. They really could have timed buybacks better, but I guess they don’t mind paying top dollar now. Are they buying the top? Probably not the exact top, but they may end up making these buybacks at prices they will regret in 18-24 months and that’s not going to make shareholders happy, especially when they could have extinguished debt instead.

This week I’ve started seeing a new issue that I think is probably way worse than doing buybacks at peak prices and/or increasing dividends near the top of the oil price cycle and into a higher rate environment. That issue is the exclusion of new hedges. Many of these companies have decided not to buy insurance against an oil price crash. They bought a huge amount of hedges at extremely low prices and many are reporting excessive losses off those hedges in recent earnings reports. But now with oil pushing $85, they aren’t going to hedge? I’m really not sure they understand how hedging works LOL. It’s just another gimmick to save money in the short term, while totally ignoring the long term health of the company and industry. Many of these stocks now have ZERO safety net. If oil prices drop significantly, these stocks are going to absolutely crater. Walking the tightrope without a safety net isn’t something that larger institutions are going to be excited about because when the fall comes (and it will) there’s no way out. Just another reason that I think longer term players will abandon these stocks.

It seems like every decision oil companies are making right now just screams top of the cycle. While this probably isn’t the exact top, I think they are likely going to look back and find that it was really close. Just so many decisions being made with an incredibly short term view and no regard at all to the longer term health of the industry. Maybe they expect a government bailout when it all goes bad, who knows. Or maybe they realize, just as Bill Gates recently said, that oil is a dying business and they are trying to get all they can now with no regard to the future because they already know the future, and it’s not good. Besides, who needs fossil fuels in the metaverse? LOL.

Another issue that’s also starting to become clear is that US shale has absolutely no ability to plan for the future. OPEC really made a statement this past week when they refused to increase output and basically said it wasn’t their problem. They have created the growing bubble of $80 oil and they know it. They also know they have the ability to open the tap and crush price whenever they want. And US shale knows it too. We’ve seen this movie before. When US shale becomes greedy and decides to overextend themselves with increased capex and production (without hedges), OPEC has the ability to pull the rug and leave US shale with expensive projects that are partially developed, new dividends that are hugely burdensome, buybacks at peak prices and no hedge safety net. Are longer term institutional players going to take that risk? Doubtful.

There’s also the growing possibility that OPEC lures US shale into overextending itself right into the teeth of a recession, which OPEC is helping create. As OPEC keeps blowing the oil bubble, the real pain will start to be felt at the pump by American citizens. OPEC hasn’t shown any intention of helping and I don’t think that changes in the near future. They seem to have their sights set on pushing our economy to the brink of recession with high oil prices, while at the same time enticing US shale to overextend itself. At some point, as a recession nears, oil demand will start to collapse again. It’s at that time that OPEC steps in and pulls the rug on prices. They will try to protect themselves against loss of market share and demand destruction, but it will likely be too late for the American economy as the damage will have already been done.

When this lowering of prices occurs, OPEC will do it under the cover of negotiations to “rescue the world” from possible recession. I have no doubt they will negotiate with the Biden administration when the time is right and totally rob us blind in a deal to lower oil prices. OPEC will simply say that they were begged to bring prices down and they will walk away from the destruction with total immunity. When oil prices drop, you then have US shale overextended right into another oil price collapse with no protection. And the worst part of it is that our government will blame US shale and not government price lowering negotiations with OPEC. I feel pretty certain the oil industry is going to get thrown under the bus, all in favor of the renewable, green energy warriors. I want no part of energy stocks in that scenario and I’m guessing institutions won’t either.

But maybe I’m wrong on all the above. There’s always the possibility that OPEC never has to step in and be the bad guy. The other theory is that these oil companies increase capex, borrow and spend a ton of money increasing production – and then they find that all that supply crushes price just like it did last time. Is this really any better than OPEC popping the bubble themselves? Really seems like US shale has gotten itself right back in that familiar catch-22. And again I ask, do longer term institutions really want to gamble on that risk with prices at current levels?

As for oil itself, the latest government response seems to be future SPR releases. Are these really going to solve anything? I know we pumped a lot of light shale oil in there back in the later Trump days, so I don’t really know what quality is in the reserve anymore. But generally, releases from our SPR (and others coordinated) aren’t great for oil prices. Just another example of government doing everything they can to bring prices down, which isn’t encouraging for oil equities/stocks. It has to be concerning for institutions to see the government working against the oil industry (and in favor of renewable?). What’s next on the short term government thinking list? We can only guess, and that lack of stability has to be concerning for oil companies. How can they plan if they don’t even know what their own government is going to do adverse to their interests?

Again, I hate to be so bearish on energy, but the game is playing out just as it has in past cycles. I’m not saying this is the top for energy stocks. Anyone who has been following SPY and QQQ knows this market can squeeze higher than anyone thinks. But is that kind of run sustainable for the energy sector, especially considering oil prices are totally under the control of an entity who wants to destroy it? I don’t know where the top is for energy names, but I do think we are much closer to the top than many people think. This isn’t the level to push all the chips in long. It’s a level where you start trimming back and locking up those profits. It’s a level where trades should become much shorter in duration with less exposure to market risk. It’s a level where position size should be decreasing, not increasing.

So enough bearishness, what’s the plan for this week? I’m still watching the 58.50 level for direction in XLE. If it breaks above that level, it has a shot at taking out the highs up at 59.41. If the SPY keeps going parabolic and enters into some type of blowoff top formation, there’s a good chance XLE could even move to the 62-64 area on a final squeeze. That would be a spot where I’d load up on the short play. If XLE keeps rising this week, I’ll be on the sideline. I might scalp a little long here and there, but I’m going to let this next rally go. I don’t want to be involved in it with any longer term plays with size because I think the trade is just too expensive with the given risk/reward structure. I don’t mind missing a move, there are plenty more out there. One particular thing to watch this week are the PPI and CPI numbers on Tuesday and Wednesday. There’s also a flood of FED speakers next week around those numbers. Trading could be volatile. Also, the infrastructure plan now looks to be done, so that market catalyst is now gone.

Now, if the SPY tops out this week and rolls over, I’ll be watching the 57 level in XLE. That’s the spot where a decision has to be made and it’s the spot where weakness shows. Everyone will probably see that area on the chart as a sell on any breakdown. I’d be even happier if the SPY created some topping structure with XLE in that 58.50-59.50 area for a short play, but given the weakness in energy last week, I don’t think I’ll get that lucky. Realistically, I think the short trade will be put on at the 57 level after some topping structure in SPY. I’d also like to see IWM put in some topping structure and come back to the 234.53 level. It would be an added bonus if IWM failed and fell back under that 234.53 level at the same time as any SPY topping structure.

The bottom line in energy is that I’m willing to do some intraday scalping on the long side, but I have no desire to put on any longer term long plays over the next couple weeks. The only longer term plays I’ll consider this week will be on the short side. But keep in mind, I’m a very short term trader and my views on the market change frequently based on new information. Good luck this week, it should be an interesting one.

Different Cycle, Same Gimmicks. A Bearish View of the Energy Sector

Oct 31, 2021 Trading Blog

I’m starting to disconnect with the larger Twitter bullish opinion of the energy sector. I can feel it. I feel myself moving toward a bearish bias, however there’s not much factual evidence to support that position – yet. Everyone around me is bullish and every piece of information they present is bullish. But the question is this: Is all of this bullishness around me simply confirmation bias gone wild? Is it the blind leading the blind? Is it simply peer pressure between participants resulting in the fact that nobody is brave enough to be bearish and that everyone has accepted the mantra that “stonks only go up”?

I’ve traded this sector for a long time and I’ve seen several cycles from top to bottom. And every time it ends up being the same story. Everything looks like roses, all the information is positive, all the numbers are good. And then, on dime, it’s not. The key is knowing when things change. Sometimes knowing when things change is simply intuition, not cold hard facts. There are certain things that have happened at every top and every bottom. This week I saw one of those things and it set off my bearish alarm.

Almost every earnings report so far has included a company raising dividends, promoting buybacks and cutting capex. These facts seem bullish, but in the larger context, are they? Many think so, and they are buying with both hands. But, after trading this sector for several cycles and seeing things that happen at the top each time, we may be closer to the top of the cycle than many people think.

At this point you really have to ask yourself, is increasing dividends really the best use of (temporary?) cash flow? Probably not. Paying down debt  would be much better, especially as we head into a much higher rate environment. How about increasing capex? They aren’t doing that either. Why not? Is the oil business so bad that there’s just no use in reinvesting the money back into the business? This seems to suggest that these companies don’t believe oil prices will remain at a level that can support more investment now or in the future. If they truly thought oil prices were going to remain higher for longer, the correct path is to SLOWLY increase capex to balance increasing profits and prop oil prices. Yet they aren’t doing that because they know oil prices can’t handle it.

Everyone is aware of the mistakes that have been made as oil companies have underinvested. So they are choosing to continue to underinvest now and instead just give that cash away? We all know that the underinvestment is what has propped up oil prices, but is underinvestment really the best option for the longer term health of the sector and oil itself? At some point, all the underinvestment will make oil so expensive that the green energy movement wins by default. It also produces energy prices that are so high that it chokes off the demand that produced those higher prices in the first place.  High energy prices have led to more than one recession which kills demand and causes oil crashes. In the bigger picture is decreasing capex and increasing dividends really the best way to go for future health? Probably not.

Which leads me to this question: Why increase dividends and buybacks but refuse to increase capex or pay down debt? Paying down debt and reinvesting in your core business is clearly the better choice for the long term. The oil business has been a huge borrower in the past, and will continue to be a huge borrower again in the future. Free cash flow won’t last in this boom or bust industry, it never does. They sure aren’t doing anything to put away some cash for a rainy day or extinguish their current liabilities. Ignoring the normal oil cycle is reckless. So instead of paying off debt, they are putting themselves on the hook for MORE debt at higher rates? Not a good long term decision.

Increasing dividend obligations at the top of the oil price cycle is quite obviously not the best long term decision either. There have been years where companies like Exxon have had to borrow to pay the dividend. So now they are going to INCREASE that obligation into an oil price that is possibly already extended and possibly put themselves on the hook for that increased dividend borrowing to occur again, but this time in a much higher rate environment? Not smart.

So why are they focusing on the short term and making decisions that are so obviously incorrect in the longer term? Because it’s what Wall Street wants NOW. It’s simply a tactic to make the stocks look better today. Unload at the top of the cycle. It’s a sales gimmick that works great for the short term and it has happened in every past cycle. It’s a great sales pitch that allows current holders to unload right into an oblivious public who only sees facts and ignores the larger context.  Larger players can see the current confirmation bias. They know this class of investors from the last ten years believes “stonks only go up”, and they are taking full advantage of those biases right now. These gifts of higher dividends come with a big hidden cost. As the old saying goes, “Be cautious of those bearing gifts”.

So if intuition is correct and these gimmicks are the sign of the top of the cycle, the next question is where is the exact top? How long does all this short term “feel good” news last? How long to investors stay gullible? When does oil price roll over and when do these new buyers realize that their stocks have just increased their obligations right into a declining (possibly crashing?) oil price and rising interest rates? It’s a very difficult question, mostly because there’s a force at play that hasn’t been there in past cycles – a tidal wave of free money from the FED. But that could also be changing soon.

We’re going to get a good look at the FED this week. If there’s a  hawkish surprise, energy stocks and other commodity stocks could get hit hard. It’s no secret that inflation is rising. At some point, we will hit a tipping point where inflation will cause more harm to the economy than good, and the FED will be forced to act. The taper may start, rates may rise, the dollar may strengthen. We could go from Goldilocks to a nightmare really quickly. Keep an eye on the USD/CAD and gold this week, they will give some good clues on the dollar. If the dollar does start to strengthen, see if that corresponds to a pullback in oil, as it usually does.

And then there’s oil itself and the media’s portrayal of the great “energy shortage”. There’s a huge difference between a real shortage and a manufactured one. Is there really a shortage or is this a manipulated scheme orchestrated by OPEC, and supported by the media, to prop prices up? Is it a trap to entice US shale into overextending itself? At what point does OPEC pull the rug? Because they can. The oil is out there, just sitting there, and all they have to do is open the tap. It’s a shortage that could end on a single OPEC PR. Just look at the OPEC/Russia strategy and tactics of March 2020. Will you be fast enough to escape what that would do to energy stocks?

We’ve also got an overall market that is running hot, almost parabolic even. How long can this continue? How quickly does it correct and how severe is that going to be? When does this market have a blowoff event which leads to an extended downturn? If the economy stalls and causes a market correction, energy stocks could be one of the first classes thrown overboard. As has been the case many times in the past, energy names lead near the end of the economic cycle. As with energy, the overall market is much closer to the top than it is to the bottom. Again, when it inevitable correction comes, will you be fast enough to get out with profits intact?

As for the energy sector itself, I keep seeing all these people claiming the sector is so hot and outperforming. Is it really? You know where XLE was on day one of the pandemic (February 21,2020)? 58.06. You know where we are now? 57.47. The XLE is actually LOWER now than it was before the pandemic started. Ask yourself why and then look at what the rest of the market has done since February 21, 2020. Yeah, sure, every guru says they are up 1000%+, but are they really? It’s somewhat amusing how they all moved their portfolio start date to April 2020. Why do you think they did that? Is that what’s produced the “hotness” and “outperformance” that everyone is screaming about? What kind of returns do they really have, knowing that most of these guys are long term players who were holding a full portfolio just prior to February 21, 2020? Look, I know a lot of people who have made good money in energy, but don’t confuse “outperformance” with simply buying a sector as it laid cold on its deathbed. The easy money was made, now we get to find out if this is all real and if there is any future in it. I don’t think there is as much future in oil as most seem to think. Be careful of all the bullish claims and hype going on around you, most of it is the result of getting lucky catching a huge dip, because in the bigger picture, we’re right back where we started.

In addition, the technical picture isn’t that great, nor is the risk reward of a long trade at this XLE level. I’m not saying a long trade can’t win here, what I’m saying is that it’s an incredibly expensive proposition, and one that’s likely better left alone. I’ve posted the weekly chart going back about 10 years several times on Twitter. From April 2020 until present, we simply moved through a low liquidity area, and even that was a struggle. That struggle has only brought us back to day one of the pandemic. Compare that to where the SPY is. If you look at that weekly chart, there’s about ten years of supply sitting right overhead. The XLE stayed in a range of 60-80 from 2011 to just before the pandemic. The collapse began near 60. We are right back to that level and there could be a huge amount of holders who are just glad to get back to even. They could clog the upward price movement as they try to escape these positions. At best, the XLE has a maximum move to 80, which is about 30%. Most likely, 70 is the true upside, which is about a 15% gain. That’s your best case. What’s your worst case risk percentage loss if it all goes bad? Way more. Getting long heavily at these levels is just not that great of a risk/reward play. If anything, let it pull back some and shift the odds more in your favor.

Look, I’m not saying sell it all and get short here. I’m saying that we are much closer to the top than we are to the bottom. The wild bullishness we are seeing now could very well be wrong. The subtle clues are there. Now is NOT the time to be pushing all the chips in long. That opportunity has long since passed. What I’m saying is start to get a little cautious here. Tighten your stops and protect yourself. Trim some profits and lock them up. Basically, I’m saying to be aware of the confirmation bias occurring all around you. Twitter is an echo chamber for the most part. Everyone is excited, everyone is talking their book, yet very few of these people have seen multiple oil price / energy stock cycles and almost nobody will take a stance opposite the majority. Be curious. Ask yourself why these decisions are being made by oil companies. Are these decisions being made for short term greed or long term health?

I hate to be so negative on energy, but that’s just the way I see it right now from the longer term perspective. I’ll still be trading intraday in both directions, but as usual, I favor the small bites in this kind of environment rather than the longer term larger plays. Now it’s time to wash away all this negativity with a couple bottles of wine and some live music. Hope the rest of your weekend is great, enjoy it with some friends or family. Good luck this week.

Real World Versus the Digital World, Which Does the Market Believe?

Aug 8, 2021 Trading Blog

Just a short article today on some market thoughts and how my market view may be changing a bit based on recent real life experiences, as opposed to digital Twitter world experiences. I wonder if other traders may start to drift toward the same beliefs, especially when it comes to oil and oil stocks.

Two weeks ago I took a family vacation to Key West. The plane was packed full. The Atlanta airport was also packed full of travelers. Once in Key West, there were people everywhere, and they were spending money. There was even a parade for the Hemingway Festival that must have included 10,000+ people. Not a mask in sight. Last night I went to the Jimmy Buffett concert where there were probably 50,000+, and while there were a handful of mask wearers, I’d guess that 99% just didn’t care at all. They were there to have fun, live and SPEND MONEY. Beer lines were long ($13) and the Merch lines were full ($40-$60 t-shirts). People want to live again.

Sometimes when we live in a digital world like Twitter, we lose track of the real world. There’s this small group of doomsday individuals on social media, yet occasionally they appear to be the majority. Truth be known, that group is probably extremely small, yet incredibly loud. They don’t represent the majority, especially in the real world. As traders, I think we get sucked into this digital world and it affects our market views. The difference in the digital world and the real world is HUGE right now. Just something to keep in mind when you make trading decisions. Are your trading decisions based on the digital world or the real world? Which is the correct view?

From what I’ve seen in the real world lately, this economy has room to run. Go back to November 2020 and the vaccine announcement. The market exploded higher with the SPY going from ~328 to ~442. The XLE went from 30 to 56. Now, imagine that this Delta variant disappears (it will). Imagine that the government backs off and drops all these silly lockdowns and mandates (they will). Imagine that all the already vaxxed get the booster (they will) and the remaining unvaxxed are coerced to comply (they will be). That kind of situation could be November 2020 all over again. There is so much bottled up demand out there, I’ve seen it first hand. Given this demand, I can’t imagine how the economy itself could reverse downward in any significant way. While there’s always black swans, I just don’t see people hiding again, they want to live – and spend.

So what could go wrong? The market has it’s own sick way of fooling us. I think the one thing that could go wrong is that things go too well and the whole thing overheats, which forces the FED’s hand. Good news becomes bad news for the market. It’s counterintuitive. We see the inflation problem that developed on the November vaccine announcement and now that inflation is at dangerous levels. What happens to inflation when a second round of “re-opening exuberance” happens? What happens when all those 50,000+ from the Buffett concert learn that it really is ok and safe to live again? What happens to their friends who are still living in fear when they see others living life again? Will they also join the party? And then it snowballs back to life as normal. The real question is, can this economy, and all the QE and printing, withstand that kind of spending without overheating an producing inflation that forces the FED to act, and possibly act quicker and more forcefully than desired?

If it overheats, the FED has no choice but to implement a taper and possibly raise rates. The real question is how fast will the market require they act? What happens to the stock market if the FED is prevented from manipulating it? Can it stand on its own without the money printer on full blast? There will be some big volatility as we blindly feel our way through that inevitable process. And then there’s the scenario of what would happen to the economy if the market did crash and all the confident 401k holders immediately stopped feeling wealthy and subsequently stopped spending? It’s one vicious cycle.

The one question that bothers me is whether the government realizes all this and is purposefully keeping its foot on the throat of the public with covid fear, lockdown threats and mandates. Are they throttling the recovery to protect the largest source of wealth we have (the stock market)? Are they throttling it so the FED can continue to print and enrich the 1%? Exactly what would happen if the government backed off and opened this great country 110% and allowed people to live (and spend) again? Do we ever get the chance to find out the answer to that question or does the whole process and cycle remain manipulated forever?

I really don’t know what happens from here, but what I do know is that bottled up demand fighting against the government oppression is going to produce some BIG volatility at some point. Who ultimately wins this battle, citizens who are ready to live again, or a government who wants to control those citizens so as to alter market cycles and manipulate the stock market? Only time will tell.

Weekly Energy Equities Review, Market Outlook and Trading Plan for August 2-6

Aug 1, 2021 Trading Blog

I haven’t had much time to write over the summer, but life is getting back to normal after a couple months of high school graduation activities and family vacations. Time to get back to trading. I’m going to start this writeup with the macro picture and the inflation trade and then move to energy.

The inflation trade, which started back in November, seems to have found its top, at least for now. While pretty much everything has risen together, on many days money has specifically flowed from tech (QQQ), bonds (TLT) and the dollar (UUP) to small caps (IWM), banks (KRE), metals (XME), gold (GLD) and energy (XLE/XOP). If you were to use just those variables, it’s been easy to determine risk on/risk off in the inflation trade, and the market in general. The profitable trade each day has been to long energy when the rest of the macro factors pointed to risk on. Intraday trading has been fairly straightforward, but longer term plays have been more difficult.

This inflation trade has pulled back over the last month and the question now is where does it stop? I think we are going to get some big clues this week. My guess is that we aren’t yet close to the bottom of this latest pullback and Covid politics could derail things. Covid is no longer about health, it’s about politics, power and money. The inflation variables of XOP, XLE, XME, KRE and IWM all look like they topped out last week and could roll over hard this coming week. The areas to watch are XOP 86, XLE 51, KRE 65, IWM 224 and XME 46. I think we might get a test of those levels early in the week. If they get rejected, the sellers could show up in force. On the other side of the trade, watch QQQ 366, TLT 150 and UUP 25. If money runs for the safety of megacap tech, bonds and the dollar, that also suggests the inflation trade is headed down. I’m getting the feeling that it’s going to take a bit of a capitulation type move to bottom this inflation trade and reverse it back upward. That move could provide a great entry for longer term plays. It’s not clear yet where those low points might be. Here’s a quick look at each and some levels to watch this week.

SPY – The only level that really offers information is last week’s high of 441.80. I expect price to test it early Monday morning, which will set the direction for the rest of the week. On the downside, watch last week’s low of 435.99. In the bigger picture, 420-424 is the lower area to watch for chart damage. If that level breaks, a correction could be starting and a break back under 400 is possible.

QQQ – This is the one area you don’t want to short. I think this becomes the safe haven in any market correction, and while it might pullback, it’s probably going to pullback less than SPY and IWM, and when it hits a bottom, the bounce back can rip shorts. Watch last week’s high of 368.89 to see if it tests simultaneously with SPY.

IWM – This is where the market weakness is showing. Smallcaps are lagging badly in the short term. The 224-226 area has been a significant level throughout this entire range that started back in January and it again rejected it on Thursday and Friday. Watch to see if that level gets one more test early in the week. If it fails, price could easily move back down to the bottom of the range around 210-212. The scary situation is if that level breaks and price dips below this six month range. Do the sellers throw in the towel or do bigger players step in and clean up any supply underneath the range, thereby shooting it toward 250?

TLT – Bonds have actually been fairly stable since last week’s FED meeting, but they are sitting at an important level in the uptrend that started back in May. Does TLT break above the 150 level or does the uptrend fail and sink back toward 140? I’m really not sure on this one. If it breaks upward, banks and energy are going to take a hit, therefore TLT is a primary watch this week. In the bigger picture, there should be significant supply sitting 154-156 to cap the upside.

UUP, USD/CAD – The XLE bottomed back on July 19, which happened to correspond with a top in UUP on the same day. If the dollar strengthens again, it’s going to be a headwind for energy stocks. The UUP level to watch is 25.00-25.20. For the USD/CAD, watch the 1.24 and 1.23 levels on the downside and 1.26/1.30 on the upside.

GLD, GDX – The decline in the dollar that began on July 19 has also helped GDX. There was a great trade around 33, but I got greedy and was waiting to see if GDX would break down toward 31-32 and missed the long play. The 35-35.50 area will offer some macro picture clues for the inflation trade, but there’s really not much trading opportunity in GLD or GDX right now.

XME – The metals made a huge run last week from ~39 to ~46. They were helped by a weak dollar, and the action showed some relative strength for the sector. If you want to gauge the volatility of the inflation trade, metals are the area to watch. Look for clues around the 41 level on the downside and 47.50 on the upside. I’m not interested in trading XME anywhere between those two points.

KRE – The banks are still showing a solid correlation with TLT and rates, but that correlation did have a few days last week where they diverged. If TLT starts down this week and the banks don’t react upward, that’s going to be a warning for energy. KRE should test the 64-65 area early in the week, so watch the price action there.

In summary, these variables control the bigger picture environment for energy and this bigger picture should control the direction of energy stock trades. Try to avoid trading counter against this inflation macro.

Energy, XLE, XOP, USO

I know I keep kicking this dead horse, but the fundamentals for energy stocks just don’t matter right now. The oil versus oil stock argument is worthless. The only thing that matters right now for energy is the unwinding of the rotation that started back in November. Inflation is the theme that is controlling, not oil or oil stock fundamentals. At some point, fundamentals will matter again, but that time isn’t now. I see a lot of Twitter gurus leaning heavily on fundamentals, which tells me immediately that they really don’t understand the current bigger picture. I’m sure you have all seen Energy Twitter’s biggest Permabull cheerleader constantly pumping fundamentals, and there’s a whole crowd of his sheep that are trying to make themselves feel better in the short term about their sinking long positions by leaning on fundamentals. He might be right in the very long term, but these guys are losing some significant money over the last month with that approach simply because they have tunnel vision and are ignoring the bigger picture. It will be interesting to see how much permabull guru finally loses and where he throws in the towel.

The technical picture for XOP and XLE is very clear. There’s major supply sitting above XOP at 86 and XLE at 51.50. Those are the two points to watch this week. The bulls might get one more test of those levels this week and if they fail price is likely headed back toward 47 for XLE and 77 for XOP. One note on XOP, the natural gas stocks really caused some divergence to the downside last week, so keep an eye on that group if XLE and XOP diverge again this week.

As for the actual commodity, USO, there should be big test in the 51-51.50 area this week. Keep an eye on the dollar, specifically the USD/CAD pair for clues. If the dollar reverses course and starts to strengthen again, there’s a good chance that could put a top in for oil. Also, watch the metals (XME) for clues since they have been moving strongly with oil. Just remember, the commodity and the underlying stocks are two separate things. I’m seeing a lot of guys fighting the oil stocks because they think they should be rising just because oil is rising. That just isn’t the case currently, so don’t fight it.

Majors – I didn’t dig too far into the earnings reports for XOM and CVX that were released on Friday, but the one thing that stood out to me was the emphasis on buybacks, debt payment and dividends. When you see companies pumping those items, it’s usually because the underlying business sucks. For many, the dividend is the only reason they hold the stock. When companies start selling investors on things that aren’t directly business related (like oil production), you have to ask yourself why. I also saw that both are again planning for less Capex spending. LESS money spent on the basic business of drilling for oil, yet MORE money spent on buybacks? That suggests to me that they really don’t believe in the longer term merits of this oil price run. Maybe that’s partially the reason both were down big on Friday after earnings.

E&P – COP is going to be a watch for me this week. Feels like a decision is going to be made around 58-60 in this one. If it tops out there, the rest of the group will follow. EOG and PXD are showing some relative weakness against COP. Watch the 150 area for PXD and 75 for EOG, there will be clues given off by the price action at those points.

Natural Gas E&P – EQT and COG got crushed Thursday and Friday. I came very close to picking up some EQT around 18, but passed on the trade. If the sector corrects in the coming weeks, I’ll be very interested in the 14-16 area. COG might present a long play sooner than EQT. I’m watching the 15 area for a possible play, depending on the bigger sector picture.

Services – Of all the services stocks, SLB has the most dangerous chart. The 30-31 area seems to have large supply sitting overhead. The chart is setting up in a head and shoulders type pattern. If price rejects again around 30, it should then move toward 25-26 for a big test of that neckline on the H/S pattern. Again, I don’t put much faith in patterns, but the underlying logic is there for SLB. I’m watching the 18 level in HAL. If it drops to that area, I might put on a long trade there, again this depends on the larger sector picture.

Refiners – Refiners are taking the biggest hit in the energy sector lately, but they did have some good bounces last week. MPC is my favorite of the group and I’m watching the next pullback to the 51 area for a possible long trade. One caution on these, the summer driving season is quickly coming to an end, and that end might get accelerated quickly if Covid lockdowns start reappearing. September starts flu season and the overreactions and fear this year will be insane. The media created this inflation trade on the vaccine announcement back in November, and they can kill it just as quickly if things go south this fall.

Trading Plan for the Week – There’s not much available this week. I exited my XLE long position on Friday with a 4.9% gain and now I’m sitting on the sideline in energy waiting for either a test of XOP 86 and XLE of 51 or a breakdown and retest of the lows around 77 and 46. I have no desire to take a position anywhere between those two points right now. My bias has turned from bullish back to a more neutral “wait and see” bias. I’m not yet bearish and definitely not interested in trying to short anything in the energy sector right now.

Outside of energy, I’m watching IWM 224-226 for a possible play. If there’s an area that could be a possible short, this is probably it. But it’s going to have to be an absolutely perfect setup with a concrete stop to manage the upside risk. My only market position right now is a long in IWM from 211. I probably should have sold that position on Friday at the same time I exited the XLE long, but I wanted to keep some exposure to the upside in the inflation trade and holding the IWM position seemed like the better approach. I’ll be exiting the IWM long on any failure of last week’s high, and then likely flipping short if the situation is right.

The only other area I’ll be trading this week are the banks, specifically XLF and KRE. The large cap financials are going to present a test around 37 which should provide some great information. If TLT breaks to the upside, it might be worth getting short XLF against 37. On the other hand, if TLT collapses, I’ll be looking at a long play in KRE off that 61.50 level.

One note about Friday’s exit on XLE, this wasn’t a great trading move and not normally something I do. The week away from the market was relaxing and it felt good to recharge, however it really took me out of the flow with the market. I left a really positive bullish situation and returned to something that was bearish, and that threw me off. I took the trade off to get my head right. The initial written trade was based on expecting a sharp move in XLE out of an extremely oversold area around 46-47 back to fair value around 51-52, however that move just didn’t happen like I wanted, which suggests the sector is weaker than I thought. If you are a longer term trader, you should use a wider stop than I did because there’s a good chance last week’s move was just a minor wiggle in the larger picture. I can always put this trade back on when/if XLE tests the 51 area or if it falls back toward 47. Sometimes regaining bigger picture rhythm is more important than short term profits.

This week is probably going to be one where I collect information rather than trade. It feels like most things I trade are in no man’s land right now and just not good risk/reward bets. Hopefully that changes this week, but patience is a must here. Now it’s time for a trip to the winery with the love of my life for a couple bottles and some live music. Good luck out there this week and don’t be in too big of a hurry to jump in this market.

Weekly Energy Equities Review, Market Outlook and Trading Plan for June 21-25

Jun 20, 2021 Trading Blog

Sorry for not posting the writeup the last few weeks, I’ve had high school graduation stuff going on almost every weekend, and honestly there just hasn’t been much to write about. The last couple of months have just been a slow grind upward, but last week’s FED meeting threw a curveball and now we might actually start seeing a two way market for awhile.

So what happened with the FED? I think they finally reached a tipping point where inflation went from a lower probability event to something that is probably a very high probability event. Inflation has been a fear for years, but it seems like it never fully develops, however this time I think they sense that they have taken a step too far with QE and inflation is now inevitable. The question now is whether it’s transitory or permanent. The market responded by taking a step back from the inflation trade. I think many traders entered the inflation trade thinking the FED would let the economy run hot for an extended amount of time, however Wednesday’s meeting may have changed that view as the FED showed some willingness to step up and fight the inflation battle in an attempt to keep it from getting out of hand. As a result, we saw all the commodity plays take a step back, including energy stocks.

So the question now is, how many steps back do traders take and how long do they let these commodity plays pull back before they hit them again for another run up? Short answer is that I don’t think they are going to let them pull back very far. In the XLE, I think the pullback goes to the 50-51 area, which would be about a 10% pullback from the high of 56.54. At worst, the pullback could go 47-48 (about 15-17%), but I really don’t see any way it goes below that. There’s just too much short term money out there willing to gamble.

I’ve been pretty bearish over the last few weeks, but as I’ve tried to explain over and over, I’m not bearish on the direction of energy stocks. I’ve been bearish on the trade in energy stocks. If anyone missed the baseball analogy in my Twitter feed, go back and give that one a read. Gambling isn’t about who wins the baseball game, it’s about what kind of odds you get on the bet. Same for trading. I see guys hugely bullish and piling into the XLE in the 55-56 area, but as I kept pointing out, that was a really bad trade and the reason I’ve been bearish. There’s a huge supply level at 60-62. The entry at 55-56 only has the opportunity to give you 5-6 points of profit. However, as many are now finding out, the downside is probably bigger than 5-6 points. This was the situation I’ve been telling people not to get into, and therefore the bearish outlook.

So what would turn me bullish? A pullback to the 50-51 area would flip me from a bearish outlook to a bullish one. And it has nothing to do with the direction of the XLE. The ultimate target is still 60-62, that supply level hasn’t changed. However, now the entry is in the 51 area, which gives about 10 points of profit rather than the 5-6 points of profit that other guys were getting with that 55-56 entry. But the real reason to turn bullish is the risk side of the equation. With a 51 entry I can probably get away with a 1 point risk for a short term trade and a 4 point risk for a long term trade. So now, instead of risking 5-6 to make 5-6, I’m risking 1 to make 10. This is why I’m hugely bearish at 55-56, yet hugely bullish at 51. It’s not about the direction of the XLE, it’s only about the odds on the bet. I know it only seems like a few points, but the odds at 51 are astronomically better than the odds at 55-56.

The risk of 1 point for a return of 10 points is a short term trade for me. However, at 51 I could even justify a longer term trade now. The risk for a longer term trade would probably be 47, which is about 4 points. The reward is still 10 points to the 60-62 level. That’s a risk of 4 to make 10, or about 2.5:1. That’s an incredible upgrade from the 55-56 entry where you are risking 8-9 points to make 5-6, or about 1:1.6. By being patient and waiting for the pullback, the entire trade has changed from bearish to bullish. Again, I’m not some crazy permabear basing my opinion on the direction of the XLE, which is clearly going up. I’m a trader who sees the bet only in odds, not direction.

I hope that kind of clears up why I was bearish at 55-56, but bullish as things pullback to the 47-51 area. It has nothing to do with the quality or fundamentals of energy stocks, only the odds I’m getting on the trade. So with that out of the way, let’s take a look around the market for the upcoming week.

SPY – The SPY has started a pullback, the question is how far. Price closed just below the 50 day moving average on Friday, so there is likely going to be a bounce on Monday or Tuesday to test the 50 day from below. The price action on that test will reveal a lot about what kind of pullback this might be. The first level of demand below the 50 day is around 405. Next level down is around 390. That’s still only about an 8% pullback, which isn’t much, especially considering the run up we’ve had in the last few months. A 10% pullback would take the SPY to around 382, which just happens to be where the 200 day moving average sits. I’m really not sure what kind of pullback this might be, so just have to be patient and let the market tell us.

QQQ – Tech was stronger than SPY and IWM last week. There might be a couple reasons for that. As the inflation trade has grown, money has moved from growth areas like tech to value type areas like banking and energy, as well as small caps. That rotation was clearly reversing after the FED meeting. Watch the QQQ and IWM correlation. One other reason for the strength in QQQ as the SPY moved down is that many see mega cap tech as a safe haven. If you have to be invested in the market, many consider tech the best place to be. It’s almost like the safe haven role that gold used to have in the past. There is always that chance that they all go down together, but see if QQQ maybe shows a little more resilience this week than other areas.

IWM – This is the area of concern for anyone trading energy. Small caps, banks and energy have been the darlings lately and have moved roughly together for quite a bit of time. It really looks like IWM might be topping out and rolling over, which is a big red flag for KRE and XOP. I’ve posted a few charts on the IWM showing the probable price path and it looks like that prediction might be coming true. There was clearly a double top around 234. The real key though is the action at 215. There’s a neckline that extends back  to January 1 that has been tested four times already. It looks like it might be headed for test number five this week. If the 215 level breaks, there’s nothing to stop a fall to the 175 area. That congestion area from mid-February to present is really looking like a Wyckoff distribution pattern with that recent 234 move being an upthrust formation. If IWM breaks the 215 level with big volume, that probably pushes XLE to test 47, so IWM needs to be the main watch for the upcoming week.

TLT – Bonds are making a big move up, but should hit some supply around 148. As money moves out of stocks, it’s finding a home in the safety of bonds. I’m not interested in trying to play TLT long, the trade is just too difficult. Given the FED’s position on raising rates a little sooner than expected, it’s a little curious as to why bonds are going up. The most useful signal coming from bonds is the effect it has on banks. As bonds rise, bank stocks fall, and as I’ve pointed out a few times, banks and energy have been moving together. Falling bank stocks probably isn’t a great sign for energy. Also, banks are about a 15% weighting in the IWM, so if banks fall, that likely drags IWM down. I’m looking for TLT to top out this week around 148-150.

GLD and UUP – The most damaging thing for commodity names this week was the incredible strength in the dollar after the FED meeting. The UUP (DXY) closed above the 200 day, so this could be a  longer term trend change. GLD took the brunt of the hit, losing about 6% in a little over two days of trading. I think this sets up a nice long trade in GDX early this week. I’ve posted the UUP chart a few times in the last few weeks pointing out the double bottom possibility. That formation has been developing since December 2020, so the recent move up should have been expected. The FED announcement probably lit the fuse for that move. The UUP should find some resistance somewhere between 25.25 and 25.40, but then it probably moves back down to test the 200 day ma from above. As for GLD, it gets really attractive in the 160-162 area. I rarely play GLD, but I do like GDX as the play on gold.

XLF and KRE – KRE is in an interesting spot this week and it’s an important watch for energy traders. It’s sitting right on demand around 63.50 in a formation that has been developing since mid-March. If KRE breaks down, the next level is around 58. If KRE breaks down, XOP likely follows. Watch the banks/bonds correlation this week for clues.

Energy, XLE, XLE, USO

There was a curious divergence last week in energy names. The money seemed to flow out of almost all large cap names, but my energy stock list did have a good amount of small cap names that were still green. My core energy list has 35 large cap names and all of them were red Friday. This suggests that the current pullback was probably larger funds adjusting their inflation trade. Many of the smaller names just aren’t widely held by funds playing the inflation trade, at least not in size. The XOP seemed to hold up a little better than XLE because of this. See if this continues Monday.

There wasn’t really any single area in energy that took a bad hit, they all pretty much went down about the same. XOM seems to be a better long play than CVX. The US majors seem to be better plays than RDSA and BP. I’m still not interested in moving into any individual names. I think this is a time when it’s more productive to play the sector as a whole because there is a macro force moving the sector. If you get the macro force direction correct, you are pretty much guaranteed to make money with XLE. If you try to get fancy and pick individual names to play the macro move, you will often pick the wrong stocks and miss the move.

If I was forced to pick one area to play, I’d probably go with natural gas names EQT and COG. I like EQT as the better company, but COG is probably the better trade down at this level. The refiners will also probably become attractive soon, especially if oil price starts to fall and driving demand starts to rise. My only other single name target is WTTR. I started in on the position last week under 6 and will be adding down to 5.

Trading Plan for the Week – Primary trade this week is long XLE in the 51 area. I’ll be playing it with a fairly tight stop. Ideally, I’d like to see it dip under 50 where I’d probably move from a short term play to a longer term play. If it dropped toward 49, I’d get long with a stop at 47 for a 2-3 point risk looking for a move back to 60-62. If XLE looks like it’s going to establish demand around 50-51, I’ll take the long trade and put a 1-1.5 point stop on it for the same move back to 60-62. Those are two different plays that depend on what kind of pullback XLE makes. The SPY, IWM, TLT, UUP and KRE will all be pieces of that decision. If the overall market starts down, I’m going to be way more patient and the longer term XLE play with the 47 stop will probably be the play of choice.

I’m also watching IWM for a play around 215. If it pulls back to that January neckline, there’s going to be a larger picture decision made there. I’m not sure how it’s going to develop or what kind of trade I’m going to put on there, but that’s the location where any trade will appear. I’ll post on Twitter which trade looks best if it reaches 215.

The only other trade on the radar this week is GDX. As the dollar ripped to the upside, gold really got hit hard. I’m very interested in GDX in the 31-33 area. There’s some really big demand at 31 that should act as a concrete stop on the trade. It’s setting up for a trade where I can probably risk 2-3 for a gain of 6-7 on any move back to the 40 area. I’ll post more on Twitter as it gets closer to any entry.

Good luck this week. My only real advice is to be really patient this week and let the market tell you where the turn is. Don’t try to anticipate or outguess this market, especially up at these levels.