Energy Sector Daily Trading Plan for Wednesday, December 11, 2024
Manic Tuesday
XLE had a manic day on Tuesday. The lows were sharp and the highs didn’t last long. There were a few different crosscurrents during the day with that big gap up open, the selling climax into a V, a couple pushes at the opening range high, a three hour range where participants couldn’t make up their mind and then an end of day plunge. That’s more volatility than we have seen in a while. What does it mean? I really don’t know. Maybe just a day where there happened to be many players with different needs. Maybe the volatility is a sign of a larger turning point. It’s really not apparent. Whatever the case, several different opinions were making moves, which made for a difficult trading day.
The sharp selloff was probably the most important formation of the day, simply because it was the most recent action. That selloff in the last hour suggests that there’s probably more downside coming on Wednesday, as XLE might be looking to probe that 89-90 area to see what’s under there. If it finds buyers, there could be a short term bottom and a bounce back toward 93.50. If it doesn’t, it’s likely headed down to the 87-88 area in the next day or two, and maybe even a retest of the September lows. It could be a wild ride to the end of the year as funds clean the trash out of their accounts for end of year reporting. Does anyone really want to get caught with energy on the books in a year where the SPY ripped? Probably not. Always consider what other traders are doing and why.
Useless Twitter Debates
I guess oil sector participants are bored and looking for ridiculous stuff to debate. The latest fascination seems to be that the Permian is mature and has topped out. Really? Who of us is qualified to make that call? And what effect does this have at all on the movement of the energy sector in the next six months? None. Absolutely none. It’s a mental exercise in futility. Like I wrote yesterday, it’s people looking for attention on Twitter trying to make a name for themselves with ridiculous calls that have almost no chance of coming true and betting other people’s money on it.
At one point, the Permian shale production never even existed and everyone said it was impossible. But this is America and we have some of the smartest people in the world. They made it work. And I’m sure they will improvise, adapt and overcome whatever limitations get set in front of them this time as well. The question isn’t whether the Permian is mature, the real question is whether the technology and innovation is mature? Or is there room to greatly improve and lengthen the life of the Permian? Summary, I think it’s a stupid debate and a clear example of why I have a love/hate relationship with Twitter. Oil will be coming out of the ground in Texas for a long, long time and a bunch of Twitter nobodies debating that is a total waste of time. Spend your time on something else that actually matters for making money trading and avoid useless distractions.
Intermarket Macro Context
Stocks/SPY: That’s two big selling days to start the week. I still think there’s room to 625-650 on this latest run, but SPY is starting to show some cracks. IWM also continued to break down. As I wrote yesterday, is it worth the risk to stay around and catch this last one or two precent or is the better and safer move to just exit here and avoid the risk? A lot of traders might be ready to lock the accounts for the year and celebrate a big bonus. Watch last week’s range low at 602.33 for direction on Wednesday.
Bonds/TLT: Stocks and bonds are recently moving with a direct correlation and that continued on Tuesday with TLT also having its second big down day of the week. Watch last week’s 92.54 low for support. TLT is also sitting right near the 92.82 50 day moving average. CPI is going to be an extremely important number at 8:30am. I don’t think there’s going to be any surprise, but if there is, it could move TLT and UUP significantly, especially a very hot number that would change the FED’s current cutting cycle. Hopefully, a surprise will cause an XLE overreaction to the downside that will provide a nice long entry for a bounce play into Friday.
Dollar/UUP: As TLT moved down on Tuesday (rates up), the dollar strengthened, but the daily candle really wasn’t as bullish as it should have been and it got rejected right on last week’s range high. The dollar might be losing steam, watch 30.12 for a retest of last week’s range high. A second rejection could push it back toward VWAP. Watch the 29.97-29.98 area for support.
Gold/GLD: Gold made another rip on Tuesday, closing up +1.32%, to close just above the 50 day moving average. It was the second big green day in a row for gold. It was a bit surprising with the dollar also stronger. Rates up, stronger dollar, higher gold seems to suggest inflation is a concern. I guess CPI will either confirm or deny that thinking at 8:30am Wednesday. Just be watchful that it isn’t forming a head and shoulders type formation here over the last 7-8 weeks. Watch 242.15 for support.
Oil/USO: It was a green day for oil, up +.32%, but the daily candles on Monday and Tuesday were both ugly selling candles with long upper wicks and a close near the low of day. That’s suggesting more downside may be coming. Watch last week’s range low of 69.99 for first support. The next level down from there is the 68-69 area, and then the September low around 66.
Summary: In theory, it should have been a better day for XLE on Tuesday given the intermarket macro picture. XLE -.68% once again diverged from USO +.32% and it’s still not really obvious which one is leading, the producers or the actual commodity. CPI should provide direction for Wednesday and PPI on Thursday. I’m still looking long on XLE for a ride on the Santa rally sleigh, but I need to get a good price on the setup because the odds of a downside trend seem to be growing and you have to be compensated accordingly for that risk.
Premarket Picture
7am: SPY +.12%, TLT -.25%, UUP +.25%, GLD +.09%. Prompt spread on CL is up to 38 cents. CL +1.22%, NG +3.04%, RB +1.19%, HO +.82%. The entire energy complex is solidly green, yet the individual energy names aren’t showing any movement yet. Are we looking at another day of USO - XLE divergence? BP -.02% and SHEL -.07% both coming to the US premarket red. Still have CPI yet to go, which could scramble the entire picture.
7:30am: USO creeps higher and XLE fades. Frustrating. CL +1.49%, NG +2.78%, RB +1.35%, HO +1.03%, yet XLE still sitting at 90.60, up just +.39%. XOM trading down -.33% at 112.30. BP and SHEL have both turned green though. Energy sector once again looks sluggish and diverging from the intermarket macro and oil. Maybe it picks up as the open approaches, but overall it looks like another day of selling.
XLE Technical Picture
XLE has completed its move back down to the lower uptrend line that started from the September low. It took eleven days, with only two of them even being slightly green. Where does it go from here? A breakdown of that lower uptrend line would be a clear change of character and could lead to 87. The more likely move though is a bounce off that lower uptrend line back up toward the middle of the range around 93-93.50 before it has to decide again on where it wants to go.
Volume was about average again on Tuesday with a 1.14B number. If the bulls are going to put in a meaningful short term bottom, we really need to see a 1.5-2.0B day to the upside. Otherwise, it likely just drifts lower on no participation from larger fund sized players.
Today’s Trading Plan
I feel like I have to keep saying this, but my trading timeframe is 1-5 days. Please keep that in mind when you read the blog or Twitter posts.
Also, this is my last trading week of the year, so I’m not looking to take much risk for the rest of the month on individual names.
The primary plan for Wednesday is to get a look at CPI and then see if there’s a downside overreaction in XLE that provides a long bounce opportunity and entry. There’s also a Bank of Canada rate decision that might cause some volatility. Bank of Japan also out there offering rate commentary. A lot of news. The sector is overextended and sitting on a pretty thick fair value area, which is a potential setup for at least a dead cat bounce. I had a buy order in at 90.05 on Tuesday, but it never got hit. I’d like to see if I can do a little better on that entry if there’s CPI drama. I’d like to ride the long play over the next 5-10 days for a Santa rally, if it comes. While a little longer than my normal timeframe, it at least gives me some exposure for the rest of the year and a possible move up.
If CPI is somehow a bullish surprise, I don’t have any desire to chase XLE to the upside with a poor entry. I’m so close to the end of my trading year that I have no problem just letting it go and shutting down for the year to work on some other stuff. There’s always other things to do to improve your game.
If you are interested in individual names, here’s a few that could work over the next couple weeks:
Long SLB 39-40, stop 38, potential for a bounce back to 45.
Long HAL 28, stop 27.50, potential for a bounce back to 32.
Long COP 100, DCA entry to 96 with a 98.50 average price goal. Looking for a bounce back to 115. This is a longer trade than normal for me, probably somewhere in the 10 day range.
Long VLO 128, stop 125, potential for a bounce back to 144-146.
Long PBF 28-28.50, stop 27, potential for a bounce back to 33-34.
Long PSX 120-122, stop 119, potential for a bounce back to 140.
Long FCX 39-40, stop 38, potential for a bounce back to 45.
Long NEM 40, stop 39, potential for a bounce back to 45.
Good luck out there today and be careful with that CPI number and the subsequent market reaction to it, could be big volatility.