A Cause for Applause

I swore that when I started this blog, I wouldn’t let myself get so caught up in one trade that I would talk about that to the exclusion of everything else. Been there, done that, not going back…except for this one time because admidst today’s overall exciting action, there was a faint glimmer of hope for energy stocks.

On Sunday night we talked about the weakening breadth and if you follow the financial news at all, pretty much all people have been able to talk about is how weak the market is acting, the economy is turning, the sky is falling, oh no! First of all, work on some deep breathing exercises, do some stretches, watch a little tube but in general just chill bro.

As you can see, both the S&P 500 and NASDAQ saw a slight bump in the % of stocks above their 50 and 200 day MA and volume was marginally higher than it has been over the last two days so maybe this one-day rally can help build a new support level for the markets. S%$t had hit the proverbial fan over the last two days and the sell-off had come too far too quickly at least for the S&P 500.

spx

COMP
But news that the PRC would “replace” the head of the PBOC with someone more to the new administrations liking has sent a shiver of stimulus hope up the legs of equity investors over the world and all those awful commodity trades of the last few years saw a spark of life. Check out a few of the winners:

dbc

Dr. Copper managed a win:

jjc

Even West Texas intermediate crude came out ahead:

wtic

EM equities managed a solid day on strong performance on Chinese growth expectations while the Chinese A share ETF was off like a prom dress:

eem

 ASHR

The only loser on the day, equity precious metals as the prospect for global inflation remains muted:

gdx

What I’m interested in is the relatively lackluster performance of energy stocks compared to the broader market today. At first glance the chart is pretty dismal; XLE hit the 200 day MA at the open and managed to scrape out a small positive return for the day but was still off the high. First look at the volume on the day, it was enormous and helped turn the CMF score around.

xle1

Now check out this chart for today’s action using 5 minute bars. Lots of heavy selling at the open followed by buying heading into the European close when the usual afternoon lull sets in. Most of the selling pressure has gone allowing for a gradual drift higher into the usual 3 o’clock institutional trade cycle. Strong selling pressure at the open isn’t surprising given how weak the price action has been over the last week. Momentum scores are close to their lowest levels of the year and before today, we were looking at a loss of nearly 8.25% since June 23rd for XLE.

xle2

My first thought was that more than a few traders, human or otherwise, had outstanding orders in case XLE hit the 200 day and which could explain both the strong selling pressure followed by the nearly as strong buying pressure at the open and this is still a strong probability to consider before putting on a position. Given that we’re now only two days into trying to form a new base at $92.22 for XLE, I’d be hesitant to add to a long at this level and moves off a 200 day are the trickiest. My experience with commodity related sectors and trying to time a trade has been to keep a close eye on them and set a trailing stop just slightly below the base as you can count on buyers to help keep you above the 200 day once, but they’re fickle. At the next sign of weakness they’ll look to blow out and take you with them. Set your initial price target at $94.50 and if we can clear that hurdle, the falling 50 day moving average will be next.

Happy hunting out there and remember to keep calm and carry on.

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