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Top Energy stocks to consider, Technically

August 27, 2018

Contact: info@newtonadvisor.com

S&P 500 SPDR ETF Trust- SPY
283.59, 281.62, 280.16, 279, 278.19, 2760276.50      Support
286.01, 286.62, 287.01, 287.50                                   Resistance

 

Summary:  Technically it's likely that the next 1-2 weeks brings about a short-term peak that causes a 4-5% correction in stocks for the month of September.  While intermediate-term trends are very much intact for the US, and the Advance/Decline is at new highs along with many other indices, the divergences have grown striking, which as explained below, is occurring on multiple fronts and is not just about US vs overseas performance.   Furthermore, Interest rates on the long end have been quite low, representing not just ample global liquidity but also perhaps a concern about economic growth in the years to come.  However, the resilience of stocks during time of very negative news flow is something to cheer, not fret about, and the US continues to be the "best house in a bad neighborhood" with regards to global stock market performance for 2018.    While technical factors could coincide with weakness next month (which many will blame on Tariffs and political drama), it's likely that stock market corrections overall prove to be minimal in scope for now.   Betting on anything more given resilient uptrends in place coupled with mass uncertainty is almost always ill-timed and requires sufficient proof.   Below we highlight the SPX having pushed yet again back to new all-time highs by a thin margin, but yet likely will face resistance here and not get to 3000 right away.  Bottom line: Pullbacks down to 2750 should come before 3000, and while not intending to voice "doom and gloom" or ignore the records being set by US indices, it's right to have a sober, honest perspective about both the positive and negatives to try to sort things out.  
 

Overview:  Yet again, US equity markets continue to defy gravity, churning higher to set new records for the longest bull market of all time with little to no regard to much of what's going on in the rest of the world.  (Whether the May-October 2011 decline causes this bull market record to be relabeled is a topic for a different discussion)  While news of political convictions, guilty pleas and/or grants of immunity have failed to take markets lower, neither have the ongoing tariffs which many believed would be problematic.  News of course is a funny thing.  It's often what serves as the narrative to explain both good and bad times in markets, yet often is conveniently ignored when it doesn't work.   Given political drama ramping up again, it's insightful to take note of what Barron's (Aug.27, 2018) notes about impeachment and market activity.   They reference the Watergate period coinciding with one of the steepest declines in Equities on record during 1974, yet Nixon resigned before facing impeachment.  The Clinton era in the late 90s however saw stocks rally 25% in 1998 leading up to Bill Clinton's impeachment which obviously wasn't a time to avoid Equities and seek safe havens.  Now the US faces a similar period of uncertainty with regards to how recent developments will play out this year and heading into the mid-term elections.  The bottom line of course, if history is any guide, these prior times in history only serve to reinforce the importance of paying attention to markets, while avoiding the news.

Of course, technically speaking, we're always taught to ignore news, as it rarely matters anyway as to being the actual "cause" of price action.   Only in retrospect do most of us look back and select various news stories to back up why we believed prices moved the way they did.   Yet, price action is largely based on sentiment and cycles and often has no bearing on where prices should go, as markets always tend to discount events and its widely known that noone truly knows the value of any one piece of information, and what's "in" the market already, and what's "not"  So trusting the trends  provides all of us with a non-emotional, mechanical way of being able to trade with the trend regardless of good, or bad news.  

Getting back to markets, there have been ample reasons to be skeptical of the longevity of this move, despite the lack of trend damage, which have nothing to do with News.  Let's list out the concerns, and also the positive factors.
1) The divergence with US stocks and the rest of the world has grown to be the largest we've seen in years.  
2) Technology has begun to slow noticeably in the last month, along with Financials, which combined represent more than 40% of the SPX.  Both have underperformed on a one-month basis.
3) The VIX has begun to diverge positively with prices, holding up over 10% above where it was in early August.
4) The divergence of DJIA to hit new highs like the DJ Transports has, and also S&P Futures and NASDAQ 100 are not yet at new high territory is something to watch.
5) Negative momentum divergence on daily charts of DJIA, SPX and NASDAQ-  Prices have moved to new highs, but momentum has not and actually lower.
6) The Defensive trade remains in place despite underperformance last week.  Utilities have performed better than Financials, or Industrials this year and have performed better than Technology in the rolling 30 days.
7) Breadth has improved in a mild fashion since mid-August, yet McClellan's Summation index , the smoothed version of Advance/Decline, still shows this year's peak occurring in June
8) Seasonality in markets for mid-term election years historically shows both August and September to be sub-par
9) Sentiment indicators like Investors Intelligence have widened out to a Bull/Bear spread of nearly +40 in the last week, (August 22) with Bulls at 57.7% and Bears at 18.3%, the highest Spread since January.  
10) Only 103 stocks in the NYSE were at new 52-week highs, way down from 176 in mid-June and well below the 340 level seen in January of this year
11)  Last, but not least, Demark's TD Sequential and TD Combo indicators are now flashing exhaustion signals on daily charts for the SPX, DJIA, NASDAQ, IWM, MID and will show more signals if the market is able to rally into Wednesday of this week.  The VIX is also showing downside exhaustion at the same time as market indices are showing upside.

Yet of course, there's been a lot of positive developments also that need to be considered. 
1) First and foremost, long-term uptrends remain intact as well as uptrends from 2016 winter lows and uptrends from April of this year.  A move down under 2750 would be needed to show even minor short-term trend damage
2) The Russell 2000, the S&P Small Cap 600 index, S&P Mid-cap 400 index along with the DJ Transportation Average and SPX, and NASDAQ Composite have all moved back to new high territory. 
3) Credit has been in very good shape, and no evidence of spread widening.  The High Yield OAS index is at just 3.36%, or 336 bps over the 5-year Treasury, or a tad tighter than where 2018 started.
4) Advance/decline line is at new highs, & historically pulls back sharply to diverge ahead of bear markets.  This has only peaked along with stocks twice in the last 100 years:  1946 and 1976.. Mostly this gives an excellent warning.
5) Technology, the main driver of this rally in the last 12 months, remains trending higher vs SPX in ratio form.  Despite the underperformance lately, tech has not broken its relative uptrend
6) Growth has made just a near-term peak vs Value, but overall still trending higher on intermediate-term basis given the uptrend from November 2016 when this bottomed and rose sharply following the US Election


SHORT-TERM / INTERMEDIATE-TERM TECHNICAL THOUGHTS ON SPX DIRECTION:

Short-term (3-5 days):  Trend bullish and 2890-5 cannot be ruled out, but SPX likely to peak sometime in the next 2 weeks with Demark indicators being complete by Wednesdayon a plethora of assets.  The reversal down under 2846 should be respected, and likely leads down to test and break 2800.  Ideally this would take the form of an early week rally but which peaks out Tuesday or Wednesday and turns lower to end the week down.  However, until then, as has proven to be the case over the last week, owning implied volatility could prove to be a more attractive trade than trying to short Futures before prices show evidence of breaking trends.    Defensive tone recommended and selectivity is key as markets enter the seasonally bearish month of September


Intermediate-term (3-5 months)-  Bullish-  (No change) While there remain ample reasons for concerns in the short run, now that markets have nearly finished August with little to no evidence of any real downturn, the period between now and end of year will likely only suffer minor pullbacks between now and into early October before rallying into end of year, postponing the larger decline yet again.  Specifically, the fact that Advance/Decline for All-stocks pushed back to new all-time highs into early July is thought to be a bullish factor.   The fact that Small-cap and Mid-cap indices have rallied back to new highs is also thought to be constructive, as most bear markets start with a serious dropoff in Small and mid-cap performance.  Though some of that did indeed happen in July with the Russell2k, most intermediate-term chart patterns remain constructive.    Overall, the 2 month bias is more negative for a 3-5% drop.  However, on a 4-5 month timeframe, it's likely yet again that markets exhibit seasonal strength.  so given that markets have been able to absorb the relative underperformance in Tech lately with little to no damage, we'll need to see S&P drop under 2700 to have any real concern, and given the tariff taunts which have been ongoing, the sentiment is likely to reflect fear much faster these days than normally which bodes well for the bulls into year end.


This week we'll take the time to dissect the Energy sector, as the recent breakout in Crude oil has resulted in this sector outperforming every other sector this past week.  While Energy is the worst performing sector on a 1 and 3 month basis, it's the best in the past week and third best in the past six months, so a very interesting roller coaster ride indeed.  Bottom line, Refiners along with the broader Exploration and Production stocks remain the most attractive part of this group.  While the Oil service names have rallied, they have not yet done so in a manner that suggests a large Energy boom awaits.   Overall, selectivity is important for Energy as with most sectors in the market at this moment.  We'll cover technicals of some of the sector indices, relative charts and then cover 5 attractive stocks to consider for long trades.


ENERGY-  Crude, XLE/SPX, Sector charts, and 5 Technically Attractive Energy to consider
 

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WTI Crude oil  (October '18 contract)    Crude's breakout last week was constructive in thinking prices likely can rise back to challenge July highs.  However, after 6 of the last 7 "Up" days, it's likely that prices might require some minor consolidation in the near future before an immediate retest occurs.  Daily charts show prices having broken the minor downtrend from early July which is a technical positive.  However, Bollinger Bands (shown in Yellow) which give 2% standard deviation price range, show prices now nearing the upper end of this band, making a move right away above $71 probably unlikely.   Seasonality tends to favor the period from February-May rather than October-February for Crude and the last 10 years have shown mixed results into year-end.  Despite the last two positive years for September/October period, the five years preceding were largely negative, seasonally speaking.   Overall, the near-term trend is more bullish than bearish, and does support the notion that an eventual retest should occur rather than a move back down to test the lows.    Crude longs are favored for a move to 71, while only a violation of $64 would postpone this rally, changing the thesis to more negative.  

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XLE vs SPX-  Short-term Positive, but challenges await-   Relatively speaking, it's still a bit early to think that Energy has turned the corner-  As was mentioned earlier, Energy has been the best performing sector in the last week, but the worst performing over the last one and three-month period.   Last week's outperformance helped the relative strength in Energy to improve slightly and this ratio chart managed to exceed a minor one-month downtrend.   Overall, this is constructive.   However, the pattern from May remains downward sloping and has not been exceeded.   This is the critical next step for Energy as a sector to start to demonstrate real strength and more signs of trending behavior.  At present, short-term strength is likely only and difficult to make the larger call without more evidence.  

 

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Exploration & Production ETF (XOP- $42.05)  Bullish for further bounce after last week's reversal near important trendline support.   The weekly XOP chart shows prices having pushed up into key resistance near $45 before reversing back lower into early August and hitting trendline support.  This looks to have successfully held given last week's push to new weekly highs, having held where it needed to.  Thus, a push back up to $45 looks likely, and any ability to get back over at this point given the consolidation near the former highs would be quite bullish for this group to start a larger rally.   For now, it remains right to be selective, as certain stocks like APA, XEC, NFX, EOG just aren't all that attractive yet technically and patience is required.   XOP does still look better than either OIH, or XLE, so this sector should still be favored for outperformance and bulls are right to consider XOP within Energy given the structure and recent relative strength.  
 

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XOP/OIH  Relative chart-   Big outperformance since this spring in XOP after Breakout-  One of the bigger mysteries to many this year concerns the degree to which XOP has powered higher, while most of OIH has been under pressure and/or has not participated.  This can be clearly seen in this ratio chart, which technically broke out earlier this year and has shown steady outperformance in recent months.  This has made XOP the way to play Energy, as opposed to owning OIH and expecting any meaningful strength.     Indeed, many stocks within OIH like HAL, WFT, RDC, DO, NBR, have had rough years, despite Crude being higher.  Halliburton is down over 10% for the year, and stocks like Weatherford are lower by over 30%.  While this ratio of XOP to OIH looks stretched, we'll need to see more evidence of this peaking out before thinking that this relative ratio is reversing.  Counter-trend signs of exhaustion look to be close, but given the uptrend and ongoing resilience, XOP still looks like the place to be.  

Exploration and Production ETF, Relative to Drillers  As this relative chart shows, the E&Ps have actually been lagging in the last month vs Drillers, most of which have bounced hard while the E&P names have underperformed.  However, this relative chart looks close to turning back higher, and as such the Exploration and Production stocks should be counted on to start to move higher in the weeks ahead relative to the Drillers.  Most of this thinking is based on a combination of near-term oversold conditions for this ratio along with counter-trend signs of exhaustion that were present at both former bottoms in the Spring and also in early 2017 the last time this bottomed and turned higher.  



Top Technical Long Ideas among Energy-   SM, VLO, PVAC, DNR, and ANDV
 

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SM Energy (SM- $30.39) Bullish Trendline breakout- SM should be favored for further gains in the weeks ahead.   The stock has just managed to exceed the two prior highs from earlier in the year.  As this weekly chart shows, the stock has broken out of the three-year downtrend and now just beginning to extend after a lengthy period of base-building.  Near-term technical targets for SM lie near $31.40, then $35, with movement over that allowing for a push up to near late 2016 highs.  $40 would represent a 38.2% Fibonacci retracement of the entire pullback from 2014.  On the downside, $26 represents the key area of risk for SM, and it can't afford to get back under that level without changing its pattern.  

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Valero Energy Corp.  (VLO- $120.55) Most Refiners still quite positive- Move to challenge/exceed all-time highs likely  VLO has shown some stellar performance in recent months.  The stock has doubled from levels seen at this time last Summer, and after just a minor consolidation since early June, last week's push to new weekly highs should represent the start to a push higher to challenge and exceed the highs made in early June near $127.  Initial resistance is at $122.60 and only on a violation of $110 would the trend turn back to negative.  For now, last week's push to multi-week highs gives this a lot of near-term acceleration and I expect higher prices.  

 

Penn Virginia (PVAC- $83.43)   The recent pullback from early July looks complete and should enable PVAC to turn higher to test and exceed recent All-time highs made back in mid-July.  Last week successfully closed at the highest weekly close in three weeks time, and after a minor pullback following its steep decline from this past Spring, makes this attractive for further gains to challenge targets at $95-$96 and then push higher up to $100.   Momentum remains positive given the degree of gains this showed in nearly tripling in price from this past Spring, and when $90 is exceeded, it's likely to not have too much trouble in getting up to $100 given its momentum.  Only a move down under $75 on a weekly close would postpone this advance, signaling a potential further drawdown to $72 before this bottoms which represents the first meaningful downside Fibonacci target on its pullback.   
 

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Denbury Resources Inc (DNR- $5.22) DNR is quite bullish near-term given the stock's ability to have exceeded mid-July weekly closing highs which puts this at the highest levels since mid-2015.  Further near-term strength looks likely based on last week's gains to areas near $6.24, and then $7.70, and $9.78 are both important for different reasons.  When scanning this stock for possible exhaustion, we see that at both former bottoms, last Fall and also in early 2016, DNR had completed counter-trend TD Sequential Countdowns (13) while on this rally they remain early by at least another 3 weeks.  Overall, the act of making a new weekly close above the highs of the last few weeks bodes well for this to follow-through higher, and longs look attractive, looking to buy dips if given the chance in early September. Only a move back under $4.19 would cancel the attractiveness of this pattern.  

 

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Andeavor (ANDV- $155.26) Push to new all-time highs keeps this rally intact.   ANDV has shown some excellent strength in recent months, having engineered a successful breakout of a large Cup and Handle pattern back in late April when the stock got above $120 which represented a breakout of both early 2018 as well as 2015 highs.  While ANDV has shown steep gains since this Spring, there's no immediate evidence of this losing speed, and if anything, last week's move back to new highs likely can allow for additional strength into the Fall.   While counter-trend sells look to be 3-5 weeks away, any near-term weakness before these are complete should be a buying opportunity for a push higher , with targets up near $170.