Tim Bovee, Private Trader: MPLX: Three influences

MPLX LP (MPLX) is a master limited partnership formed by Marathon Petroleum Corp. (MPC) to operate its midstream assets, such as pipelines.

Such partnerships are first and foremost income plays with favorable tax implications. Investopedia in 2009 published a fine introductory article on the subject, "Discover Master Limited Partnerships".

MPLX has three significant influences: General interest rates, certainly, but primarily the price of crude oil and the health of its parent company, Marathon. The prices of crude and Marathon, in turn, embody a multitude of influences, from geopolitics and sectarian strife in the Middle East to our summer vacation plans.

The Chart

MPLX is a tax vehicle created by Marathon and at the mercy of the commodity that keeps the world's economy moving. Its chart needs context.

In the first chart, MPLX vs. Crude, compare MPLX to the light sweet crude oil futues traded on the New York Mercantile Exchange. MPLX, after all, has little value of the product it moves for Marathon has little value.

The right-hand chart overlies crude futures in red on the MPLX chart. Clearly, they share trends much of the time, but with anomalies, such as the crude spike of 2013 and the sharp dips of April 2013 and January 2014.

MPLX has only been trading for a bit more than a year and a half, since Oct. 26, 2012. It has been in an uptrend since that time, but where is that trend embedded?

The left-hand chart is a 5-year weekly history of NYMEX crude oil futures. Crude is tracing out a triangle, and the present uptrend is nearing the triangle's upper trendline, signifying that a reversal is near.

Crude Oil vs. MPLX
Click on chart to enlarge.

Crude oil futures 5 years weekly bars (left), MPLX and crude 2 years 7 months daily bars (right)

Next, I turn to Marathon, the parent company of MPLX, in the chart below titled "MPC vs. MPLX".

The Marathon chart -- MPC is the symbol -- shows a distinct uptrend over the past five years, but also shows that the uptrend has ended with the May 2014 peak that I've labeled B {+2} on the left-hand chart. What follows by that Elliott wave count is a C wave to the downside, a wave that typically has much momentum.

The alternate count allows for a more shallow downside correction, but it is still bearish.

MPC, in red on the right-hand chart, actually has been less likely to diverge from MPLX than crude oil has been. It has sometimes shown more momentum to the upside or the downside, and the timing has sometimes been off by a bit, but generally, they've tracked each other in direction.

No more. The two symbols are presently in the midst of their first major divergence, with MPLX moving up swiftly and MPC declining at a similar steep angle.

MPC vs. MPLX
Click on chart to enlarge.

MPC 5 years weekly bars (left), MPLX and MPC 2 years 7 months daily bars (right)

At this point I know enough to break off my analysis and render a decision.

Decision for My Account

The bet on MPLX, I think, is whether its shares will follow those of the parent company, MPC, or whether MPC will trail along behind MPLX.

I'm betting on the Mother Ship. Just as a matter of common sense, I think MPC's chart will drive that of MPLX.

Moreover, crude is nearing a reversal point and MPC has already reversed. Does it seem reasonable that MPLX would move contrary to two of its significant influences? I think not.

For those reasons, I don't intend to open a bull position in MPLX under my longer-term rules, because of the reversal prospects for crude and the divergence from the parent company's chart.

-- Tim Bovee, Portland, Oregon, June 26, 2014

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.