Phil Flynn: Downgrade Dilemma

E-Minis Unfair Advantage....Have You Watch This Yet?

The oil market wanted to believe that the worst was over for the global economy, bouncing back from a 6 month low but a downgrade of Japan means the market will have to struggle to find the lower end of our trading range. As the June contract trades its last, more drama will ensue as the market awaits talks with Iran and their nuclear program and perhaps a Japan downgrade won’t be enough to keep the oil down.

Oh Fitch, talk about the timing of you Japanese downgrade. Oil stated to fall resuming its massive retreat as Fitch lowered sovereign debt rating to A+ with a negative outlook. Oil traders reacted as the dollar rallied and demand expectations again began to fall. It appears that oil may not have found the absolute low of its trading range just yet.

Of course the offset to that will be worries surrounding Iran and the nuclear talks. The market has been hopeful that a conflict can be avoided. This comes after the US Senate keeps the pressure on by voting more sanctions on the sanction overwhelmed regime. Reuters News reported the U.S. Senate unanimously approved on Monday a package of new economic sanctions on Iran's oil sector just days ahead of a meeting in Baghdad between major world powers and Tehran.

The pressure became more apparent when Iran said that they would allow the International Atomic Energy agency to allow weapon inspectors into sites that are suspected to be producing materials needed to make a nuclear weapon. CBS and the AP reported that, “despite some differences, a deal has been reached with Iran that will allow the U.N. nuclear agency to restart a long-stalled probe into suspicions that Tehran has secretly worked on developing nuclear arms, the U.N. nuclear chief said Tuesday.

The news from International Atomic Energy Agency chief Yukiya Amano, who returned from Tehran on Tuesday, comes just a day before Iran and six world powers meet in Baghdad for negotiations and could present a significant turning point in the heated dispute over Iran's nuclear intentions. The six nations hope the talks will result in an agreement by the Islamic Republic to stop enriching uranium to a higher level that could be turned quickly into the fissile core of nuclear arms.”

Yet will oil stay optimistic if Iran at any point tries to limit what the inspectors can do? We have seen this cat and mouse game many times before not only with Iran, but the king of the cat and mouse, the late Saddam Hussein. While oil traders can remain optimistic can Israel?

The Wall Street Journal is asking whether some investors wagering on natural-gas prices are losing their spark. The Journal says that, “natural-gas prices have jumped as much as 44% since sinking to decade lows last month. Much of that rally had been powered by rising demand from utilities, which had taken advantage of the low prices by using more natural gas instead of coal. But the higher prices are making coal competitive once again. Coal prices are down 22% since the start of the year."

The Journal says that utilities are continuously fine-tuning how much coal and natural gas they're burning to generate electricity. In recent months, they've increasingly favored natural gas due to the steep drop in natural gas prices. Utilities keep the breakdown of their fuel use a trade secret. How utilities will respond to higher gas prices has spurred debate among investors. Some analysts and traders say the rally threatens to erode natural gas recent gains in market share as utilities switch back to coal, and that could limit any further price increases. A must read in the Journal Today!

To sign up for Phils Daily Trade Levels! Just call him 800-935-6487 or email him at pflynn@pfgbest.com

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What is Next For The SP 500?

Three weeks ago he began urging members of his service to reduce risk and raise cash. He pounded the table incessantly for the past two weeks to continue to raise cash and reduce risk. He has not issued a trade alert to members in over 3 weeks, but by acknowledging risk ahead of the debt ceiling debate he was able to sidestep one of the worst weeks in U.S. financial markets since 2008.

Here's what else J.W. Jones saying about the potential bottom in these markets........

Armed with cash and my emotional capital intact, I am going to be able to take advantage of price action in coming days and weeks. I am expecting a bounce in the near term, but the downgrade of U.S. debt on Friday by the S&P rating agency could have a dramatic impact at the open on Monday morning. I intend to remain in cash until the news is digested by the marketplace.

My first public warnings about a potential top came back on July 8 when I posited an article which illustrated the bullish and bearish position of the market at that time ahead of the debt ceiling debate in Washington. The following excerpt and chart was taken directly from that article:

“In addition to the short term overbought nature of the S&P 500, the daily and weekly charts clearly illustrate a head and shoulders pattern. The head and shoulders pattern is a typical characteristic of a topping formation that is often found at several major historical tops. The daily chart below illustrates the head and shoulders pattern: 




This particular head and shoulders pattern is not getting a lot of recognition in the media which lends it a bit more credence. If we start hearing about this pattern on CNBC or FOX Business I will expect the pattern to fail. Call me a contrarian, but in the past when major television personalities are constantly talking about chart patterns they almost always fail.


Besides just technical data points, continued worries stemming from the European sovereign debt crisis helps the bear’s case further. In the event of a major default in the Eurozone, the implications to the financial sector of the U.S. economy will come into focus. It is widely expected that a banking crisis in Europe could spread to some degree to the large money center banks in the United States. Clearly this would have negative implications on price action in domestic equity markets.

In addition to the European debt crisis, the United States government has a looming credit crisis of its own. With politicians currently arguing over whether to raise the debt ceiling, bears point out that if the United States defaulted on its debt (unlikely) the implications would be severe. However, many traders and economists point out that the end of QE II may have dramatic implications on price action as well. The current uncertainty around the world lends itself in favor of the bears.”


Clearly the head and shoulders pattern has played out and barring a breakout over the 2011 highs on the S&P 500, an intermediate to long term top has been carved out. In fact, I believe we are likely entering the next phase of the ongoing bear market that started back in 2000.

Panic level selling pressure has been registered and the S&P 500 is in an extremely oversold condition as is evident by the charts below:
Stocks Above 50 Period Moving Average



Stocks Above 200 Period Moving Average

The charts above illustrate that we are extremely oversold in the intermediate term time frame and that we are nearing extreme oversold conditions in the longer term time frame as well. I am expecting a bottom to form in the next few weeks which should offer outstanding risk / reward long entries for short to intermediate term trades.

Another indicator that is showing some extreme fear in the marketplace is the Volatility Index (VIX). The VIX has traded in a choppy pattern for quite some time before finally pushing higher the past few weeks.

The daily chart of the VIX below demonstrates the fear in the marketplace:



Almost every indicator that I monitor is screaming that the current market is extremely oversold and fear levels are running at or near 2011 highs. When the masses are fearful and the S&P 500 is this oversold, I want to be looking for opportunities to get long risk assets.
While consistently picking bottoms is nearly impossible, there are a few key levels on the S&P 500 that I’m going to be monitoring.

The weekly chart below illustrates the key support levels which could hold up prices and also future targets for the likely reflex rally:



Once a bottom has been carved out, the use of Fibonacci Retracement and/or Extension analysis will help me determine more precise resistance levels. We could see further selling pressure this week before we see a pronounced bottom carved out. With volatility at these levels price action will be pretty wild. I intend to use smaller position sizes with wider stops to start layering into exposure as opportunities present themselves.

By sitting on the sidelines during this downside move, members of my service are ready to take advantage of lower prices to get long. Now the interesting part will be how Mr. Market handles the downgrade of U.S. debt on Monday ........


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Is This all the Crude Oil Bulls Have Got?

Crude oil traders continue their push in this higher trading range but can't seem to push through critical resistance at the 90+ level. Crude oil bulls are supported by newfound optimism on the street that the economic environment in the U.S. will continue to improve. But worries loom about the Ireland and the Euro as Fitch downgrades Ireland's credit rating despite the recent bail out deal. Precious metals have rebounded slightly but sediment has grown extremely bearish on the street across the whole metals sector. Here your trading numbers for Thursday morning.

Crude oil was higher overnight as it consolidates some of this week's decline. Stochastics and the RSI are overbought and are turning bearish hinting that a short term top might be in or is near.

Closes below the 20 day moving average crossing at 85.32 would confirm that a short term top has been posted. If January extends the rally off November's low, May's high crossing at 93.29 is the next upside target.

First resistance is Tuesday's high crossing at 90.76
Second resistance is May's high crossing at 93.29

Crude oil pivot point for Thursday morning is 88.20

First support is the 10 day moving average crossing at 87.25
Second support is the 20 day moving average crossing at 85.32

Natural gas was higher overnight as it extends the rally off November's low. Stochastics and the RSI are diverging but are bullish signaling that sideways to higher prices are possible near term.

If January extends the rally off November's low, the 38% retracement level of the June-November decline crossing at 4.654 is the next upside target. Closes below the 20 day moving average crossing at 4.294 would confirm that a short term top has been posted.

First resistance is the overnight high crossing at 4.637
Second resistance is the 38% retracement level of the June-November decline crossing at 4.654

Natural gas pivot point for Thursday morning is 4.523

First support is the 10 day moving average crossing at 4.384
Second support is the 20 day moving average crossing at 4.294

Gold was slightly higher overnight as it consolidates some of the decline off this week's high. However, stochastics and the RSI have turned bearish hinting that a short term top might be in or is near.

Closes below the 20 day moving average crossing at 1377.10 would confirm that a short term top has been posted. If March extends this year's rally into uncharted territory, upside targets will now be hard to project.

First resistance is Tuesday's high crossing at 1432.50
Second resistance is 1455.30

Gold pivot point for Thursday morning is 1392.40

First support is the 20 day moving average crossing at 1377.10
Second support is the reaction low crossing at 1352.00


Watch our latest video "After a Tough 2010, What's Next for Crude Oil Traders?"


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