Weekly Crude Oil Market Recap with Mike Seery

Our trading partner Mike Seery is giving us his weekly crude oil futures market recap.....go shorty, go shorty!

Crude oil futures in the August contract are down $1.00 at 101.93 a barrel and I am currently recommending a short position as prices have hit a 4 week low while placing your stop at the 2 week high of 106.10 risking around $4,000 from today’s price levels as the commodity markets in general have turned extremely bearish as deflation is a short term concern as prices are trading below their 20 day but still above their 100 day moving average telling you the trend is mixed as the chart structure will improve on a daily basis so I remain bearish.

Problems in Iraq have basically gone on the back burner and not talked about as much as it was a couple weeks back when prices hit new highs at 107 as prices are down over $2 for the trading week with the next major support around 101 and if that level is broken I think you could trade between 96 – 98 here in the short term. Crude oil prices have rallied from $90 in January all the way up to 107 as many of the commodity markets rallied early in 2014 but that has changed in recent weeks as many of the agricultural markets have absolutely plunged as I think that will start to pressure crude oil prices also due to the fact that the Federal Reserve is cutting back on the quantitative easing which is bearish commodities.

TREND: LOWER
CHART STRUCTURE: IMPROVING

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What You and Monica Lewinsky Might Have in Common

By Dennis Miller

Collateral damage can assume many forms—and though some may be more newsworthy than others, the latter are no less real, nor any less frightening.


On Tuesday, controversial radio talk show host Rush Limbaugh called Monica Lewinsky “collateral damage in Hillary Clinton’s war on women,” saying that President Bill Clinton and his wife destroyed the former White House intern “after he got his jollies, after he got his consensual whatevers.”

Last month, Jeremy Grantham, cofounder of GMO, a Boston based asset management firm that oversees $112 billion in client funds, dubbed savers “collateral damage” of quantitative easing and the Federal Reserve’s continued commitment to low interest rates.

Would it be worse to be known as the “president’s mistress” for more than a decade and, as Lewinsky claims, to be unable to find a normal job? Maybe. But it’s no laughing matter either to find yourself penniless in your “golden years.”

Signs of Monetary Collateral Damage Among Seniors

 

The 55-plus crowd accounts for 22% of all bankruptcy filings in the U.S.—up 12% from just 13 years ago—and seniors age 65 and up are the fastest growing population segment seeking bankruptcy protection. Given the wounds bankruptcy inflicts on your credit, reputation, and pride, it’s safe to assume those filing have exhausted all feasible alternatives.

But even seniors in less dire straits are finding it difficult to navigate low interest rate waters. Thirty seven percent of 65 to 74 year olds still had a mortgage or home equity line of credit in 2010, up from 21% in 1989. For those 75 and older, that number jumped from 2% to 21% during the same timeframe—another mark of a debt filled retirement becoming the norm. With an average balance of $9,300 as of 2012, the 65 plus cohort is also carrying more credit card debt than any other age group.

While climbing out of a $9,300 hole isn’t impossible, the national average credit card APR of 15% sure makes it difficult. For those with bad credit, that rate jumps to 22.73%—not quite the same as debtor’s prison, but close.

None of this points to an aging population adjusting its money habits to thrive under the Fed’s low interest rate regime.

Minimize Your Part of Comparative Negligence

 

A quick side note on tort law. Most states have some breed of the comparative negligence rule on the books. This means a jury can reduce the monetary award it awards a tort plaintiff by the percentage of the plaintiff’s fault. Bob’s Pontiac hits Mildred’s Honda, causing Mildred to break her leg. Mildred sues Bob and the jury awards her $100,000, but also finds she was 7% at fault for the accident. Mildred walks with $93,000. (Actually, Mildred walks with $62,000 and her lawyer with $31,000, but I digress.)

Comparative-negligence rules exist because when a bad thing happens, the injured party may be partly responsible. For someone planning for retirement, the bad thing at issue is too much debt and too little savings. Through low interest rates, the Federal Reserve is responsible for X% of the problem.

Though ex-Fed chief Bernanke doesn’t seem to see it that way—in a dinner conversation with hedge fund manager David Einhorn, he asserted that raising interest rates to benefit savers wouldn’t be the right move for the economy because it would require borrowers to pay more for capital. Well, there you have it. And there’s nothing you can do about that X%. You can, however, reduce or eliminate your contribution.
In other words, you don’t have to be collateral damage; you can affect how your life plays out.

Money Lessons from Zen Buddhism

 

This might sound like a “duh” statement, but it bears repeating from time to time. Inheritance windfall from that great-aunt in Des Moines you’d forgotten about aside, there are two ways to eliminate debt and retire well: spend less or make more.

Rising healthcare costs, emergency car repairs, and the like are real impediments to reducing your bills. Costs rooted in attempts to “keep up with the Joneses,” however, are avoidable. Those attempts are also futile. A new, even richer Mr. Jones is always around the bend.

Instead of overspending for show, make like a Buddhist and let go of your attachment to things and your ego about owning them. Spring for that Zen rock garden if you must and start raking.

One of the wealthier men I know drove around for years with a gardening glove as a makeshift cover for his Peugeot’s worn out, stick shift knob. It looked shabby, but this man wasn’t a car guy and had no need to impress. As far as I know, the gardening glove worked just fine until he finally donated the car to charity and happily took his tax deduction. Maintaining your car isn’t overspending, but you catch my drift. Dropping efforts to show off can benefit us all.

That said, keeping up isn’t always about show. You may feel pressure to overspend just to be able to enjoy time with your friends and family. Maybe you can no longer afford the annual Vail ski week with your in laws or the flight to Hawaii for your nephew’s bar mitzvah. Maybe your friends are hosting caviar dinners, but you’re now on a McDonald’s budget and can no longer participate.

Spending less in order to stay within your budget can mean missing out on experiences, not just stuff. If you’re in this camp, there’s no reason to hang your head. As I mentioned above, you can spend less or you can make more. The latter is far more fun.

An Investment Strategy to Prevent You from Becoming Collateral Damage

 

While it’s tempting to start speculating with your retirement money, resist. If you have non-retirement dollars to play with and the constitution to handle it, carefully curated speculative investments can give you a welcome boost. However, if all of your savings is allocated for retirement, just don’t do it.

Unless you’re still working, how, then, can you make more money in a low-interest-rate world? At present, my team of analysts and I recommend investing your retirement dollars via the 50-20-30 approach:

• 50%: Sector diversified equities providing growth and income and a high margin of safety.
• 20%: Investments made for higher yield coupled with appropriate stop losses.
• 30%: Conservative, stable income vehicles.

No single investment should make up more than 5% of your retirement portfolio.

Whether you’re designing your retirement blueprint from scratch or want to apply our 50-20-30 strategy to your existing plan, the Miller’s Money team can help. Each Thursday enjoy exclusive updates on unique investing and retirement topics by signing up for my free weekly newsletter.

Don’t let the Fed’s anti-senior and anti-saver policies unravel your retirement.  

Click here to start receiving Miller’s Money Weekly today.

The article Collateral Damage: What You and Monica Lewinsky Have in Common was originally published at Millers Money

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Listening to the Canary

By Terry Coxon, Senior Economist

During World War II, the British Royal Air Force (RAF) undertook a plan of misdirection to allow a squadron of bombers to approach an exceptionally valuable target in Europe undetected. The target was so heavily guarded that destroying it would require more than the usual degree of surprise.


Although the RAF was equipped to jam the electronic detection of aircraft along the route to the target (a primitive forebear of radar was then in use), they feared that the jamming itself would alert the defending forces. Their solution was to “train” the defending German personnel to believe something that wasn't true. The RAF had a great advantage in undertaking the training: The intended trainees were operating equipment that was novel and far from reliable; and those operators were trying to interpret signals without the help of direct observation, such as actually seeing what they were charged with detecting.

At sunrise on the first day, the RAF broadcast a jamming signal for just a fraction of minute. On the second day, it broadcast a jamming signal for a bit longer than a minute, also around sunrise. On each successive day, it sent the signal for a somewhat longer and longer time, but always starting just before sunrise.

The training continued for nearly three months, and the German radar personnel interpreted the signals their equipment gave them in just the way the British intended. They concluded that their equipment operates poorly in the atmospheric conditions present at sunrise and that the problem grows as the season progresses. That mistaken inference allowed an RAF squadron to fly unnoticed far enough into Europe to destroy the target.

People will get used to almost anything if it goes on for long enough. And the getting-used-to-it process doesn't take long at all if it's something that people don't understand well and that they can't experience directly. They hear about Quantitative Easing and money printing and government deficits, but they never see those things happening in plain view, unlike a car wreck or burnt toast, and they never feel it happening to themselves.

QE has become just a story, and it's been going on for so long that it has no scare value left. That's why so few investors notice that the present situation of the U.S. economy and world investment markets is beyond unusual. The situation is weird, and dangerously so. But we've all gotten used to it.

Here are the four main points of weirdness:

1. The Federal Reserve is still fleeing the ghost of the dot-com bubble. It was so worried that the collapse of the dot-com bubble (beginning in March 2000) would damage the economy that it stepped hard on the monetary accelerator. The growth rate of the M1 money supply jumped from near 0% to near 10%. This had the hoped for result of making the recession that began the following year brief and mild.

2. A nice result, if that had been all. But there was more. Injecting a big dose of money to inoculate the economy against recession set off a bubble in the housing market. Starting in 2003, the Fed began gradually lowering the growth rate of the money supply to cool the rise in housing prices. That, too, produced the intended result; in 2006, housing prices began drifting lower.
   
   But again, there was a further consequence—the financial collapse that began in 2008. This time, the Federal Reserve stomped on the monetary accelerator with both feet, and the growth of the money supply hit a year-over-year rate of 21%. It's still growing rapidly, at an annual rate of 9%.

3. The nonstop expansion of the money supply since 2008 has kept money market interest close to zero. Rates on longer-term debt aren't zero but are extraordinarily low. The ten-year Treasury bond currently yields just 2.7%; that's up from a low of 1.7%.
   
   The flow of new money has been irrigating all financial markets. In the U.S., stocks and bonds tremble at each hint the Fed is going to turn the faucet down just a little. And it's not just US markets that are affected. When credit in the US is ultra cheap, billions are borrowed here and invested elsewhere, all around the world, which pushes up investment prices almost everywhere.

4. US federal debt management is living on borrowed time. The deficit for 2013 was only $600 billion, down from trillion dollar plus levels of recent years. But this less terrible than before figure was achieved only by the grace of extraordinarily low interest rates, which limit the cost of servicing existing government debt. Should interest rates rise, less than terrible will seem like happy times.

Almost no one imagines that the current situation can continue indefinitely. But is there a way for it to end nicely? For most investors, the expectation (or perhaps just the hope) that things can gracefully return to normal rests on confidence that the people in charge, especially the Federal Reserve governors, are really, really smart and know what they're doing. The best minds are on the job.

If the best minds were in charge of designing a bridge, I would expect the bridge to hold up well even in a storm. If the best minds were in charge of designing an airplane, I would expect it to fly reliably. But if the best minds were in charge of something no one really knows how to do, I would be ready for a failure, albeit a failure with superb academic credentials.

Despite all the mathematics that has been spray-painted on it, economics isn't a modern science. It's a primitive science still weighted with cherished beliefs and unproven dogma. It's in about the same stage of development today that medicine was in the 17th century, when the best minds of science were arguing whether the blood circulates through the body or just sits in the veins. Today economists argue whether newly created cash will circulate through the economy or just sit in the hands of the recipients.

Let's look at the puzzle the best minds now face.

If the Federal Reserve were simply to continue on with the money printing that began in 2008, the economy would continue its slow recovery, with unemployment drifting lower and lower. Then the accumulated increase in the money supply would start pushing up the rate of price inflation, and it would push hard. Only a sharp and prolonged slowdown in monetary growth would rein in price inflation. But that would be reflected in much higher interest rates, which would push the federal deficit back above the trillion dollar mark and also push the economy back into recession.

So the Fed is trying something else. They’ve begun the so called taper, which is a slowing of the growth of the money supply. Their hope is that if they go about it with sufficient precision and delicacy, they can head off catastrophic price inflation without undoing the recovery. What is their chance of success?

My unhappy answer is "very low." The reason is that they aren't dealing with a linear system. It's not like trying to squeeze just the right amount of lemon juice into your iced tea. With that task, even if you don't get a perfect result, being a drop or two off the ideal won't produce a bad result. Tinkering with the money supply, on the other hand, is more like disarming a bomb—and going about it according to the current theory as to whether it's the blue wire or the red wire that needs to be cut means a small failure isn’t possible.

Adjusting the growth of the money supply sets off multiple reactions, some of which can come back to bite. Suppose, for example, that the taper proceeds with such a light touch that the U.S. economy doesn't tank. But that won't be the end of the story. Stock and bond markets in most countries have been living on the Fed's money printing. The touch that's light enough for the U.S. markets might pull the props out from under foreign markets—which would have consequences for foreign economies that would feed back into the U.S. through investment losses by U.S. investors, loan defaults against U.S. lenders, and damage to U.S. export markets. With that feedback, even the light touch could turn out not to have been light enough.

To see what the consequences of economic mismanagement can be, and how stealthily disaster can creep up on you, watch the 30 minute documentary, Meltdown America. Witness the harrowing tales of three ordinary people who lived through a crisis, and how their experiences warn of the turmoil that could soon reach the US. Click here to watch it now.

The article Listening to the Canary was originally published at Casey Research

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Fundamentals Rendered Irrelevant by Fed Actions: Probability Based Option Trading

The fundamental backdrop behind the ramp higher in equity prices in 2013 is far from inspiring. However, fundamentals do not matter when the Federal Reserve is flooding U.S. financial markets with an ocean of freshly printed fiat dollars.

As we approach the holiday season, retail stores are usually in a position of strength. However, this year holiday sales are expected to be lower than the previous year based on analysts commentary and surveys that have been completed. This holiday season analysts are not expecting strong sales growth. However, in light of all of this U.S. stocks continue to move higher.

Earnings growth, sales growth, or strong management are irrelevant in determining price action in today’s stock market. In fact, the entire business cycle has been replaced with the quantitative easing and a Federal Reserve that is inflating two massive bubbles simultaneously.

Through artificially low interest rates largely resulting from bond buying, the Federal Reserve has created a bubble in Treasury bonds. In addition to the Treasury bubble, we are seeing wild price action in equity markets as hot money flows seek a higher return. Usually fundamentals such as earnings, earnings estimates, and profitability drive stock prices.

However, as can be here the U.S. stock market is being driven by something totally different......Read "Fundamentals Rendered Irrelevant by Fed Actions: Probability Based Option Trading"



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The Headline Data that Financial Media Ignored on Wednesday

Wednesday was a wild trading session where we saw the largest intraday selloff in the S&P 500 E-Mini futures that we have seen in some time. Intraday price action was driven largely by statements made by Chairman Bernanke and the release of the Federal Reserve Meeting Minutes which saw some monster intraday moves and a large spike in the Volatility Index (VIX).

While the world is focused on when the Federal Reserve is going to taper their Quantitative Easing program and the impact those actions will have on financial markets, I wanted to look at another divergence in the economic data which is supported by market action.

Instead of trying to determine how or when the Federal Reserve will taper or end their monetary experiment, I wanted to juxtapose statements that were made today with the actual facts. Readers can draw their own conclusions.

Recently, we have been told that the housing market is in the early stages of recovery. Unfortunately due to low interest rates housing has turned back into a speculative market. Consequently, a lot of so called fast money is flowing into housing which in many cases is either being purchased for rentals or by foreign investors as a speculative investment.

At present the housing market is not being driven by capital formation at the household level and data indicates that construction jobs are under pressure and affordability is reversing.

This first chart illustrates what has recently transpired in the 10 Year Treasury Yield.....Click here to read J.W. Jones' entire article and view his charts for "The Headline Data that Financial Media Ignored on Wednesday"


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Gold Chart of The Week

After the worst weekly decline of the year in US equities, we are slowly on the mend as we enter a week full of FED activity.

A few standouts from last week included a terrible Non Farm Payroll number on Friday and a full throttle campaign from the BOJ to continue to crush the Yen. Fridays jobs number was a big miss as 88,000 jobs were added and some real numbers regarding the drop in individuals that are actively looking for jobs was revealed. Even after these figures were announced, the stock indexes were only rattled for a short period of time before the realization that the FED will step up Quantitative Easing set back in. Since then, the stock market seems to be holding up fairly well.

The Japanese Yen had a wild week last week after the BOJ doubled down on its asset purchase program and effectively wiped out two week’s worth of recovery, and more. I think it will be interesting to see how the Yen responds to this weeks FOMC announcement that will be held on Wednesday.

The week ahead of us may be tricky as Wednesday’s Interest Rate decision looms. Traders will be less concerned about the actual rate decision, and will focus on the language used by Bernanke and other FED members throughout the week. The standout will be Bernanke’s view on the amount and the length of time the FED plans to participate in easing the market.

Keep in mind that in last month’s report, the FED maintained its focus on the labor market and we also saw a less divided FED panel on the length of Quantitative Easing. After a big miss in the Non Farm Payroll, it would be difficult to expect anything but a more aggressive campaign to keep Interest Rates row in an effort to stimulate growth.

After Wednesdays news, the markets will begin to use this information along with first quarter earnings and Fridays Retail Sales and Consumer Confidence numbers. Overall, this week should be very active for the US markets as well as commodities like Gold. The question for Gold prices is whether last week’s drop to test last Summers low is actually the low. I think after Wednesday, we should have the information necessary to make a confident decision.

The chart shows last week’s test of support, which will continue to be the focal point as Wednesdays FOMC announcement comes to pass.




Posted courtesy of Brian Booth and the staff at INO.com

Silver Suffers The Most From Bernanke And What Is Next

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While the exchange traded funds for gold and copper fell today due to investors expressing disappoint at the modest response of the Federal Reserve to declining economic growth, it was silver that was off the most.

SPDR Gold Shares (GLD) fell in trading today by 0.89%. IPath Dow Jones Copper (JJC) dropped 1.89%.  Plunging the deepest was iShares Silver Trust (SLV), off by 2.14%.

Traders were hoping for more aggressive action by Federal Reserve Chairman Ben Bernanke. But that will not come until after the November elections in the United States. Remember that Quantitative Easing 2 did not begin until November 2010, though it was announced at the Jackson Hole economic policy summit in August of 2010.

Silver is in what would seem to be the “sweet spot” between gold and copper.  Almost all of gold is used for investment or decorative purposes.  Almost all of The Red Metal goes for industrial needs.   For silver, it comes almost down right in the middle between commercial and a commodity for investments or jewelry.  The charts below show the trading relationship for each of the exchange traded funds when paired against each other.

Even though silver has a much higher industrial usage, the SLV moves along with the GLD.   As a result, it soared during Quantitative Easing 2.  Obviously, the charts reveal that most of the trading is from speculators as the JJC should move in an inverse relationship with the GLD.  That is due to gold being used almost entirely for non-industrial end uses while copper is used almost industrial for industrial uses.

Up slightly for the week as traders thought more dramatic economic stimulus efforts would result from the Federal Open Market Committee meeting  other than an extension until the end of the year for Operation Twist, the SLV is down for the last month, quarter, six months and 52 weeks of market action.  Year to date, the SLV is off by 1.48%.

For the last year, however, the SLV is down 33.35%.  Volume was up today, with the SLV below its 20 day, 50 day and 200 day moving averages.  In the most obvious trend, it is trading much lower under its 200 day day moving average at 11.67% down than underneath the 20 day moving average, beneath it by only 0.17%.  The only move worth noting in the technical indicators for silver were the long engulfing green bodies last week after Treasury Secretary Geithner’s  gloomy testimony on The Hill and more bad economic news from the US peaked buying as traders thought Quantitative Easing 3 was coming.

If traders long on silver are looking for help from Bernanke, it will not be coming until after the November election, though it could be announced when he speaks later this month at Jackson Hole.

Chris Vermeulen


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Phil Flynn: Quantitative Conundrum

10,000 Trades have viewed this video this morning.... Here is the simple truth about trends

Gold and silver soars and oil sinks in what can be best described as a quantitative easing conundrum. Many people were confused how gold might rally after briefly dipping in bear market territory after the dollar rallied for a record 14 days. The day after the Fed minutes showed that several Fed Officials would be open to more economic stimulus if the economy turned worse all of a sudden it seemed that indeed thinks look worse.

Against a backdrop of Europe coming apart at the seams somehow contraction in the Philly Fed Manufacturing Index and Leading Economic Indicators that are leading us in the wrong direction the odds of quantitative easing are rising Howard Packowitz at Dow Jones “The Wizard of Fed Fund Future Odds” showed that Fed funds futures traders now believe that the FOMC will wait two years or longer before it begins raising the funds rate.

Packowitz pointed out that trading volume heavier than usual for longer dated contracts as July 2014 fed funds price in a 40% chance for the Fed to boost the rate to 0.5% by then, down from a 44% chance at Wednesday's settlement. November '14 fed funds see 88% chance for a 0.5% rate, down from a 96% chance at Wednesday's settlement.

Yet while those odds rise the dollar rises as it is clear that it won’t just be the US that will have to come to the printing presses. The pressure on governments around the globe are clear in the currency differentials as the British Pound and Euro falls and yen rises. China and other markets may have to stimulate. Gold now is pricing in easing.

The Brent Crude WTI spread came in as Japan announced the restart of some nuke plants and the historic reversal of the Seaway pipeline is ready to begin!

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How to Risk Less When You Trade

Crude Oil? Bah Humbug!

Oil traders need to get visited by the ghosts of Christmas oil trading past, present and future to get that holiday risk taking sprit. Remember those famous Christmas spikes on Iran rumors or when Russia cut off gas supplies to Europe? Yesterday oil traders acted like someone told them there was no Santa Claus the way they pulled in their bull horns and hid from risk.

This is despite the fact that all of the economic data that was released such as weekly jobless claims, the Empire State and Philly Fed Manufacturing numbers and good numbers from FED-EX, should have got the bullish juices flowing, yet after the blood bath the day before, kept traders cautious and fearful. Oh, some Scrooge may point out that the Industrial Production number had a lot to be desired but the preponderance of the evidence suggests that the US economy is indeed improving.

Of course we know what the problem is. The problem is Europe. Europe continues to miss opportunities to try to set the market straight as their aversion to stimulus and euro bonds is holding us back. You can be pro quantitative easing or anti quantitative easing but based on the US data, compare the US debt with record low yields against Europe with record high yields, at least for now quantitative easing seems to be working better than the European inflation aversion. Ben Bernanke may be smiling......Read the entire article.

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J.W. Jones: Understanding The Key Support Levels For Gold

Gold bulls and inquiring minds are perplexed by last week’s mayhem in the precious metals markets. In addition to gold and silver, copper prices also went into free fall last week which is an ominous sign for the broader economy in general. We live in interesting times as geopolitical uncertainty, social acrimony, and financial collapse shape the world around us.

The situation in Europe continues to worsen and central banks and wealthy individuals are trying to find safe havens to protect their wealth. Most gold bugs believed that gold and silver would be the answer, but in this environment that hypothesis did not play out. In addition, the Federal Reserve came out with operation twist which market participants despised. Since the 3rd round of Quantitative Easing was not announced, risk assets such as the S&P 500, gold, and silver sold off sharply.

Many gold investors believed that gold is a “safety” trade. I would agree with them if the objective is to remain “safe” from ever rising inflation. In a “run for the exits” sell off caused by deflationary pressure and debt destruction, gold will generally show relative strength versus equities. However, I would remind readers that during the deflationary period back in 2008, gold held up far better than the S&P 500, but prices were volatile.

The gold futures chart from 2008 is shown below:

As can be seen from the chart above, gold futures were volatile throughout 2008 with the March high point representing a 19.83% gain for the year. The low point for gold futures in 2008 was in October and represented a loss of 21.07%. The total return for gold futures in 2008 was 1.94%. Clearly gold futures showed volatility throughout 2008, but gold clearly outperformed the S&P 500 during the same period of time.

The S&P 500 was lower by 37% in 2008, thus gold was clearly the safer asset during 2008 in terms of return. However, one asset class was safer still and had considerably less volatility . . . the U.S. Dollar. In 2008, the U.S. Dollar index futures closed the year with gains around 8.44% with far less volatility than gold or the S&P 500. I am pointing this out to readers because a similar situation is unfolding presently.

Moving forward to the present, the U.S. Dollar Index futures have put on an impressive rally that started back on August 30, 2011. Since August 30th, the Dollar Index futures are trading higher by around 7%. As it turns out, on August 31st I entered a long call ratio spread using the UUP ETF with members of my service and we were able to lock in a gain of around 30% recently.

The daily chart of the U.S. Dollar Index futures is shown below:

All of the calls for hyperinflation in 2011 and a massive crisis in the U.S. Dollar are not coming to fruition. In fact, the opposite is occurring as deflationary pressures are helping force the U.S. Dollar higher. I would point out that the majority of economists and analysts were all predicting hyperinflation for several years and so far they have been wrong. Gold nor any other asset can rally forever, but long term investors must understand that even during a raging bull market corrections and pullbacks are commonplace and healthy.

I want to point out that I sent out multiple articles warning about the possibility that gold prices could sell off or correct dramatically. In every instance, my email inbox was littered with hate mail and vitriolic remarks from gold bugs. Back on August 29th, I wrote the following in my article, What Could Lie Ahead for the S&P 500 and Gold:

“There is an ominous pattern starting to form on the gold daily chart which if it is carved out and triggered, it could produce the next leg of this selloff.”

The daily chart of gold is shown below:

“While it is far too early to determine if a head and shoulders pattern will be carved out or if lower prices take place, I am of the opinion that this selloff will offer an attractive entry point for longer term investors. At this point it is a bit too early to get involved, but if my analysis is accurate the next leg of the gold bull market will be potentially extreme.”

As it turns out, the head and shoulders pattern did not play out as I had hypothesized but a double top did emerge which ultimately produced similar price action. The extreme nature of the recent sell off backs up my analysis in that gold prices had gone parabolic and we needed to see regression back to the mean in terms of price.

We are seeing that process unfold now, but as I stated in the article above the completion of this sell off is going to offer an attractive entry point for long term gold investors. While I have routinely discussed pullbacks and corrections regarding gold, I continue to be a longer term bull.

Gold has sold off sharply in the past week, but the following chart illustrates some key support levels for the yellow metal:

While gold and silver sold off sharply, the S&P 500 was also under extreme pressure. My most recent article written on September 21 prior to the Federal Reserve announcement illustrated two outcomes based on what rhetoric came from the meeting. Unfortunately for equity investors my downside prognosis is holding sway. The follow is an excerpt from my article entitled The S&P 500 & the Dollar Ahead of the Fed Statement:

“The flip side of that argument would see the S&P 500 jamming into recent resistance around the 1,230 price level. If prices rolled over and momentum picked up, a test of the recent August lows would likely transpire and could produce a breakdown and a lower low.

When looking at recent price action, the S&P 500 Index has put in a series of higher lows which is a bullish signal, however the S&P 500 has a long road ahead to break out above the 2011 highs. If the S&P 500 carves out a lower high on the S&P 500 Index at 1,230, 1,250, or even 1,280 and subsequently takes out the August lows then the secular bear will be back. The weekly chart of the S&P 500 Index ($SPX) shown below illustrates key support levels:

For now I am just going to sit in cash and wait for Mr. Market to provide me with some better clues. The trading range is pretty wide going from around 1,100 to 1,280.”

My downside scenario played out last week, but I will be watching closely to see if the S&P 500 can push below the August lows. If the August lows are taken out, we could see support come in around the 1,085 price level. If that level breaks down then the 1,008 – 1,040 price range will be in play.

The daily chart of the S&P 500 Index is shown below with the key support levels illustrated:

In closing, last week was wild in terms of price action and volatility was nearly palpable. I am anticipating some additional volatility this coming week. Gold prices could bounce as price is sitting right at the key 50 period moving average. If gold works through the 50 period moving average additional downside will be likely.

Similar to gold, if the S&P 500 is able to push through the August lows additional sellers will step in as stops will be triggered on a breach of the S&P 1,100 price level. News flow and headline risk coming out of Europe will continue to impact price action. I would also point out to members that there is a standing chance that the U.S. government could shut down as budget issues continue to manifest within the confines of the U.S. Congress.

Risk remains extremely high.

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What the U.S. Dollar and the Euro Mean to the S&P 500

The buzz around the blogosphere and in the media is that Quantitative Easing II is scheduled to end in around 3 weeks. Already pundits are asking about Quantitative Easing III as a matter of when, not if. In reality a QE III Lite version is already in the cards as the Federal Reserve has stated they will be buying Treasuries and Mortgage Backed Securities (MBS) with maturing issues. The Fed also plans on reinvesting the interest earned from the existing portfolio (Roughly $15 billion/monthly).

When it comes to the application of financial principles, doing the opposite of what everyone else does generally leads to an extreme variation in the overall results. While the results are not always better, they are at the very least significantly different from what most lemmings within the group experience. In every aspect of my financial life I try to do the opposite of what the herd is doing. It takes experience and a significant level of discipline, but buying from the herd when they are selling and being willing to sell into a crowd when they are buying is a great way to trade. It sounds easy, but for most people it is not, myself included.

Right now financial markets are uncertain. I would be remiss if I did not point out the recent strength in the U.S. Dollar Index and the potential higher low that it has carved out on the daily and weekly charts. The weekly chart of the U.S. Dollar Index is shown below:

The current pattern on the U.S. Dollar Weekly chart is bullish. We could see the U.S. Dollar Index trade significantly higher from here as it has been under severe selling pressure for an extended period of time. While I believe technical analysis is just one context through which to view financial markets, it is uncanny how often market cycles and headline events line up. Is it merely a coincidence that the U.S. Dollar is potentially bottoming around the same time the Federal Reserve is ending the QE II asset purchase program?

Regardless of what camp economists are in, we presently live in a strange time for financial markets and capitalism in general. One of the more interesting charts to study is the Euro currency, which in contrast to the U.S. Dollar Index appears to have a more bearish pattern. Could it be that the U.S. Dollar is setting up to rally because of the perceived weakness of the Eurozone? The daily chart of the Euro ETF is shown below:

The Dollar may be firming up here based on the Euro’s weakness and it may have absolutely nothing to do with QE II ending. I always refer to price action and never question Mr. Market’s directional bias. If the U.S. Dollar begins to work higher what impact will it have on equities?

A stronger U.S. Dollar would certainly put pressure on risk assets, specifically equity and commodity prices. As it turns out, we are at an interesting juncture in financial markets at this point in time.

The 4 year stock market cycle is nearing an end, a presidential election will take place in less than 18 months, the U.S. government has a massive debt crisis developing, and the European debt crisis continues to mature in what will likely be a microcosm of what we will face here in the United States. The Middle East remains tense at the very least and the recent OPEC announcement to maintain supply levels has helped support oil prices.

Higher oil prices have obviously slowed down the U.S. economy as the consumer is strapped with higher costs on nearly everything, specifically food and energy. In addition, the unemployment numbers are seemingly not improving and housing appears to be rolling over . . . again.

Almost everywhere we look the news is bleak. Mr. Market has shrugged off bad news time and time again since the March 2009 lows. The long term shorts remain frustrated to say the least and those who were actively shorting along the way have likely been stopped out multiple times. Everywhere I look market commentary is bearish and pundits are talking about additional weakness as they point to a rallying Dollar and multiple economic headwinds facing domestic markets.

Traders and investors should be focused on a few specific price levels on the S&P 500. With the Dollar rallying, the S&P 500 index has remained under extreme selling pressure for multiple weeks. The S&P 500 (SPX) is likely going to test its 200 period moving average. From there I am expecting a bounce higher, although the bounce may be nothing more than a Dead Cat Bounce.

As always, time and price will be the final arbiter but if the Dollar continues to trade higher we could see the S&P 500 lose its 200 period moving average and eventually test a major support level which needs to hold up for the bulls. If the March 16, 2011 pivot lows are taken out to the downside, the next leg of the secular bear market may be under way. The daily chart of the SPX illustrated below shows the key price levels and the potential price action that may lead up to a key test of the March 2011 pivot lows:

Very rarely does the first mouse get the cheese, so I would anticipate a bounce off of the 200 period moving average which currently coincides with the March pivot lows. With not only the pivot lows but the 200 period moving average offering support a breakdown lower will be a large tell about the health and future price action of the S&P 500.

Right now I am just going to focus on how the S&P 500 handles the key support zone illustrated above. The forthcoming price action will tell traders everything we need to know about the health of financial markets. I have no idea if we are about to enter a double dip recession nor do I know whether price action will even test the March pivot lows.

What I do know is that price action in coming days around key support areas is going to be critical. I am convinced that Mr. Market will tell us whether the bullish party will continue or come to an end in the next few weeks/months. A breakdown of the March pivot lows in the future will likely initiate the launch sequence for the next secular bear market. I would keep the S&P 500 1,250 price level on the radar going forward. Risk remains high.

If you would like to receive J.W. Jones emails several times per week on SP 500, Volatility Index, Gold, and Silver intermediate direction and option trade alerts… take a look at Options Trading Signals.com today for a 24 hour 66% off coupon, and/or sign up for his occasional free updates.

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Investors are Fearful and That Means Higher Prices are Around the Corner

Everyone knows people make mistakes when rushed to do something or if they are scared of something bad happening. We also know fear and greed is what moves the market each month, week, day and tick… So when the majority of investors are selling their shares at the same time you must recognize the psychology behind it and prepare for a low risk trading opportunity in the days that follow.

Stepping back and looking at the general vibe in the financial arena we hear about Quantitative Easing II coming to an end which should help the dollar gain strength again. A rising dollar means lower stock and commodity prices. Also keep in mind the United States is in so much trouble they will always have quantitative easing even if they are not calling it QE, that’s my opinion anyways…

In addition, everyone was talking about the saying “sell in May and go away”. Take a look at the chart of the SP500. The first session in May was the highest point and the SP500 has only gone down since then. The chart below shows my fear indicator and with the masses all selling in the month of May I have to think it’s getting ready to bottom and start another 5-6% rally from down here. Keep in mind I am more neutral on the overall market for the longer term. In the next month or two I figure we see higher prices from here but come August we could see the dollar bottom and stocks sell off in a more significant manner.

Last but not least, gold and silver…
Looking back in time and reviewing inter-market relationships with gold and silver I feel more and more investors are becoming bearish and moving their money into safe havens like gold and silver. Recently we saw a sharp pullback in both gold and silver. The price and volume action that took place was a clear sign of distribution selling meaning big money players taking money out of those investments. I see this pattern happen in stocks, indexes and commodities all the time and it generally warrants caution!

My trading buddy JW Jones over at OptionsTradingSignals.com has some very exciting ways to profit from these choppy market conditions with limited risk. If you are into options then check it out.

Typically we will see a few more new highs being reached which are quickly followed with strong selling. What happens is that the big money players allow the price to make a new high and that hits the headline news, CNBC, BNN etc…. drawing in new buyers and a surge of volume for the big money guys to sell into and exit their positions at the top. It also helps cover up their large volume selling.

Below is what I am thinking will take place in gold this summer.

Weekend Trend Conclusion:
In short, I feel the dollar will continue to slide lower, both stocks and commodities should have some strength over the next 1-2 months but after that all bets are off and it will be time to re-evaluate things.

The next week in the market will most likely make or break this outlook as the overall market is trading at a tipping point. Let’s see how this week pans out then take another look at the charts.

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Commodity Corner: Crude Oil Passes $85 Mark

December crude oil surged past $85.00 Wednesday, thanks in part to an expected move by the Federal Reserve that should have a bullish effect on oil. Oil settled 79 cents higher to end the day at $84.69 a barrel after peaking at $85.36 and bottoming out at $83.57. The Fed on Wednesday afternoon announced a decision to buy $600 billion in government debt by mid-2011.

The central bank's action, commonly called "QE2" to reflect the Fed's second attempt to stimulate the economy by printing more money through a policy of "quantitative easing," is meant to induce businesses and consumers to borrow more from lenders. Because more money will be in circulation, it should also devalue the dollar. Consequently, oil and other commodities priced in dollars are expected to become a better buy for those holding other currencies.

Also supporting oil was a weekly U.S. Department of Energy report observing that the country's gasoline stocks fell again last week. December gasoline futures consequently rose three cents to settle at $2.14 a gallon. According to the Energy Information Administration, U.S. gasoline inventories remain relatively high; however, they have declined sharply and continuously for five of the past six weeks.

EIA attributes the decline to reduced imports from Europe and Canada as well as higher than average domestic refinery outages in September and October. Gasoline traded from $2.11 to $2.15 Wednesday. Natural gas for December delivery slipped three cents to end the day at $3.84 per thousand cubic feet. During Wednesday's trading, natural gas traded within a range from $3.79 to $3.90.


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Crude Oil Advances to a Two Week High on Chinese Expansion, U.S. Stimulus

Crude oil increased to a two week high after Chinese manufacturing expanded at the quickest pace in six months and on expectations the Federal Reserve will announce measures this week to stimulate the U.S. economy. Oil rose 1.9 percent as China’s Federation of Logistics and Purchasing said the country’s purchasing managers’ index climbed to 54.7 in October. The Fed may make more asset purchases, known as quantitative easing, after its meeting Nov. 2 to Nov. 3. An industry report showed that U.S. factory output expanded more than forecast last month.

“The combination of the strong Chinese data and expectations for quantitative easing this week, is giving traders good reasons to be long,” said Phil Flynn, vice president of research at PFGBest in Chicago. Crude oil for December delivery rose $1.52 to $82.95 a barrel on the New York Mercantile Exchange, the highest settlement since Oct. 18. Prices are up 7.7 percent from a year ago. Brent crude oil for December settlement increased $1.92, or 2.3 percent, to $85.07 a barrel on the London based ICE Futures Europe exchange.

The Standard & Poor’s 500 Index advanced 0.2 percent to 1,185.70 at 2:31 p.m. in New York, and the Dow Jones Industrial Average increased 0.2 percent to 11,142.82. The reading in the logistics federation’s PMI in China compared with 53.8 for both the previous month and the median forecast of 13 economists surveyed by Bloomberg News. The country overtook the U.S. last year as the biggest energy user......Read the entire article.



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Phil Flynn: Shock and Bore

Promises, promises, quantitative easing the act of printing money to add excess money supply to the banking system by central banks to create inflation to combat deflation has been the policy tool that the Federal Reserve has used to in their mind have us avoid a “Great Depression”. Of course with the economy still sputtering and jobs growth anemic the Fed wants to do it to you one more time. The talk of “Quantitative Easing 2” by your Federal Reserve has been the overriding global economic force that driven the price of just about everything on the globe whether it be commodities or equities or bonds.

The anticipation of the Fed’s awesome money printing power has had the world markets giddy with excitement as they search for clues how the Fed was going to wow this moribund economy into a vibrant job creating monster. Yet if the Wall Street Journal is right then instead of QE2 being compared to a luxury liner it appears now that the market may compare it to a dingy. The Wall Street Journal is moving markets by reporting that the Federal Reserve is likely to unveil a program of US Treasury Bond Purchases worth a few hundred billion dollars over several months. A measured approach in contrast to.....Read the entire article.


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Renewed USD Selling Boosts Commodities

G20's pledge to avoid competitive devaluation failed to halt the slide in USD. Indeed, the market realized the agreement may only calm fears of currency tensions temporary while, in the long term, global economic imbalances persist. The focus has turned to the upcoming FOMC meeting which will be held on November 2-3. Announcement of some sort of easing measures has been priced in. The unknown is how aggressive the Fed will restart QE2. As the dollar weakens, commodities advance with gold rising to 1339 after plunging to as low as 1315.6 last Friday. Crude oil strengthened for a second day to 82.5 as strikes in France continue and tropical storm threatens.

There are few catalysts stopping the market from selling USD even after the G-20 meeting. While member countries agreed to 'refrain from competitive devaluation of currencies' and to move towards 'more market determined exchange rate systems that reflect underlying economic fundamentals', there's no proposal on how to reduce international trade imbalance between countries. It's only stated in the communiqué that 'persistently large imbalances, assessed against indicative guidelines to be agreed, would warrant an assessment of their nature and the root causes of impediments to adjustment as part of the Mutual Assessment Process'.

The US has also made no commitment to refrain from further quantitative easing in the fact of criticisms by other member countries. German Economy Minister Rainer Bruederle said 'it's the wrong way to try to prevent or solve problems by adding more liquidity…Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate'. Canadian Finance Minister Jim Flaherty also agreed with the notion that 'aggressive quantitative easing in the US would create devaluation pressure on the U.S. currency'......Read the entire article.


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