Market Meltdowns, Inflation, Protecting Capital & Trading Commodities

The purpose in owning commodities like gold, silver and oil is to protect oneself from the effect of inflation that I believe will begin to assert itself in the coming months.

Unfortunately, the United States has taken a monetary policy of printing massive amounts of money to attempt an escape of deflation. In just the past 16 months, the monetary base has ballooned from $908 billion to $2.0 trillion. Bailout funds in the past 2 years total $8.1 trillion….. That is 78 times more than what they spent to bail out WorldCom…… and 123 times more than they spent on Enron. U.S. debt has risen sharply, from $6.2 trillion in 2002 to $12.1 trillion today. These are scary numbers!

The illusion of economic recovery in the U.S. is simply the function of the FED making billions and trillions of newly printed money available at literally ZERO percent interest to the largest financial institutions. The idea that you really can get something for nothing is fantasy. But that’s what’s happening – Money created out of thin air, instead of created by PRODUCTION.

A painful reality check will appear when these quantitative easing policies create inflation without employment or productivity gains. Commodities – hard assets – will outperform everything in this type of environment. To some people commodity investments may sound like a no brainer investment, however without a sound money and risk management system in place there really is no such investment.

This is why I focus on technical analysis as it provides price points for investments when we should be putting our money to work on a weekly or monthly basis. When volatility is rising I put less money to work to protect my portfolio from sharp price movements (risk). And during low volatility I push more money into the market catching trends with lowered risks.

What really blows my mind is how almost everyone I know who employed a broker or financial advisor lost between 30-70% of their portfolios during the market crash. What the heck was everyone paying for?

What I am trying to say is everyone can make money in a bull market. The question is, do either you or your financial advisor know when to take some profits to lower overall risk? How much money will you give back when the market corrects, starts another bear market or is affected by a terrorist attack? Do you have protective stops in place?


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Crude Oil and Natural Gas Technical Outlook For Monday Morning

Nymex Crude Oil (CL)

Crude oil edges higher to 83.67 earlier today and at this point, intraday bias remains on the downside as long as 81.72 minor support holds. Current rise from 68.59 is still expected to continue to upper trend line resistance at 87/88 level. On the downside, break of 81.72 will argue that a short term top might be formed with bearish divergence condition in 4 hours MACD and deeper pull back could be seen before another rise.

In the bigger picture, the break of 82.0 resistance confirms that whole medium term rise from 33.2 has resumed. Nevertheless, there is no change in the view that it's a correction to fall from 147.27. Hence, we'd continue to look for reversal signal as crude oil approaches 50% retracement of 147.27 to 33.2 at 90.24, which is close to 90 psychological level. However, break of 68.59 support is still needed to confirm that rise from 33.2 has completed. Otherwise, outlook will be neutral at worst even in case of deep pull back......Nymex Crude Oil Continuous Contract 4 Hours Chart.

Nymex Natural Gas (NG)

Natural gas's consolidation continues and with a short term top in place at 6.108, deeper retreat could be seen to 38.2% retracement of 4.157 to 6.108 at 5.363 first. On the upside, while some recovery might be seen, break of 6.108 high is needed to confirm that medium term rise has resumed. Otherwise, we'd expect more consolidations with risk for another fall.

In the bigger picture, medium term fall from 13.69 is treated as part of the long term consolidation pattern that started at 15.78 back in 2005 and might have completed at 2.409 already. Rise from 2.409 is still in progress and should target 38.2% retracement of 13.694 to 2.409 at 6.72 and beyond. On the downside, break of 4.157 support is needed to indicate that medium term rise from 2.409 has completed. Otherwise, outlook is neutral at worst even in case of deep pullback.....Nymex Natural Gas Continuous Contract 4 Hours Chart.

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Weaker Dollar and Chinese Import Data Drive Crude Oil Higher

Crude oil was higher overnight as it extends the rally off December's low. Strong Chinese import data along with a weaker Dollar are the primary factors driving the overnight rally. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term.

If February extends this rally, the 38% retracement level of the 2008 decline crossing at 84.82 is the next upside target. Closes below the 10 day moving average crossing at 81.20 would signal that a short term top has been posted.

Monday's pivot point, our line in the sand is 82.67

First resistance is the overnight high crossing at 83.52
Second resistance is the 38% retracement level of the 2008 decline crossing at 84.82

First support is the 10 day moving average crossing at 81.20
Second support is the 20 day moving average crossing at 77.71

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Natural gas was lower overnight and trading below the 20 day moving average crossing at 5.709 as it extends last week's decline. Stochastics and the RSI are bearish signaling that sideways to lower prices are possible near term.

Closes below the 20 day moving average crossing at 5.709 would confirm that a top has been posted while opening the door for a larger degree decline during January. Closes above the 10 day moving average crossing at 5.777 would temper the near term bearish outlook in the market.

Natural gas pivot point for Monday is 5.741

First resistance is the 20 day moving average crossing at 5.709
Second resistance is the 10 day moving average crossing at 5.777

First support is the overnight low crossing at 5.545
Second support is the reaction low crossing at 5.505

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The U.S. Dollar was sharply lower overnight confirming last Friday's key reversal down. Stochastics and the RSI remain bearish signaling that additional weakness is possible near term.

If March extends the decline off December's high, the 50% retracement level of the November-December rally crossing at 76.66 is the next downside target. Closes above last Friday's high crossing at 78.43 are needed to confirm that a short term low has been posted.

First resistance is the 20 day moving average crossing at 77.84
Second resistance is last Friday's high crossing at 78.43

First support is the overnight low crossing at 77.03
Second support is the 50% retracement level of the November-December rally crossing at 76.66

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Oil Rises to a 15 Month High on Signs Recovery May Be Sustained

Crude oil rose to a 15 month high on speculation fuel demand will increase as energy and economic data indicate the global recovery may be sustained amid freezing temperatures in the Northern Hemisphere. Oil advanced a second day after crude imports by China, the second largest energy consumer, climbed in December to reach a record annual total of 203.8 million metric tons, a customs report showed yesterday. U.S. consumers probably took advantage of holiday discounts in December while manufacturers churned out more goods, economists said before reports out this week.

“Asia has obviously performed well throughout this recession,” said Toby Hassall, commodity analyst at CWA Global Markets Pty in Sydney. “Beyond the short term, the global economy, and the U.S. in particular, the largest consumer of oil, is in the early stages of a recovery, which suggests that demand is on the mend.” Crude oil for February delivery rose as much as 92 cents, or 1.1 percent, to $83.67 a barrel in electronic trading on the New York Mercantile Exchange. That’s the highest since Oct. 14, 2008. It was at $83.46 a barrel at 12:50 p.m. Singapore time.

The contract gained 9 cents to $82.75 a barrel Jan. 8 after the dollar declined on a report showing employment in the U.S. unexpectedly fell in December. Futures have risen in 11 of the past 12 sessions as freezing temperatures in the U.S., Europe and Asia boosted heating fuel demand. More cold weather is forecast for China in the next two days.....Read the entire article.

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Oil Rises for Second Day on Demand Outlook, Supply Constraints

Crude oil rose for a second day on speculation increasing demand and constraints on supply will reduce global stockpiles and support prices. Oil imports by China, the world’s second largest consumer, climbed 24 percent in December to reach a record annual total of 203.8 million metric tons, according to a customs report yesterday. Chevron Corp. said the Makaraba-Utonana pipeline it operates in southern Nigeria’s Delta state was breached on Jan. 8, shutting-in 20,000 barrels a day of crude.

“Asia has obviously performed well throughout this recession,” said Toby Hassall, commodity analyst at CWA Global Markets Pty in Sydney. “Beyond the short term, the global economy, and the U.S. in particular, the largest consumer of oil, is in the early stages of a recovery, which suggests that demand is on the mend.” Crude oil for February delivery rose as much as 71 cents, or 0.9 percent, to $83.46 a barrel in after hours electronic trading on the New York Mercantile Exchange. It was at $83.43 at 8:07 a.m. Singapore time.

The contract rose 9 cents to $82.75 on Jan. 8 after the dollar tumbled on a report showing employment in the U.S. unexpectedly fell in December. Futures climbed 4.3 percent last week and gained in 11 of the past 12 sessions as freezing temperatures in Europe and North America boosted heating demand.....Read the entire article.

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How do you Calculate the Pivot Point?

Rarely a day goes by that someone doesn't ask "how do you calculate the pivot point". And while their are many different ways of coming up with this number, let me share with you what I think is the most common method.

Pivot points are very useful tools that use the previous bars' highs, lows and closings to project support and resistance levels for future bars. Daily pivot points are useful for swing trading. Longer term pivot points provide an idea of where key support and resistance levels should be. Place the pivot points on your charts and see how traders appear to give pivot point levels a lot of respect.

Daily pivots are calculated from previous day's high, low, close. Weekly pivots are calculated from previous week's high, low, close. The pivot levels and charts are updated throughout the day to cater for data adjustments during the day.

Formula: Pivot Point = Previous trading sessions high + close + low, divided by 3.

Try working this on all of your favorite tickers and watch the traders "show some respect"!


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Determining Oil & Gas Valuations

How do valuations get set for oil and gas companies? I ask because I’m seeing very fast rising valuations in the junior and intermediate oil sector that I cover. I have seen junior oil producers valued at $200,000 per flowing barrel recently, more than triple the peer group average.

Industry statistics concur. A December 24th report by Peters & Co., a Calgary based securities firm that is an oil and gas boutique, showed that the average purchase/sale price for oil weighted production in Q4 2009 was $100,000 per flowing barrel. This is up more than 50% from the Q3 valuation of just over $60,000. (Oil and gas equivalent is the way the industry puts the two commodities into one valuation, usually at 6:1 ratio of gas-to-oil).

The report showed that valuations for natural gas weighted purchases also jumped up more than 50% in Q4, from $35,000 per flowing boe to $54,700. These numbers have an immediate impact on junior and intermediate stocks across the board, as you’ll read.


(There are several ways to value oil and gas companies, but I find the price per flowing barrel to be the simplest. It’s easily calculated: market cap + debt (or minus cash) divided by the daily production level of the company, in barrels per day.)

What is driving these fast rising valuations? It’s

1) an increasing oil price and

2) improving technology – especially multi-stage fracking – that is allowing producers to retrieve more oil and gas, more quickly, in each well. This increases cash flow which increases stock prices.

3) Lower risk oil reservoirs—especially with the new “tight” oil and gas plays—drilling success rate is often 95%-100% now.


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Phil Flynn: Vying to be Mr. Yen

Whose yen is it anyway? Strong yen, weak yen and why in the world does the oil market care? Well the Japanese yen along with the dollar, have been bit players in the massive run in the oil. This year as traders looked for trades to carry them away, one trade that was very bullish for oil was the dollar/yen carry trade.

Oil soared as investor sold dollars because of our negative interest and bought other currencies, even the yen for heaven’s sake, that were yielding a higher interest rate. Traders tried to lock in the difference between the rates. Aggressive traders would take the profit from that yield and try to use it as free money to make more aggressive trades! Some even bought oil! Imagine that. By buying oil, it was like doubling down because as the trade gained more popularity and because oil is priced in dollars as the dollar weakened, oil rallied even more.

Other traders just took a piece of this trade by just selling the dollar outright or going long the yen or just buying things that would benefit by the weak dollar scenario like gold, silver, grains, copper and yes, even oil. Yet big changes in Japan and some mixed signals on the yen is causing some adjustment in this carry trade. It is also causing adjustments in the many cross currency/commodity spreads that in part explains why the oil and other commodities may seem to be less sensitive to movements in the dollar as of late.....Read the entire article.

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Where is Crude Oil Headed Next Week?

CNBC's Brian Shactman discusses the day's activity in the commodities markets, and looks ahead to where oil is likely headed next week.




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ExxonMobil May Strike Deal for $1B Arctic Rig With Transocean [RIG]

Exxon Mobil Corp. is reportedly mulling over a deal with leading offshore rig contractor Transocean to construct a drilling rig capable of operating in extreme Arctic conditions for as much as $1 billion, according to Reuters.

Citing a person familiar with the matter, Reuters reported Friday that ExxonMobil may deploy the rig offshore Greenland, Iceland or Alaska at a dayrate close to record level contracts in the $650,000 range, such as those signed for ultra deepwater rigs by Seadrill and Transocean near the peak of the market in 2008.

In November, Transocean Chief Executive Bob Long stated that the company expected to unveil a new Arctic class newbuild rig order, along with a contract, by the close of the year.

Chief Operating Officer Steven Newman, who will take the helm as Transocean's next chief executive in the first quarter of 2010, also commented during a recent conference call: "We have progressed [the rig's] design fairly far along [and] are in very developed discussions with a customer." Newman was hopeful that the contract would be finalized by the end of 2009, although Transocean had confirmed neither the contract nor the customer as 2009 drew to a close.....Read the entire article.

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