Monday Mayhem – Panic Selling Has Set In!

In overnight and pre-market trading the US Dollar posted a strong rally which in turn caused a sharp selloff in the equities market. The market is currently down 1.6 – 2.3% depending on the index traders are following.

Here is what I see on the charts going forward a few days.

Dollar Index – 4 Hour Chart
The Dollar is trading at a resistance level which has in the past triggered strong moves lower. If we get a move lower on the dollar from here then I expect a strong recovery in the equities market and likely higher commodity prices also. If the US Dollar breaks out and rallies above this point then we could see a much further collapse in stocks and commodities.

The falling dollar has also helped to boost crude oil prices the past couple months. One of my trading buddies J.W. Jones at OptionsTradingSignals.com pocketed a nice 86% gain on a USO cash secured put based on the credit sold. Also the weak dollar has his GLD options trade up over 50% already and it has just begun. Jones is an options expert and always seems to find a way to pull money out of the market month after month…

SPY Daily Chart
The daily chart shows a large gap down putting the market in a short term oversold condition. Typically we see the market bounce back up or gap higher the following day. In some cases similar to today the market actually bottoms. So those long the SP500 I feel have a good change of recouping some of today’s decline by waiting for the kneejerk reaction bounce in the next 24-48 hours.

Market Sentiment – Panic Selling At Extremes
Today we are seeing panic selling at levels not seen since the market bottom in March. The green indicator spikes on the chart show very high levels of traders/investors dumping stocks in fear of a collapse. Today’s negative headline news has sparked mass fear and when levels like this are reached you should think of holding long positions for another 1-2 session to see if we get that bounce or market bottom.

Monday Mass Selling Conclusion:
Today’s sharp drop in equities could be an excellent low risk opportunity to add or take a long position here because most of the downside fear for the short term has been eliminated today.

That being said the trend appears to be down on the SP500 now so at this time I am looking to sell into a rally if we get one today, tomorrow or Wednesday.

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Equities Don’t Follow the Dollar Index So Hold On!

So far in 2011 the equities market has made some sizable whip saw type moves that even veteran traders have had difficulty being on the right side of the price action. The year started out with equities being very overbought and extended making is virtually impossible for a low risk trader to buy on pullbacks. This was primarily due to the fact that there were no real pullbacks other than for a day or two which was immediately followed by prices continuing to grind higher.

In March, we finally had the pullback everyone was waiting for which we caught 4% of the sell off using an inverse ETF. Then we saw the bottom a few days later and caught a 3% gain from near the lows during a rally higher. So as you can see there have been three trends in the SP500 so far this year and we are about to see another sizable move unfold in the coming week.

In the past 8 sessions we have seen the market pullback slightly and the big question everyone is asking is do we get long or do we short here? Below are my thoughts and analysis….

US Dollar Index – Daily Chart
The dollar is still in a very strong down trend. As long as it continues to fall we should see higher stock and commodity prices. I do feel as though there is more downside for the dollar but its nearing an end. Stepping back and looking at the longer term chart of the dollar is very clear that it is getting oversold and sizable bounce should take place. If we see the dollar breakout of this falling wedge and start to rally you will want to be short stocks and commodities.

SPY ETF (SP500 Index Fund) Daily Chart
When comparing the Dow Jones Industrial Average and the Russell 2K indexes it is rather obvious that both have performed well this year and have broken above the February highs. The DOW was strong because it has it is exposed to energy stocks and with oil rocketing higher, it has helped those energy based stocks lift the index higher. The Russell 2K consists of small cap stocks and with the general public still being so bullish on the equity markets and investors are buying volatile, high risk small cap stocks to help boost their gains.

Now, looking at the SP500 it has yet to break the February high and this is because it holds several large tech stocks and financial stocks which have been lagging the overall market so far this year. Tech stocks and financials tend to lead the market and the fact that they are not is of great concern to me.
So going back to the US Dollar, I feel as though it has a little more downward motion left which will help get the SP500 to a new yearly high. Once the dollar rally starts, it will crush stock and commodity prices for several months.

Weekend Trend Conclusion:
In short, I favor the long side for both stocks and commodities, but that can change on a dime once the dollar starts to rally. There are many negative factors coming together that give me a negative outlook on stocks and commodities for the next 2-4 months and they are:

1. Quantitative Easing is now done = rising dollar
2. Investor sentiment is at an extreme bullish level = typically a bearish sign for stocks
3. The Sell In May and Go Away is almost here…
4. Earning season is here and that is typically a time when stocks get sold into = lower stock prices
My final thought is to keep positions small and be ready to flip positions from long to short and vise versa depending on what you trade…

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The S&P 500, Crude Oil, and Gold Will Respond to Price Action in the U.S. Dollar

J.W. Jones is on fire this week.......

No More!
The crap rolls out your mouth again
Haven’t changed, your brain is still gelatin
Little whispers circle around your head
Why don’t you worry about yourself instead!

Who are you? Where ya been? Where ya from?
Gossip burning on the tip of your tongue
You lie so much you believe yourself
Judge not l’est ye be judged yourself.

“Holier Than Thou” – Metallica

“The week that was” left many investors running for the exits on Monday and Tuesday as prices in the equity, energy, and precious metals markets plunged. The U.S. Dollar index futures tried to work their way out of a descending channel, but came up unsuccessful. The U.S. Dollar index rallied in several morning sessions, but usually was met with heavy selling later in the day which either muted gains or pushed the dollar index lower. The other notable development this week was some Fed drivel which solidified the Central Bank’s continued efforts to devalue the U.S. currency and hold short term interest rates hostage. In addition, it seems more likely with every press release from a Fed Governor that Quantitative Easing II will expire in June and Quantitative Easing III will not be pursued unless economic conditions worsen.

Recent statements from the Federal Reserve chairman and several of his minions believe that we are not experiencing real inflation in the economy. Apparently the Fed does not believe that most Americans need food to eat or gasoline to drive to their jobs, assuming they have one since around 16% of the adult population capable of working is either unemployed, underemployed, or taking part time work. Apparently, they seem to believe, the increase in food commodity prices are only going to last for the short term and have little consequence according to the Fed. We have also been told that energy prices are just a blip and that it is nothing more than a short term market perturbation. Gold and silver prices continue to break out to new highs, but still we have no inflation.

Long-term readers known that I generally do not get involved in macroeconomic discussions about inflation, deflation, stagflation, or any other type of “flation” because I am not an expert in those areas. What I do know is that food prices are rising in most countries and energy prices are volatile and seem likely to continue to probe higher, even if Goldman Sachs analysts disagree. Yes, Goldman Sachs can be wrong and there is a relatively strong precedent for them to enter into rather onerous financial transactions.

Speaking of Goldman Sachs, does it seem odd that Goldman Sachs comes out and says oil prices are going to continue lower and a large selloff takes place? Then in a strange turn of affairs, the very next day Bank of America energy analysts say that oil prices could go to $160/barrel. I wonder if any Goldman Sachs energy traders used the statements to scoop up oil at a cheap price? Is that a conflict of interest?
At the very least, the timing was interesting and the Bank of America comments are also intriguing, not to mention the fact that oil prices have bounced back since Goldman’s entrance into the void of market predictions. I wonder if this latest prediction is as accurate as their prediction that oil prices were going to $200/barrel in 2008? Finally, is Goldman Sachs playing the Federal Reserve’s song loud and clear for everyone to hear? All of these questions will go unanswered most likely, but at the very least they are thought provoking.

Where do I think oil is headed? A one word answer, higher. Obviously I could be wrong, but my stance on oil is not just about tension in the Middle East or increasing demand from emerging markets. In fact, I believe that oil will continue to work higher because we are in the later stages of this bull market cycle and most cycles end with commodity prices pushing higher and energy related stocks putting up solid gains. We are in that period now, and while it could last for several months or even a year potentially, I believe that we have further room to run. More than anything else, I firmly believe that the U.S. Dollar Index is the most critical chart to watch in coming days and weeks. The daily chart is shown below:

If the dollar breaks down which aligns with my expectations, I would expect it to test the lows reached back in November of 2009. If we see prices test the November lows in coming days/weeks, I expect oil, precious metals, and equity prices to continue to work higher. However, we could see a huge breakout in all three asset classes if the U.S. Dollar Index tests the November lows and they do not hold. If a breakdown transpires, we could see a huge rally in gold and oil. It can be assumed that equity prices would rally, but it would depend on how orderly the U.S. Dollar sold off. A quick glance at the key levels in oil futures can be seen below:

As far as the future in equities prices, we continue to have an inverse head and shoulders pattern on the SPX daily chart. If the pattern plays out it would presage a rally that could extend as high as 1,450 on the SPX. However, a breakdown below the key 1,300 area presents a possible retest of the 1,250 lows. Right now I’m leaning to the bullish side on the back of a sliding dollar and my expectations that earnings may not be as bad as expected. Until we get a breakout higher or a breakdown lower, I continue to believe the S&P 500 is pinned in a range between 1,300 – 1,340. The daily chart below illustrates the inverse head and shoulders pattern as well as the key channel high and low:

Finally, gold futures sold off early in the week but have since rallied back and have taken out previous highs. Silver futures also broke out to new highs after experiencing selling pressure early in the week. After the Federal Reserve made it rather clear that they were not going to tighten interest rates in the short run, precious metals and oil futures have rallied. While the two may not go hand in hand, it is a rather interesting coincidence, particularly when various financial institutions have different opinions about the future price of oil referenced above. If the U.S. Dollar index falters, I expect gold and silver to continue higher. The daily chart of gold is shown below:

In closing, I am going to be focused on the U.S. Dollar Index futures next week looking for clues as to whether we are going to see a breakout, a breakdown, or whether we will remain in a range bound market. At this point anything could happen, but unlike the Federal Reserve I’m leaning into the idea that inflation is here, and unfortunately it might have just arrived. If the Federal Reserve becomes too accommodative and waits too long to raise interest rates to slow down inflation, then the Federal Reserve might have not only let Mr. Inflation in the door, but they likely just asked him to stay for dinner.

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Are You Tired of "Print and Spend" Monetary Policy? Then Check Out Todays Video

If you are tired of "print and spend" monetary policy, a crumbling economy and tax policy that, well, I think you know where I'm going with this...then I think you will enjoy todays video.

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Goldman Call Forces Profit Taking in Gold, Crude Oil and Equities in Tuesdays Trading

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Market Commentary For Tuesday Morning Crude Oil, Gold, Natural Gas, U.S. Dollar

Crude oil was lower during Mondays overnight session due to light profit taking as it consolidates some of the rally off March's low. However, 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 106.19 would confirm that a short term top has been posted. If May extends the rally off March's low, the 75% retracement level of the 2008-2009 decline crossing at 121.09 is the next upside target. First resistance is Monday's high crossing at 113.46. Second resistance is the 75% retracement level of the 2008-2009 decline crossing at 121.09. First support is the 10 day moving average crossing at 108.71. Second support is the 20 day moving average crossing at 106.19. Crude oil pivot point for Tuesday morning trading is 110.69.

Natural gas was lower overnight as it consolidates some of Monday's short covering rally. Stochastics and the RSI are oversold but remain neutral to bearish signaling that a short term top might be in or is near. If May extends the aforementioned decline, the 87% retracement level of March's rally crossing at 3.899 is the next downside target. Closes above the 20 day moving average crossing at 4.253 would confirm that a short term top has been posted. First resistance is the 10 day moving average crossing at 4.206. Second resistance is the 20 day moving average crossing at 4.253. First support is Monday's low crossing at 3.990. Second support is the 87% retracement level of March's rally crossing at 3.899. Natural gas pivot point for Tuesday morning trading is 4.083.

Gold was lower due to profit taking overnight as it consolidates some of this year's rally. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. Last week's breakout above the neckline of March's inverted head and shoulders pattern projects a potential upside target of 1514.90 later this spring. It will take closes below the 20 day moving average crossing at 1436.10 to confirm that a top has been posted. First resistance is Monday's high crossing at 1478.00. Second resistance is the head and shoulders upside target of 1514.90. First support is the 10 day moving average crossing at 1450.20. Second support is the 20 day moving average crossing at 1436.10. Golds pivot point for Tuesday morning trading is 1468.80.

The U.S. Dollar was lower overnight and poised to extend this year's decline. The low-range close sets the stage for a steady to lower opening during the day session. Stochastics and the RSI remain bearish signaling that sideways to lower prices are possible near term. If June extends this year's decline, weekly support crossing at 74.21 is the next downside target. Closes above the 20 day moving average crossing at 76.00 are needed to confirm that a short term low has been posted. First resistance is the 20 day moving average crossing at 76.00. Second resistance is the reaction high crossing at 76.87. First support is last Friday's low crossing at 75.06. Second support is weekly support crossing at 74.21.




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Take a Look at Occidental Petroleum (OXY)

As a follow up to my trade alert for Macro Millionaires to buy the double leveraged oil major ETF (DIG), I thought you’d like to know what my second choice was. There are a lot of belles at the ball, but you can’t dance with all of them. 

While a student at UCLA in the early seventies, I took a World Politics course which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, crawling out of the desert half starved, lice ridden, and half dead.  I concluded that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10.  I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Fabergé egg on his desk. He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians? I told him everything I knew, including the two weeks in an Algiers jail for taking pictures in the wrong places. His parting advice was to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since. 

When I went back to UCLA I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the F.B.I had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again. 

Some 40 years later, while trolling the markets for great buying opportunities set up by the BP oil spill, I stumbled across (OXY) once more. (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005. (OXY’s) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. The company has raised its dividend for the eighth year in a row, by 15% to 1.60%. Need I say more?   

The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. I decided to add it to my model portfolio. Energy is one of a tiny handful of industries I am willing to put my money in these days (technology and commodities are the others), and BP has handed me a rare opportunity to get in as the tightwad that I truly am. 

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

From the desk of John Thomas

The Mad Hedge Fund Trader

Friday, April 8, 2011

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Todays Market Update Video

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The U.S. Dollar’s Impact on Price Action in the S&P 500, Gold, & Crude Oil

I was starting to put on my bullish hat on Friday morning when out of the blue an ugly close has forced me to rethink my position. After viewing a few hundred charts, I have determined that while I am still leaning into higher prices at this point in time, I will not totally rule out a rollover on the S&P 500. In coming days the news flow will be extreme and headline risk will be everywhere we look. The S&P 500 has been able to deflect worry for quite some time now and in every case the resiliency is unquestionable.

However, we are nearing the beginning of another earnings season which will start in just a few weeks’ time. First quarter earnings for 2011 are going to be quite interesting and most analysts’ estimates are relatively challenging. Will the rubber hit the road into earnings? Are we about to see a double top play out into earnings, or is there going to be a breakout which will take us to the SPX 1,400 – 1,415 price level?

I know, I ask a lot of questions but quite frankly that is what is running through my head. The SPX is not out of the woods yet, and the price action on Friday indicated that there is some serious supply overhead and two key resistance levels to break through before the SPX gets back to clear blue skies overhead. That being said Chris Vermeulen has caught a nice part of the recent bounce with his subscribers. He does feel the market is about to get choppy but his analysis is pointing to overall higher prices in the coming weeks.

SPX illustrates the two key price levels:

In addition to the uncertainty that earnings season can bring, the primary reason why I am still leaning into a bullish move in the S&P 500 is the recent price action in the U.S. Dollar Index futures. The U.S. Dollar is scheduled to make its 3 year cycle low sometime this spring and the recent price action is indicative that the recent lows may not be the cycle lows. If the U.S. Dollar Index breaks down below recent lows, I would expect to see a nasty sell off.

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

Whether readers believe that we are going to be in an inflationary environment or a deflationary environment is a topic for a different time, but the chart above is undeniable that recently the U.S. Dollar has declined in value and is exhibiting weak price action. Friday morning it looked as though the U.S. Dollar was going to rip higher, but by the end of the day sellers had stepped in and forced the U.S. Dollar into the red for the session. The price action on Friday highlighted the weakness in the U.S. Dollar and the high levels of overhead supply.

If the U.S. Dollar continues to weaken, in the short run I would view this as a positive for the S&P 500, crude oil, and precious metals. If the dollar breaks down to new lows, it should help bouy the S&P 500 and gold prices. Gold has been consolidating for nearly 6 months and a breakout higher from current price levels would make a trip to $1,500 an ounce very likely. I would not be surprised to see gold work even higher than $1,500 an ounce depending on how violent the selloff in the U.S. Dollar might be.

The weekly chart of gold futures is listed below:

I would think that most investors are aware that crude oil futures have been trading higher recently. On Friday oil prices climbed above recent resistance around the $107/barrel price level and reached new recent highs. Members that belong to my paid service enjoyed a relatively low risk options trade that we put on several weeks ago which involved selling cash secured naked puts on $USO. The trade was closed on Friday for a total gain of 85% of the premium that was sold. For long time readers, my stance on energy has been pretty obvious. In the longer term, energy prices almost have to go up as the world’s demand for energy increases while supplies remain flat.

I will likely get involved in another oil trade at some point in the future, but for right now I’m going to wait for a more prudent entry. Based on current price action, it would not surprise me to see crude oil futures test the $110 – $112 per barrel price range in the near future. If the $112/barrel price level is breached to the upside, a test of the $120/barrel price level will be likely.

The weekly chart of oil futures is listed below:

Weekend Trend Conclusion:
The S&P 500 is in an interesting place as far as the price action is concerned. With earnings season rapidly approaching and a possible break down in the U.S. Dollar Index likely, future price action is uncertain. I am leaning into the bullish camp at this point, but that could change rather quickly based on the price action later this week in both the S&P 500 and the U.S. Dollar Index. One thing worth mentioning is that if the U.S. Dollar Index were to bottom around these levels and a bounce higher transpired, it would put negative price pressure on most asset classes. The fact that price action in the U.S. Dollar Index has been weak lately makes me believe a break down is likely, but as most readers know Mr. Market offers few guarantees.

Assuming the U.S. Dollar breaks down, we should see the S&P 500, precious metals, and oil continue to work higher. My eyes are going to be watching the U.S. Dollar Index closely in coming days/weeks. If a breakdown transpires, the potential upside in precious metals and oil could be intense. Ultimately, I remain slightly bullish on stocks and extremely bullish on oil and precious metals. However, my entire thesis could change if the U.S. Dollar Index starts to firm up and begins to work higher. There are simply too many question marks surrounding price action to take on significant amounts of risk at this point in time.

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Are Stocks & Commodities About To Start Another Rally?

Over the past couple months everyone seems to have been preparing for a sharp market correction. Crazy part is that the SP500 dropped about 10% from the high and that is a typical bull market correction. The thing is… the stock market has a way of slowly unfolding making it look and feel minor, then before you know it, the correction is over and it’s back to an uptrend. That is kind of how this one unfolded.

The good news is that we caught the low risk portion of the correction locking in a 4.5% drop, and we are now in a long trade and in the money by 2.5% with very little down side risk at this point. Time will tell if this up trend is sustainable or not…

Now, let’s take a look at the charts…

Dollar 60 minute intraday chart
As you can see below the dollar looks to have started a breakdown today. If there is continued selling pressure in the next couple days then expect to stocks and commodities to move higher as the US Dollar drops. It is important to know that when a bullish pattern fails we typically see a very strong reaction in the opposite direction (down) catching the majority off guard and they rush to the door.

SPY Broad Market ETF – Daily Chart
A couple weeks ago we watched the market go into a free fall creating a washout bottom. From there we saw prices bounce back and retake my key moving averages. This gave us a bullish bias and dips should be looked at as buying opportunities. I will admit that stocks still have a long way to go before the masses are convinced. I feel we need to see the February and March highs get taken out first. Once they get taken out there should be strong buying as short covering (protective stops from traders who are short) causes a surge in buying pressure sending stocks sharply higher yet again.

My trading buddy David Banister at Active Trading Partners is starting to see small cap stocks come back to life. Money is starting to flow into these lucrative areas of the market and he is on top of things… This week’s trade is up 20% in less than 24 hours which is very exciting.

Gold Daily Chart
Gold has been moving up this year but the current price action is not really getting me excited to buy just yet. Recently we have seen strong selling volume and very light buying volume. My bias still favors higher prices but there is still a good chance we get another dip in the coming sessions.

Mid-Week Trading Conclusion:
In short, I feel as though the dollar will trigger the next wave of buying in stocks and commodities for the next week or two… We should see the dollar make a clean moving in either direction shortly and that will help guide my analysis, positions and setups. I hope this analysis helps you to see the market from a different perspective.

Just click here if you would like to get Chris Vermeulens mid-week reports and his free newsletter.

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