Are we in the Late Stages of a Major Trend?

Last weeks crude oil spike created some exciting trading and so far 2011 has been interesting to say the least. Stocks and commodities have been jumping around with high volatility generating mixed trading signals. This choppy price action typically indicates trends are in their late stages. The late stages of a trend is very difficult to trade because volatility rises meaning larger day to day price swings, and at any time the price could either drop like a rock or go parabolic surging higher in value. Generally the largest moves take place during the final 10% of trend, but with a sharp rise in price keep in mind the day to day gyrations are much larger than normal, hence the false buy and sell signals back to back on some investment vehicles.

Taking a look at the charts it’s clear that we are on the edge of some sizable moves in both stocks and commodities. It’s just a matter of time before a correction is confirmed or this current pullback in stocks is just a dip (buying opportunity). I am in favor of the longer term trend at work here (bull market) but it only takes a 1 or 2 bid down days and that could change.

SPY (SP500 Price Action) – 60 Minute Chart
This chart shows intraday price action with my market internals. It is signaling a short term bottom within the overall uptrend on the equities market. The big question is if this is a just an opportunity to buy into this Fed induced bull market or the start of a larger correction?

Currently I am bullish but the next couple trading sessions could confirm my bullish view or a correction could be unfolding. Until then, we must remain cautious.

Price Of Gold – Weekly Chart
Gold has staged a strong recovery in the past four weeks. But it has yet to break to a new high. I do feel as though it will head higher because of the way silver has been performing (new highs). But it is very possible we get a pause for a week or two before continuing higher.

Because of the international concerns in the Middle East both gold and silver should hold up well even if the US dollar bounces off support. But, if the US dollar breaks down below its key support level we could see stocks and commodities go parabolic and surge higher in the coming months. It’s going to be interesting year to say least…....

Dollar Weekly Chart
This long term view of the dollar shows a MAJOR level which if penetrated will cause some very large movements across the board (stocks, commodities and currencies).

In short, a breakdown will most likely cause a spike in stocks and commodities across the board which could last up to 12 months in length. On the flip side a bounce from this support zone will trigger a pullback in both stocks and commodities. This weekly chart is something we must keep our eye on each Friday as the weekly candle closes on the chart.

Weekend Trend Report:
In short, 2011 has been interesting but trading wise it’s has yet to provide any real low risk trade setups which I am willing to put much money on. There are times when trading is great and times when it’s not. It all comes down to managing money/risk by trading small during choppy times (late stages of trends), and times when we add to positions as they mature building a sizable portfolio of investments which I think will start to unfold over the next few months.

I continue to analyze the market probing it for small positions as this market flashes short term buy and sell signals. Last week we say a lot of emotional trading and that typically indicates large daily price swings should continue for some time still so keep trades small and manage you positions.

You can get our FREE Weekly Analysis here at The Gold and Oil Guy.Com


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J.W. Jones: Mr. Market Sends Oil Investors Mix Signals

While this week was shortened due to the President’s Day holiday, it has been quite a ride for traders and investors. The 24 hour news cycle certainly intensifies current market conditions as any news focusing on oil or the Middle East protests moves markets. Thursday the International Energy Agency came out and indicated that the expected drawdown in crude oil supplies coming from Libya was being exaggerated. Immediately upon the release of this information light sweet crude oil got hammered and stocks rallied from day lows.

By now most market prognosticators and the punditry will be out declaring that oil prices are going to continue lower and equities are on sale and primed for a snapback rally. I’m not sure that it is that easy. Mr. Market makes a habit of confusing investors with mixed signals. One thing is certainly clear from the recent price action, rising oil prices are not positive for equities here in the United States. What is also clear when looking at the Massachusetts Institute of Technology’s (MIT) version of inflation data (http://bpp.mit.edu) for the United States, it becomes rather obvious that inflation continues to ramp higher in the short term and also on monthly and annual time frames.

If inflation continues to work higher, it would be expected that light sweet crude oil futures prices would work higher as well. The dollar index futures have been selling off while oil and precious metals have rallied until the IEA news came out on Thursday. What should be noted from the recent uncertainty in the marketplace is that the U.S. Dollar Index futures did not rally. This is the “dog that didn’t bark.” During recent periods of market uncertainty such as the European sovereign debt crisis, the U.S. Dollar was considered a safe haven. This most recent market uncertainty caused by political instability in the Middle East has seen the U.S. Dollar Index futures sell off while gold and silver rallied as investors looked to the shiny metals for safety.

So what do all of the mixed signals relating to financial markets really mean? It’s simple, the U.S. economy is not on solid ground, rising oil prices will damage the economy, the world does not necessarily view the U.S. Dollar as a safe haven, and inflation is rising. With all of that being said, what if this is just the beginning of a major rally in energy and the metals? What if prices are going to pull back to key breakout levels, test them successfully, and probe to new highs? As can be seen from the chart above, the U.S. Dollar Index is poised to test recent lows. Should price test the lows and breakdown, oil and the metals could rally in lockstep in a parabolic move.

The daily chart of light sweet crude oil futures illustrates the breakout level that oil prices surged from.

I am expecting a test of that level at some point in the near future. If that level holds, oil prices could be poised to take off to the upside. If prices were to move considerably higher it could place downward pressure on equities and would correspond with the U.S. Dollar cycle lows which are expected by most sophisticated analysts sometime this spring. The intermediate to longer term fundamentals in the oil space are strong and technical analysis could also affirm higher prices very soon. If we see the key breakout level hold and a new rally takes shape on the heels of a lower dollar, the equity market could be vulnerable.

The next few days/weeks are going to prove critical as a lower dollar could change everything. A quick look at the silver futures daily chart illustrates the key breakout level which will likely offer a solid risk / reward type of setup.

As can be seen, silver has had a huge run higher and has broken out to new all-time highs. Gold has moved higher but has yet to breakout and could play catch up while silver consolidates. Longer term I remain bullish on precious metals and oil, but volatility is likely to increase in both asset classes going forward, particularly if inflation continues to increase. Patience and discipline will be critical in order to enter positions where the risk / reward validates an entry.

As for the equity market, it remains to be seen what we will see next week. I am not convinced that the issues in the Middle East are over and that oil is going to come crashing back down to previous price levels. Oil has broken out and if the breakout levels hold I would expect a continuation move higher. If we see price action in oil transpire in that fashion, equities will be for sale and prices could plummet tremendously.

I will be watching to see how much of the recent move lower is retraced. If we see a 50% retracement and prices rollover the S&P 500 will likely be magnetized to the 1275-1285 price range. If that price level is tested and fails, we are likely going to see a 10% correction and potentially more. The daily charts of SPX listed below illustrate the key Fibonacci retracement levels as well as the key longer term price levels that could be tested if prices rollover.

While lower prices are possible, if we see a retracement of the recent move which exceeds the 50% retracement level in short order prices will likely test recent highs and begin working higher yet again. The price action on Friday and next week is going to be critical to evaluate as many traders and market participants are going to be watching the price action closely looking for any clues that might help indicate directionality.

For right now, I am going to be patient and sit in cash and wait for high probability low risk setups to emerge. As I have said many times, sitting on the sidelines can be the best trade of all!

Get More Trade Ideas J.W. Jones visit Options Trading Signals.Com


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Is it Really That Easy to Replace Libyan Oil

If you listen to the TV news man we have nothing to worry about. Saudi Arabia will make up for the Libyan crude oil not making it to the market. Well, we know it's just not that simple. Most European refiners that rely on this sweet light crude coming out of Libya cannot handle the high sulphur content and sour nature of the Saudi crude. And that's if the Saudis can even back up the ability to increase their production on the drop of the dime.

Here's how the oil producing countries stack up in quality of oil they produce......

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High Oil Prices Have Fund Managers Moving Into "Risk Off" Mode

Let's ask ourselves "what is the true cost of oil". Economists are furiously downsizing their economic growth forecasts for 2011 in the wake of the oil price spike, both for the US and for the world at large. Since last week, West Texas crude prices have soared $12 from $86 to $98. Each $1 increase in the price of oil jumps gasoline prices by 2.5 cents. Each one cent rise in the cost of gasoline takes $1 billion out of the pockets of consumers.

If oil stays at this price, it removes $30 billion from the pockets of consumers. At $110 a barrel, it short changes them by $60 billion, or 4.1% of GDP. Subtract this out from even the most optimistic GDP forecasts for this year, and you end up with negative numbers. That, my friends, is what they call a recession. If you wonder why hedge fund managers have lurched into an aggressive "RISK OFF" mode, are throwing their babies out with the bathwater, and why the volatility index is spiking to three month highs, this is why.

Posted courtesy of our partner John Thomas, "The Mad Hedge Fund Trader"


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WIA: The Resurrection of Peak Oil

1) The Resurrection of Peak Oil

It has been a long wait for “peak oilers,” whose passionate belief is that the world will run out of oil in coming years, sending prices through the roof.

This splinter religion came into being in 1956 when M. King Hubbert produced some simple supply/demand charts showing that US reserves of Texas tea would dry up by 1965-70, forcing a heavy reliance on imports with which we have become all too familiar. This was later expanded globally, implying that Western civilization would come to a grinding halt.

It all seemed very prescient, when in 1973 OPEC raised prices from $3/barrel to $12 in the wake of the Yom Kippur war, and the resulting boycott caused enormous lines at American gas stations. It happened again in 1979 with the fall of the Shah of Iran, taking crude from $12 to $40. Then Saudi overproduction kicked in big time, bring 20 years of falling prices, all the way down to $8. At the 1998 low, oil was selling for less than the barrel that contained it.

Then came China and the commodities boom, which suddenly sent the value of all things “hard” skyward. Virtually overnight, the Middle Kingdom became the world’s largest marginal consumer of not only oil, but all energy sources. By 2008, peak oilers had the second coming in sight, with prices soaring to $150/barrel.

Enter the Great Recession. The real damage this caused was not the temporary collapse of prices down to $28/barrel and the wiping out of many industry participants. It was the two year freeze on the financing of new exploration and development, a byproduct of the Wall Street crash. BP’s Gulf oil spill didn’t help matters either. These events have combined to create a bubble in the energy pipeline, the implications of which we may only just now be seeing.

Now the Middle East is blowing up. With populations exploding, per capita incomes plunging, and a religion that mires them in the 14th century, this sort of viral, grass roots revolution could have, and should have happened any time over the last 40 years. It took cell phones, social media, and the Internet to provide the spark. At first, the world didn’t care, as Egypt and Tunisia produce little oil, and are non-factors in the global economy.

Now it’s Libya’s turn, and it’s a different kettle of fish. Having dealt with the Libyan government myself since 1968—Muammar Khadafi overthrew the government just before I was about to cross the border —I can only say this couldn’t happen to a nicer guy. I missed the Pan Am flight he blew up over Lockerbie, Scotland by a week and lost a few friends. The sooner he is found hanging by his heels from a lamp post, the better.

The revolution there raises broader, far more concerning questions. If it can happen in Libya, why not in Saudi Arabia, where the government is still essentially tribal in nature and will not be winning any prizes for their human rights record anytime soon. Women are still not allowed to drive. Take their 12 million barrels/day off the market, even for a few days, and the geopolitical implications are large.

Which brings me back to peak oil. After a quiet, long term downsizing, the US now only imports 2 million barrels a day from the Middle East. Canada is now our largest foreign supplier, followed by Mexico and Venezuela. But oil is a globally traded commodity, and if you prick the supply line in one place we all have to pay. Remove Saudi Arabia from the picture, and the results could be catastrophic, for China first, but for ourselves as well.

Even without these “Armageddon” scenarios, we are still facing a huge problem. World oil production today is 82-83 million barrels/day. There is probably another 5 million barrels/day in reserve. By 2015, an additional 3 million barrels/ day in will come on stream that was financed prior to the Wall Street melt down. After that, new supplies become very problematic.

Even if the US can keep its own demand relatively flat through modest economic growth, conservation, new efficiencies, alternatives, and switching to natural gas, China promises to eat up all of this increase. That’s when the sushi hits the fan. I think oil could hit $300/barrel by 2020, or $225 in today’s prices. If you are wondering why I have become so cautious about investing lately, this is a major reason why.

Which leads us all to the bigger question of how do we make a buck out of all of this? Brent crude, which trades in Europe, is already at $104.40/barrel, a $12/barrel premium to our own West Texas intermediate. Prices here have stayed low because of a shortage of storage facilities. My buddies in the field also tell me there is some elaborate conspiracy to keep West Texas artificially low, because the prices for Middle Eastern imports are priced off of that highly manipulated benchmark. It is far more likely that West Texas trades up to Brent than the other way around.

I missed the window to get in last week at $85/barrel. But if you believe it’s going substantially higher, it is not too late to get involved. For a start, do notbuy the oil ETF (USO). The tracking error caused by the contango will kill you, assuring that you will take all of the risk but get few of the benefits.

Individual oil major stocks that I have been recommending, like ExxonMobil (XOM), BP (BP), and ConocoPhillips (COP) are great vehicles. A simple alternative is to pick up the double long oil majors ETF (DIG). These guys have massive supplies in the pipeline that are about to be revalued by higher prices. So are independents like Occidental Petroleum (OXY). You can throw oil service companies into the mix as well through the ETF (OIH). Higher oil prices almost make alternative energy producers like First Solar (FSLR) much more profitable.

As (OXY) founder, Dr. Armand Hammer, told me when I was a kid, “Keep your eye on oil, because everything stems from that.” Some 40 years later, and I think the old man is still right.

Quote of the Day

“The American hegemon knows no limits, it seems, when it comes to other people’s money for their own consumption….The American answer to a bulging waste line is always manana,” said Bill Gross, managing direct at the bond giant, PIMCO.

Posted courtesy of our partners at The Wealth Insider Alliance

Check out Macro Millionaire John Thomas


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An Interesting Twist on Shorting Gold

In todays short 4 minute video we explain exactly what we mean by a "short gold position." It does not mean we are bearish on gold, however the scenario we point out in this video could make money by being short gold and long another important market.

The video points out what the scenario is, and which market you should be long in, against a short gold position. This is an interesting twist and a video you shouldn't miss.

As always our videos are free to watch and there is no registration required. Please feel free to re-tweet this video on Twitter or share this video on Facebook. Also take a minute to leave a comment and let us know what you think about the video.

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Dian Chu: A Tale of Crudes.....Anybody Got A Big Rig?

From guest blogger By Dian L. Chu at the EconForecast......

On Wednesday, Feb. 16 Israel said Iran is sending two warships into the Suez Canal on way to Syria, and that the action is considered a “provocation.” Due to the long history of bad blood between Israel and Iran, this very possible scenario was enough to even send the bear infested NYMEX crude oil futures volume surging midday.

West Texas Intermediate (WTI) on Nymex rose to just below $85, while Brent crude on the ICE futures exchange spiked $2.17 higher to $103.81 a barrel, a 29 month high, widening the WTI Brent spread to a new record near $19.

High Middle East Tension

Then on Friday, Feb. 18, AFP reported that permission has been granted for Iranian warships to transit the Suez Canal into the Mediterranean. Canal officials say it would be the first time Iranian warships have made the passage since the 1979 Islamic revolution, while Israel has labeled the Iranian action as "hostile' and said Israel was closely monitoring the situation.
As the worst Israel-Iran conflict scenario failed to materialize, at the close Friday Feb. 18, Brent crude oil for April settled at $102.79 while WTI for April delivery rose to $89.71, narrowing the spread to $13.11.

Crude Glut at Cushing, OK

Since WTI is lighter and sweeter crude which requires less processing, it has historically enjoyed a $1 – $2 a barrel price premium to Brent crude oil. According to Bloomberg, the WTI Brent gap averaged only 76 cents last year.

However, WTI’s premium disappeared about a year ago and in recent days it has been trading at more than a $10/bbl discount to Brent mainly due to rising inventory levels at Cushing OK, the delivery and price settling point of Nymex crude futures.....Click Here to Read The Entire Article and View Dian's Charts.



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Technical Formations You Shouldn't Miss

Experienced traders have been using this particular technical formation for many years and it continues to produce profits for those who can spot it, and better yet, take advantage of it.

In this new short video we are going to share the market, the pattern, and a price projection where we think this market is headed based the MarketClub Trade Triangle technology.

We hope that this educational video will help you spot this very same technical formation in the future. The video is extremely short and will only take a few minutes of your time, however, the lesson is priceless.

As always our videos are free to watch and there are no registration requirements. Our only request is that you tell your friends about The Crude Oil Trader by Tweeting and sharing this post on Facebook and other social networking sites. We would also enjoy hearing from you, so please feel free to comment here about this video.

Want to trade like Adam? Click here for FREE lessons.

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Do You Know Where to Find our MarketClub Webinar Archives?

MarketClub webinars are a great free, educational and sales tool that allows users interact with Adam. Not everyone can make it to the live webinars whether it be because of the user limit, scheduling etc so I wanted to make sure you knew where you could find our webinar archives.

Here is a link to our latest webinar from February 9th...."Strategy Trading Webinar"

Here is a link to our "Upcoming Webinar Page". It will update with the latest webinar and information so you can continue to use the same link for your users for multiple webinars. It also has a list of archived webinars so that users can see all past webinars.


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Just When the Bears Think They are Home Free, Mr. Market Reminds Them Who is in Charge

While it may be bear season in the equity markets as Mr. Market continues to punish the ursine, the oil futures market has produced a new home and a new river for eager bears to feed. Mr. Market has had an appetite for S&P 500 bears for several months now. In each instance in which the bears think they are going to get away, Mr. Market draws up his high powered rifle and drops the bears just before they can comfortably return to their caves. Just when the bears think they have escaped and are home free, Mr. Market reminds them who is in charge.

However, Mr. Market’s appetite for oil bears has diminished tremendously over the past week as the U.S. Dollar and geopolitical news coming out of Egypt pushed oil prices lower. Mr. Market’s appetite is always changing it would seem, but right now he is enamored with S&P 500 bear meat and not really that interested in the oily bear meat. The question remains whether his tastes will change in the near term, or if he will continue to turn S&P 500 bears into fodder and steak.

S&P 500
With all metaphors and short stories aside, the price action in the S&P 500 for the past several months has been devastating for bears. Going back to November of 2010, every key resistance level ended up being taken out by the bulls and prices pushed higher and they push higher still. Last Friday’s close pushed prices to new recent highs and in time prices may challenge long term overhead resistance levels. The table below shows just how extended the equity market is:

As can be seen above, 82.73% of all stocks are currently trading above their 200 period moving average and over 68% of equities are above the 20 and 50 period moving averages. While this certainly does not mean that prices are going to rollover, it is hard to refute the conclusion that prices in the equity market are overbought.

A quick glance at the SPX daily chart reveals the recent price action.

It is obvious when looking at the SPX daily chart that prices are extended to the upside in this bull market run. However, as I pointed out in a recent article the distance between current price action and the 200 period moving average is significant. There is a total of 167.79 SPX points between Friday’s close at 1329.15 and the 200 period moving average at 1161.36. Based on Friday’s closing price a reversion to the mean (200 period moving average) would produce a decline of around 12.62%. The SPX weekly chart is shown below:

It is worthy of note that the May 2008 swing high of 1,440 coincides with the upper band of the rising channel that is obvious when looking at the weekly chart of SPX. While price action may or may not get to SPX 1,440 during this bullish run higher, it is likely not coincidental that both key trend lines coincide at the same price point. The intersection of the long term rising trend lines corresponding with the upper band of the current rising channel and the 1,440 swing high may be something of import, or it might turn out to be nothing. However, it certainly is an eery coincidence on the chart if you believe in coincidences.

I am still convinced that stocks need to pullback at some point if they are to continue higher. Consolidation or a 5-10% correction would likely be healthy for the market and might prove to be a launchpad for another thrust higher in price. From the underlying strength in the domestic market, a correction or pullback will likely be an opportunity to get long barring price breaking down through the lower level of the rising channel located on the weekly chart.

I am not sure that I am going to get involved in the short side if we see bearish price action in coming weeks, instead I will likely be looking for opportunities to get long equities at more attractive prices. Right now risk to the downside appears to be increasing as the S&P 500 continues to probe higher.

Light Sweet Crude Oil
Oil prices surged when Egyptian protests intensified and have sold off recently as President Mubarak has stepped down and demonstrations have turned into nationwide celebrations. In addition, the U.S. Dollar has strengthened considerably the past few days which has also put price pressure on oil. The daily chart of light sweet crude oil futures is illustrated below:

Oil price are hanging onto a key support level by a thread and price action in the coming week could see prices push lower through the support area and an eventual test of the 200 period moving average. I am not considering a short in oil, but I am looking at lower prices as a solid risk / reward long entry. I am going to be patient, but envision building a longer term trade using options to profit from a possible rally after putting in a clear bottom.

Right now, price could hold above current support levels and bounce higher, but I think the more likely scenario is a brief bounce early this week and then a flush out lower running stops and reaching panic level selling. As is customary for my trading methodology, I will be looking to buy into panic selling should that take place, however at this point I am not interested in getting involved just yet. I intend to remain cautious and will patiently wait for a low risk, high probability trading setup to emerge. Until then, I will be watching the price action from the sidelines letting others do the heavy lifting.

Conclusion
While it may be bear season in the equity markets as Mr. Market continues to punish the ursine, the oil futures market has produced a new home and a new river for eager bears to feed. The question continues to remain how long will Mr. Market punish the short traders in equities while rewarding them in the oil futures pits. Mr. Market may be losing his appetite for bear meat in equities and he might just decide to feast on some bears covered in oil. Time as usual will be the final arbiter, but for right now I’m sitting on the sidelines waiting for Mr. Market to tell me his next order.

Just Click Here to Get More of J.W. Jones' trading ideas at Options Trading Signals.Com


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