The Final Market Rally up Before The Big Leg Down is Near an End

Back on October 3^rd, I penned a public article  forecasting a major low in the SP 500 to occur around 1088.  The SP 500 had been declining from the 1370 highs this May and was in the 1130’s and nearing its final descent in a corrective pattern.  The next day, the market bottomed intra-day at 1074 and closed north of 1100.  Since that time, we have rallied impressively to a high of 1292, with a strong pullback to 1215, and now what I believe is the finally rally to a major top formation.

This current rally is part of a normal retracement of the 1370 highs to 1074 lows that similarly occurred in the 2008 rally off the first major market drop.  One would expect this rally to take a few months to complete from October 4^th and likely peak sometime between now and Christmas in the 1292-1320 ranges as outlined below.

First you must understand that my forecasts are largely based on human behavioral patterns and not economic news or European headlines.  The crowd commonly buys and sells in the same fear and greed swing patterns over and over again throughout history.  Once you understand these patterns, you can make pretty strong educated guesses on the direction and pivot highs and lows within a few percentage points.  Other than those wave patterns, there are other indicators I use to confirm what I think I’m seeing, so let’s review:

1.  The bullish Percent Index readings are now at 72%, which typically is an area that marks a rally high in the markets.  These indicators tell you how many of the SP 500 stocks have bullish point and figure charts.  Typically a reading over 70% is way overbought and all bulls are on board, and a reading below 30% is the opposite.   The market bottomed this summer twice on August 8^th and October 4^th as these readings were sub 30%.  The market topped in July at 1356 as this reading was over 70%. With my wave patterns and this reading now again over 70%, it’s a strong warning of an imminent reversal.
2. Sentiment Indicators are now back to full on bullish.  In the most recent AAII survey, we have nearly 46% of those polled bullish, up from an extreme low of 24% in early October near the market lows.  In addition, the Bears in this survey are at a near extreme low of 24% of those polled, leaving the ratio at almost 2 to 1 bulls.  This is another warning flag.

The Bullish Percent Index chart is below with some notations:

Stock Market Forecast

Longer term, my best view right now is that this is a counter-trend bounce off the 1074 lows that will give way to another big down leg.

Here is my reasoning:

First, look at the SP 500 chart. I show the congestion zone from 1275-1300.  My Fibonacci and wave targets have been 1292/93-1306 for a few weeks; we hit 1292/93 once and fell hard.  The market is trying to work back up there in this final E wave up I think.  So far 1274-76 were hit (One of my targets) and we will see if it can run to 1292/93 and the final is 1306-08.

Stock Market forecast Prediction

This is a B wave rally or wave 2 rally off the 1074 lows. We are in a bear cycle bounce.

From March of 2009 (I forecasted a market low on Feb 25th 2009), the market rallied from 666 to 1370 in 3 clear waves, ABC. Those are corrective patterns of a bear market. The market topped at .786% of the 2007 highs to 2009 lows at 1370 with Bin Laden’s death, a seminal event.

Since then 5 waves down (impulsive) to 1074 marked a 38% retrace of the Bear rally that went from 666 to 1370.

This is a counter trend rally from 1074 to 3 potential pivot areas. 1292 (which I forecast and already hit), 1306-1308, and max 1320. 1306-08 is probably the max in my views.

Why?

A wave: 1074-1233 wave A from October 4th lows.  (I forecasted a bottom on October 3rd)

B wave:  1233-1195 wave B (A mild .236% retrace of A wave)

C wave: 1195- 1292, 1308, 1320 wave C  (Where wave c is either .618, .71, or .786 of wave A (159 points 1074-1233)

This recent pattern in a more microcosmic view is much like the ABC rally from 666 to 1370. There the A wave was huge and went from from 666 to 1221.  The B wave 1221-1010; and then the C wave 1010-1370.  That C wave was only 64% of the A wave.  All of those pivots, 1010, 1221, 666, 1370 etc. have Fibonacci relationships to prior market highs and lows.

I’m looking for this current counter-trend rally to mimic the nature of the 2009-2011 ABC Rally.  That means this final pattern up now we are in from 1195 pivot would be much less substantial than the rally from 1074-1233.  That is why I look for 1292-1306 ranges (same forecast I had weeks ago) as a top between now and Christmas at best.  At any time this market could top and crack, so I’m laying it out as best as I can.

Bottom Line: Market is trying to complete a counter trend rally which so far peaked at 1292/93 and is struggling to get back up there or maybe a tad higher before the markets lose strength.  Many indicators short term are peaking as well, and everyone should be on guard.  If you’d like to be forewarned of major tops and bottoms in Gold, Silver, and the SP 500 with outside the box thinking, check us out at www.Market Trend Forecast.com for a great offer.

Our normal price is $327 per year, however, in the spirit of the holiday’s and the upcoming “Black Friday” shopping day, we are offering an early Holiday Present with a large discount of $100 off the annual price for just $227 for the first year of your TMTF subscription.

David Banister

Has The SP 500 Index Been Naughty or Nice?

At the beginning of this week I warned readers that the market was extremely overbought and that a top could be forming. While it is still unclear whether a major top has formed, it is without question that we saw a major correction on Wednesday as yields on Italian debt caused margin requirement adjustments at the London Clearing House.

I generally will not make bold predictions as today’s financial markets are so dynamic that a lot can change in a short period of time. However, Tuesday night I sent out a video to members of my service which I entitled my “European Rant.” My soapbox rant discussed where we were in the market and what my thoughts were regarding the structural issues in Europe.

Little did I know that the very next day Italian 10 year bond yields would surge calling the fiscal stability of the Eurozone back into question. My intent for the video was to give my members a better understanding of what was going on in Europe. As it turned out, the video was spot on in its timing so I could not help but share it with readers.

My current view on the S&P 500 is neutral. I am watching several key price levels on the S&P 500 Index for clarity, but so far Mr. Market has not tipped his hand. I am watching for a breakout over recent highs around the 1,290 area before I consider layering back into long positions. Consequently, I am watching the 1,230 and 1,190 areas as potential short entry points. The daily chart of the S&P 500 Index is shown below:

SPX Option Support Levels

Clearly the 1,190 – 1,200 level should offer strong support as the 50 period moving average is resting right at the 1,200 price level currently. If the 1,190 price level breaks down I think we could see a dramatic selloff transpire. On the flip side, if the recent highs around 1,290 are taken out to the upside we could see a rally that takes us back to the 2011 highs around 1,370. Right now I am going to wait patiently and let others do the heavy lifting.

The 1,257 price level on the S&P 500 Index is a major pivot that I am going to be watching closely. If the bulls can push prices above that area for two or more consecutive closes I think the bulls may have the bears on the ropes. As of the writing of this article, the SPX is currently trading around the 1,263 level. If the bulls can hold up prices into the closing bell, we could see an extension higher on Monday. The chart of SPX below illustrates the key 1,257 price level:

SPY Option Trading Setup

At the close on Tuesday I was involved in a SPY 122 Put Calendar Spread for members which capitalized on time decay (Theta) as well as lower prices in the SPY ETF. Thursday morning I took profits on the position locking in a gain of around 13% on maximum risk. Recently I have had several winning trades for members of my service, but I admittedly have been taking profits aggressively and trading in smaller size due to the wild volatility swings that are commonplace in this market.

Trading is a marathon, not a sprint and my focus is to live to play another day. Since the inception of my service, I am running at about a 70% success rate based on all trades that have been taken. I am not telling you this to boast, I am telling you this to point out that I am wrong 30% of the time. In the trading world the overall numbers look good, but if my position sizing is not appropriate the 30% could potentially blow up my account.

With that in the back of my crowded mind, I try to use smaller position sizes and lock in profits aggressively during times of widespread volatility. I take fewer trades and focus my attention on risk and money management during times of heightened volatility which has been prevalent the past few weeks.

In addition to monitoring my risk profile, I am watching the price action in two underlying assets which I believe will throw off clues about where this market may be headed. The EUR/USD currency pair has been on my screens quite a bit the past few weeks. Most of the time I monitor the U.S. Dollar Index futures as well, but recently my focus has been on the currency pair. The chart below illustrates the correlation between the Euro currency and the S&P 500 since September:

Euro Index Trading

Since the beginning of September, the moves in the S&P 500 have been very similarly correlated to the Euro currency as can be seen above. Additionally the Dow Jones Industrial Average also has very similar congruence in terms of price action when compared to the Euro.

The strength of the Euro has a profound impact on the price action of the U.S. Dollar Index. The U.S. Dollar Index soared on Wednesday and took out recent resistance. Since Wednesday, the Dollar has been retracing a large portion of the move higher. The daily chart of the Dollar Index is shown below:

USD Dollar Index Trading

It is a bit too early to tell for sure, but the Dollar could be rolling over based on austerity plans coming out of Italy and the expectation that the Eurozone is going to try to get ahead of the crisis unfolding based on the yields of Italian government debt instruments.

Last and certainly not least is the banking sector of the economy. The KBW Banking Index (BKX) is a proxy for financial institutions domestically. The KBW Banking Index is a great indicator for the future price action in the S&P 500. Stocks cannot rally if the banks do not participate with higher prices.

If stocks are selling off and the financials are holding up well many times equity indices will reverse higher. The key price level that a lot of traders are monitoring currently is the 40 area. The daily chart of the KBW Banking Index is shown below:

Banking Index XLF, FAS Trading

Similar to the key 1,257 pivot level on the S&P 500 Index, the key 40 price level on the KBW Banking Index has a similar impact on the underlying price action. If the bulls can push the BKX above the 40 price level and hold it up then a rally in stocks becomes more likely. As I write this, the BKX is trading at $39.78 / share so we are getting close to crunch time. The S&P 500 has broken above its pivot during intraday trade and now a lot of eyes are watching to see if the banks can follow through.

Ultimately investors could be looking at a Santa Claus rally or an absolutely ugly selloff in the near future. I will be monitoring the key price levels mentioned above on the S&P 500 and will wait patiently for Mr. Market to tip his hand. This is a tough market to trade and volatility is running relatively high. Headline risk coming out of Europe is seemingly constant. I would keep position sizes light and monitor risk aggressively. This is not the time to be a hero!

Subscribers of OTS have pocketed some serious return in the past few months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at Options Trading Signals.com and take advantage of my professional trading alerts and position management experience each week.

JW Jones

ONG: Crude Oil Weekly Technical Outlook

Crude oil's rise from 74.95 continued last week and reached as high as 99.20 and is picking up intraday upside momentum again towards the end of the week. Bias will continue to remain on the upside for 100 psychological level, which is close to 61.8% retracement of 114.83 to 74.95 at 99.60 and 100.62 resistance. Sustained break there will target 114.83 resistance next. However, note that a break of 95.29 minor support will suggest that a short term top is formed and flip bias back to the downside. Further break of 89.17 support will indicate completion of the rise from 74.95 and should turn outlook bearish for a test on this support level.

In the bigger picture, the choppy corrective structure indicates that price actions from 114.83 are merely a correction, or part of a consolidation pattern to decline from 114.83. Such decline should have completed at 74.95 after being supported above 50% retracement of 33.2 to 114.83 at 74.02. That is, rise from 33.2 is not finished yet. Sustained trading above 100 psychological level will affirm this case and would likely send crude oil through 114.83 high. On the downside, break of 74.95 will revive the case that rise form 33.2 is already finished at 114.83 and will turn outlook bearish.

In the long term picture, crude oil is in a long term consolidation pattern from 147.27, with first wave completed at 33.2. The corrective structure of the rise from 33.2 indicates that it's second wave of the consolidation pattern. While it could make another high above 114.83, we'd anticipate strong resistance ahead of 147.24 to bring reversal for the third leg of the consolidation pattern.

ONG Crude Oil Continuous Contract 4 Hours, Daily, Weekly and Monthly Charts

It's Make or Break Time For Crude Oil....And Your Vote is?

Short of a lifetime or a new bull run in the making. Thoughts?



Chart posted courtesy of The Slope of Hope, please join the conversation there as well.

Phil Flynn: The Great Energy Divide

There is a growing gap is this country between the haves and have nots. This is what I call the great energy divide. If you heat with natural gas you are the fortunate and if you heat with heating oil, well boy, you are in trouble. Once again heating oil soars as US supply is dangerously low and strong demand elsewhere around the globe is keeping our supply tight.

The good news is that as refiners ramp up production to meet heating oil demand, the beneficiary will be gasoline as supply should surge because demand is still weak. This of course opens up a host of spread opportunities whether you are talking about the " Widow Maker", heating oil versus gasoline spread or even the Brent versus WTI spread and the gasoline vs crack could fall while the heat vs crack could rise. The best part is that volatility, the mother's milk of the oil speculators, will continue to run high.

This of shortage has been building for weeks. We wrote about how the heat oil gasoline spread had widened. At the same time we have seen the gas crack tank and the Brent versus WTI spread come back in. At the same time US refiners expected strong demand for WTI crude is one of the reasons that this market may just kiss $100 a barrel. Heat oil is probably headed to above $3.20 so other than worrying about Italy's bond yields or whether the next Greek Prime Minister is going to be Papademos or Popinfresh, oil traders have to watch the supplies of distillates closely as they are the tightest they have been in about four years.

Of course natural gas users are in heaven. While natural gas storage is down 0.2 percent from last year, record supply natural gas stocks should set a new record because of above average temperatures that are being forecast. The EIA said that the week ending Nov. 4, the country's natural gas stockpiles fell 6 billion cubic feet from last year at this time, coming in at 3,831 bcf and increased by a more than expected 37 bcf increase from last week. Stocks are now a whopping 215 bcf above the 5 year average.

Traders are going long heat short natural gas and nat gas prices for the strip are near historic lows for this time of year......Read the entire article.


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Obama Delays Decision on Keystone XL

The U.S. Department of State announced Thursday afternoon that it will postpone making a decision on whether TransCanada's proposed Keystone XL Pipeline project is in the national interest until at least early 2013.

Under Executive Order 13337, the State Department can issue Presidential Permits for transborder pipelines projects that it deems are in the national interest. The department has led what it calls a "transparent, thorough and rigorous" review of TransCanda's permit application for the Keystone XL project, and the executive order directs the secretary of state or a designee to consult with at least eight other federal agencies. The pipeline would carry crude oil approximately 1,661 miles from Alberta's Oil Sands to refineries along the Texas Gulf Coast.

This past summer, the State Department issued its Final Environmental Impact Statement (EIS) for the project under the National Environment Policy Act (NEPA). The agency found that the 36-inch-diameter pipeline would pose "no significant impacts" to most resources along the proposed route. Prior to Thursday's decision to delay making the national interest determination, the State Department accepted public comments during a 90-day review period. Click here for a timeline showing the agency's role in the permit review process......Read the entire article.


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Crude Oil Bulls Cling to Technical Advantage, Gold Bulls Losing Strength

Crude oil was slightly higher overnight as it extends the rally off October's low. Stochastics and the RSI are overbought but remain neutral to bullish signaling that additional short term gains are possible. If December extends the rally off October's low, the 62% retracement level of the May-October decline crossing at 100.08 is the next upside target. Closes below the 20 day moving average crossing at 92.33 would confirm that a short term top has been posted. First resistance is the 62% retracement level of the May-October decline crossing at 100.08. Second resistance is the 75% retracement level of the May-October decline crossing at 105.41. First support is the 10 day moving average crossing at 94.99. Second support is the 20 day moving average crossing at 92.33. Crude oil pivot point for Fridays trading is 97.11.

Natural gas was lower overnight as it extends this year's decline. Stochastics and the RSI are oversold but remain bearish signaling that sideways to lower prices are possible near term. If December extends this year's decline, monthly support crossing at 3.225 is the next downside target. Closes above the reaction high crossing at 3.978 are needed to confirm that a short term low has been posted. First resistance is the reaction high crossing at 3.978. Second resistance is the reaction high crossing at 4.039. First support is the overnight low crossing at 3.605. Second support is monthly support crossing at 3.225. Natural gas pivot point for Fridays trading is 3.656.

Gold was higher overnight as it consolidates some of this week's decline. Stochastics and the RSI are overbought and are turning neutral to bearish hinting that a short term top might be in or is near. Closes below the 20 day moving average crossing at 1719.60 are needed to confirm that a short term top has been posted. If December extends the rally off September's low, the 75% retracement level of September's decline crossing at 1826.50 is the next upside target. First resistance is the 75% retracement level of September's decline crossing at 1826.50. Second resistance is the 87% retracement level of September's decline crossing at 1875.10. First support is the 20 day moving average crossing at 1719.60. Second support is the reaction low crossing at 1681.20. Gold pivot point for Fridays trading is 1757.70.

Adam Hewison: Don’t Underestimate Yesterday’s Market Action

Yesterday’s action in the equity markets is a grim reminder of just how fragile the economic and financial system is globally. We would not dismiss the market action as just another pullback in the market.

The sharp down move should not be ignored, in my opinion. We are looking at a key support level on the S&P 500 at $1220. A close below that level will accelerate the decline to the next key level of support, which is $1180. That move may have to wait until Friday as traders jockey for positions today. For the year, the S&P at the moment is down, the NASDAQ is flat, and the DOW is barely higher with gain of 3%.

The copper market gave a pretty strong negative signal yesterday, as it moved below the $3.50 level. The copper market is telling us that demand is just not there for this industrial metal. For some time now, we have been discussing the trials and tribulations of Europe and all the drama that has become a Greek tragedy. The fact that they have a new prime minister in Greece does not change one thing, in my opinion.

Italy is now the star of the show, and we are not convinced that Prime Minister Berlusconi is going to step down off his pedestal anytime soon. Politicians still have a “quick fix” mentality and are counting on that to solve this mega financial mess. The reality is, there is no quick fix. It is going to take years for this mess to be cleaned up, and in all likelihood it will get ugly.

The best thing a trader can do at the present time is to watch the market action, as it will tell you exactly what to do. We believe the rest of this week is going to be a very important one, particularly where we close tomorrow. If we have a negative close on Friday below $1220 on the S&P 500, we would then expect to see this index move lower for the balance of November.

Now let's take a look at our trend analysis for crude oil........

We suspect that the crude oil market, basis the December contract, will have problems between the $97 a barrel to $100 a barrel level. With a Chart Analysis Score of +70, this market may be trying to move out of its broad trading range and reach the $100 mark. The $100 level represents a 61.8% retracement of the entire down move starting from the highs seen earlier this year in April. Intermediate term traders should be on the sidelines. Long term traders should continue to be short the crude oil market.


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Oil Executive: Military Style "Psy Ops" Experience Applied

Last week’s oil industry conference at the Hyatt Regency Hotel in Houston was supposed to be an industry confab just like any other, a series of panel discussions, light refreshments and an exchange of ideas.

Robert Nickelsberg | Getty Images

It was a gathering of professionals to discuss “media and stakeholder relations” in the hydraulic fracturing industry, companies using the often-controversial oil and gas extraction technique known as “fracking.” But things took an unexpected twist.

CNBC has obtained audiotapes of the event, on which one presenter can be heard recommending that his colleagues download a copy of the Army and Marine Corps counterinsurgency manual. (Click below to hear the audio.) That’s because, he said, the opposition facing the industry is an “insurgency.”

Another told attendees that his company has several former military psychological operations, or “psy ops” specialists on staff, applying their skills in Pennsylvania. (Click below to hear.)

The comments were recorded by an environmental activist, who passed along audio files to CNBC. The activist, Sharon Wilson, is the director of the Oil & Gas Accountability Project for the nonprofit environmental group Earthworks. She said she paid full price to attend the two day event, and wore a nametag identifying her organization as she recorded the conference......Read the entire CNBC article.

Crude Oil Rises Near Three Month High on Europe Sentiment and U.S. Inventories

Crude oil rose to its highest in more than three months in New York as falling unemployment applications and decreasing crude supplies in the U.S. bolstered confidence that demand will remain supported.

Futures extended gains after the Labor Department said that jobless claims fell by 10,000 to 390,000 in the week ended Nov. 5., the lowest level in seven months. Oil had already gained after Italy met its fund raising target in a Treasury bills auction. The International Energy Agency reduced forecasts for global oil demand in 2012 for a third month on weaker prospects for developed nations.

“It’s quite bullish at the moment in the oil market,” said Gerrit Zambo, a trader at Bayerische Landesbank in Munich. “But the bullish sentiment can easily turn again if we see markets crashing further due to the Italian situation”.......Read the entire Bloomberg article.

$100 Resistance Next Target For Crude Oil Bulls

Crude oil closed lower due to profit taking on Wednesday as it consolidated some of the rally off October's low. The mid range close sets the stage for a steady to lower opening on Thursday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If December extends the rally off this month's low, the 62% retracement level of the May-October decline crossing at 100.08 is the next upside target. Closes below the 20 day moving average crossing at 91.15 are needed to confirm that a short term top has been posted. First resistance is the 62% retracement level of the May-October decline crossing at 100.08. Second resistance is the 75% retracement level of the May-October decline crossing at 105.41. First support is the 20 day moving average crossing at 91.15. Second support is the reaction low crossing at 89.17.

Natural gas was sharply lower on Wednesday as it extends this week's decline below broken trading range support crossing at 3.724. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If December extends this year's decline, monthly support crossing at 3.225 is the next downside target. Closes above the reaction high crossing at 3.978 are needed to confirm that a short term low has been posted. First resistance is the reaction high crossing at 3.978. Second resistance is the reaction high crossing at 4.039. First support is today's low crossing at 3.648. Second support is monthly support crossing at 3.225.


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Phil Flynn: Italy Inverts

Crude oil prices are starting to pullback as the situation in Italy goes from bad to worse. The Italy bond yield curve has gone inverted suggesting that the recent Italian Prime Minister Berlusconi show has taken away Italian confidence and could drive the country into a recession. While Berlusconi is promising to go somehow that is not giving the market the same solace that it seemed to yesterday.

Yesterday Iran fears helped drive the market higher but today it is the concern of economic slowing and the fear of contagion. Maybe because the market is not convinced that the bombing of Iran is not going to happen anytime soon. That makes the news on Chinese inflation data sort of a double edge sword. Yes China inflation hit a five month low and that will allow China some slack to stimulate the economy. Yet at the same time the Chinese economy might be slowing reflecting a great European recession .

President Obama 5 year plan for offshore drilling is a five year plan to economic disaster. President Obama trying to provide political cover for his politically motivated drilling moratorium that has cost this nation thousands of good paying jobs and has intensified the impact of the recession across the south is now proposing a five-year plan to open up six areas for oil and gas drilling, including unleased portions of the Gulf of Mexico and along Alaska's coast which they say is a cautious approach that "will help us continue to reduce our dependence on foreign oil and create jobs here at home."

The problem is that it is too little too late. The Interior Department is proposing just 15 potential lease sales in 2012-2017, with five annual lease sales in the western Gulf beginning next fall, and lease sales in the central Gulf starting in spring 2013. according to reports Two of the lease sales will be held in 2014 and 2016 for tracts in the eastern Gulf. Those that are not currently under a congressionally mandated leasing moratorium, set to expire in 2022, and three more sales would be scheduled in "frontier areas" off Alaska's coast, including the Beaufort and Chukchi seas, and the Cook Inlet.

Also the jobs lost because of the resistance to the Keystone pipeline is it any wonder that the President's approval rating is abysmal?

Email Phil to get a trial of his must have trade levels at pflynn@pfgbest.com

Cory Mitchell: The Macro Dilemma

When asked to explain two scenarios that could play out in the global energy markets, and what it means for energy investors, here's what Cory Mitchell of CMT said. 


Here's Part 1 of his story..... "The Macro Dilemma"

Energy investors need to be aware there are two massive macro forces in our global markets and economies battling it out.  One is obvious (and positive!), and one is not, it's negative.  But the new global credit crunch has brought this dilemma for energy investors into sharp focus:

1.   Stagnant or declining oil production, which should mean oil prices, and oil stocks, are going higher.

But as I'll show you,

2.   If oil production declines, it will have a negative on global debt and GDP—declining oil production will in turn lead to a long-term decline in the global economy – and a declining economy should push the price of oil down.  The lack of continued growth in oil supply has been a constraint on global growth since 2004, says Canada's Sprott Asset Management.

One scenario points to a higher oil price, and another to a lower price—yet they are two sides of the same coin.  And while it's counter-intuitive, lower oil production can potentially lower oil prices by constraining demand. As these contrasting forces play out now and in to the future, oil markets are likely to remain volatile.

The volatility created by this global battle will present opportunities for energy investors as the macro forces play out.

Economic Relationships with Oil

Oil production (and consumption) drives GDP and debt.  While debt is often viewed negatively, it is what allows our economy to expand.  When a consumer goes to the bank and gets a loan, money is created.

This money is then spent and deposited into someone else’s bank account, allowing the bank to grant another loan and so on.  This is healthy for the economy as long as the process is not taken to extremes and leveraged too highly, like what occurred in the 2008 “credit crisis.”

US debt had been steadily rising but has now plateaued, as shown in Figure 1. The problem is, debt, and thus the economy, do not expand if oil production does not expand.

Figure 1. US Government and Non-Government Debt:

*Source The Oil Drum
 

Figure 2 shows the high correlation of oil production and GDP.  Oil production levelling off corresponds to the flattening in debt (above) and GDP that we are currently seeing.  Oil production levelled off in 2005 and GDP is failing to get above 2008 levels after a significant decline.  The plateaus in oil production, debt and GDP may be short-term, or may indicate a long term lack of growth or decline in global economies.

It's interesting to note that oil production and demand has increased steadily by 10 million barrels of oil per day per decade since 1970—just as the world experienced the largest debt increase in global economic history.

Figure 2 World Oil Production and GDP (Crude Production in blue and scale on the right, GDP in red and scale on the left):
 

*Source: Economagic

Figure 3 shows the high correlation of oil consumption to GDP.  The relationship of oil production to these major economic factors—debt and GDP—are unavoidable.  As goes oil production so goes the global economy.  The major issue presented is that oil production has levelled off.  If oil production cannot increase the world has reached “peak oil” and by extension, peak debt and peak GDP.

This means investors need to look for places which still exhibit growth prospects and may even benefit from peak oil over the next several years to decades.

Figure 3. Oil Consumption vs GDP:





 

*Source: Gail Tverberg,  The Link Between Peak Oil and Peak Debt

Issues the Relationship Presents

“Peak oil” occurs when global productions hits maximum output and can no longer continue to increase, leading to a long-term decline in supply.  Oil is what allows economies to operate, and without it to fuel many projects — well, companies, consumers and banks would have no need for debt.  Debt would dramatically drop, forcing down GDP in the process.

Therefore, peak oil and peak debt will create peak GDP.

When peak oil and peak debt (and by extension peak GDP) will exactly occur is unknown, but global production has levelled off and the idea that we are rapidly approaching a global peak oil production is becoming more prominent in the media. Canada, however, is continuing to see its oil production rise—which is providing a very interesting opportunity for energy investors around the globe.

With debt and oil production levelling off, I believe that at some point the world will hit a “growth ceiling,” until some new technological advance drives us forward once again.  This has happened throughout history, when there have been moments of radical growth following a new technology or an increase in productivity.  Then growth levels off or declines until the next big idea comes along.

That big idea may or not be here yet — shale gas, hydrogen and electricity are some the alternatives currently being explored; though the transition away from oil will take at least 30-50 years according to Vaclav Smil in the book, Energy Transitions: History, Requirements and Prospects.  That's not hard to fathom, given the vast infrastructure aligned with our dependence on oil.  At this time, creating or extracting an alternative fuel and transporting it stills relies on oil.

In conclusion, I see the combination of (at least short term) peak oil and peak debt, which should cause lower demand and lower oil prices, continuing to do battle against the idea that lower oil production should obviously mean higher oil price.

To me, this means the oil sector will continue to be a hot bed of macro volatility and investor opportunity.  And in my next article, I'll explain how energy investors can best profit from the volatility created by these two forces.

- Cory Mitchell, CMT

Commodities Gain Strength on the Back of a Weaker U.S. Dollar

Crude oil closed higher on Tuesday extending the rally off October's low. The high range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are overbought but are neutral to bullish signaling that sideways to higher prices are possible near term. If December extends the rally off this month's low, the 62% retracement level of the May-October decline crossing at 100.08 is the next upside target. Closes below the 20 day moving average crossing at 90.63 are needed to confirm that a short term top has been posted. First resistance is the 62% retracement level of the May-October decline crossing at 100.08. Second resistance is the 75% retracement level of the May-October decline crossing at 105.41. First support is the 20 day moving average crossing at 90.63. Second support is the reaction low crossing at 89.17.

Natural gas was higher due to short covering on Tuesday as it consolidated some of Monday's decline. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If December extends this year's decline, monthly support crossing at 3.225 is the next downside target. Closes above the reaction high crossing at 3.978 are needed to confirm that a short term low has been posted. First resistance is the reaction high crossing at 3.978. Second resistance is the reaction high crossing at 4.039. First support is Monday's low crossing at 3.652. Second support is monthly support crossing at 3.225.

Gold closed higher on Tuesday as it extends the rally off September's low. The high range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that additional strength is possible near term. If December extends the rally off September's low, the 75% retracement level of the 2008-2011 rally crossing at 1826.50 is the next upside target. Closes below the 20 day moving average crossing at 1704.70 would confirm that a short term top has been posted. First resistance is the 75% retracement level of the 2008-2011 rally crossing at 1826.50. Second resistance is the 87% retracement level of the 2008-2011 rally crossing at 1875.10. First support is the 10 day moving average crossing at 1748.30. Second support is the 20 day moving average crossing at 1704.70.


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Crude Oil Rises for a Sixth Day on Iran’s Nuclear Speculation

Crude oil rose a sixth day in New York on speculation Iran’s nuclear plans threaten Middle East stability and an offer to resign by Italy’s Prime Minister Silvio Berlusconi brings Europe closer to solving its debt crisis.

Futures advanced as much as 0.5 percent, matching the longest run of gains since the six days ended Nov. 8, 2010. The U.S. may pursue additional sanctions against Iran following release of a United Nations report that concludes the Islamic Republic was working to develop a nuclear weapon, according to two U.S. officials. Fuel stockpiles fell last week, the American Petroleum Institute said yesterday.

“This current supply shock potential that the markets are looking at with Iran has pushed the price well above our outlook,” said David Lennox, a resource analyst at Fat Prophets in Sydney, who had forecast oil to trade from $80 to $90 a barrel. “The situation in Europe will still take some time for the corrective activities to flow through to the real economy”.....Read the entire Bloomberg article.


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Phil Flynn: Old Risks Return

Something old something new something bullish and something blue. The bulls have wrestled control of the petroleum markets with a slew of bullish news and some strong technical formations driving oil to a three month high. With the market focused on the bailout of Europe the risk to supply is increasing as tension between Israel and Iran are heating up. In fact for oil the situation with Iran and the violence in Nigeria and Syria may be a better reason to be long than the European charades. European finance chiefs continue to work on details increase the European Financial Stability Facility by$1.4 trillion.

Oh sure we know the new economic maxim that bailouts are bullish yet as the market awaits the fate of Italian Prime Minister Berlusconi and who the New leader of Greece is going to be it may be the fate of Iran that may present more risk. Debate is raging in Israel on whether they should attack Iran as the regime once again lied to the world about their nuclear intentions. According to Intelligence provided to U.N. nuclear officials Iran has mastered the critical steps needed to build a nuclear weapon. Israel feels that they may be the target and the risk of a conflict is being priced into oil.

Nigeria continues to be a risk as well recent violence by Islamic fundamentalists is putting supply at risk. Reuters' news reports that " Nigeria's national security adviser on Monday dismissed a weekend warning from the United States of an Islamits bomb threat to luxury hotels in the capital as "not news," and said it was spreading unnecessary panic. The attacks were the deadliest since Islamist sect Boko Haram launched an insurgency against the government in 2009. The group claimed responsibility for the violence that left bodies littering the streets and police stations in ruins.

Witnesses reported gunfire in the city again on Monday, but military sources said it was from guards at the Yobe state governor's house firing at a suspicious speeding car, and gave no further details."The (U.S. statement) is eliciting unhealthy public anxiety and generating avoidable tension," said Owoeye Andrew Azazi, Nigeria's national security adviser. "The ... government wants to advise members of the public that it (will) continue to ensure security of lives and property under its jurisdiction."


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How Cheap is Natural Gas?

How cheap is natural gas? The EIA tells us winter (November-March) natural gas futures prices are near their lowest levels since 2001-2002.

The average natural gas futures price for the upcoming winter is less than $4 per million British thermal units, the lowest level entering the winter since 2001-2002. The so called "winter strip," the average natural gas futures price for the contract months November through March as settled on the New York Mercantile Exchange is a closely followed measure of market participants' price expectations.

In markets such as New England and California, where natural gas prices often set on peak, wholesale power prices, the NYMEX winter strip for natural gas also can influence expectations for forward wholesale power prices.

Source: U.S. Energy Information Administration, based on Bloomberg, L.P.
Note: October 20 was selected because it represents a date near the start of the natural gas winter heating season yet still has information for five months of the upcoming winter's natural gas NYMEX future's strip.


These prices do not reflect expectations for the cost of transporting natural gas from Henry Hub to downstream market locations. The Henry Hub, in Erath, Louisiana, is the physical delivery location for the NYMEX natural gas futures contract. Sabine Pipeline is the operator of the Henry Hub. 

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Crude Oil Bulls Take Solid Near Term Advantage

Crude oil closed up $1.25 a barrel at $95.51 today. Prices closed nearer the session high and hit a fresh three month high today. Crude bulls have the solid overall near term technical advantage and gained more upside momentum today. Prices are in a five week old uptrend on the daily bar chart.

Natural gas closed down 8.6 cents at $3.697 today. Prices closed nearer the session low today and scored another fresh contract low. The bears have the solid overall near term technical advantage.

December gold futures closed up $35.90 an ounce at $1,792.10 today. Prices closed near the session high today and hit another fresh six week high. Strong safe haven buying interest was seen amid the EU turmoil that is now focusing on Italy. Bulls have solid the overall near term technical advantage and gained more upside technical momentum today.


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Phil Flynn: Will He Stay Or Will He Go

No Not Papandreou he was so over the weekend. No the question is all about Italian Prime Minister Silvio Berlusconi.

While Greece has a new coalition government in place now the focus is on Italy and whether Italian Prime Minister Silvio Berlusconi will resign and open up the gridlock that has slowed the reforms that are needed to keep Italy of becoming more like Greece.

The markets have a lack of confidence in Berlusconi after many broken promises on reform and rallied on the prospect that Berlusconi was gone. For oil it is headline to headline.
We will be looking to play ranges!


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How to Trade This Headline Driven Stock Market

With all eyes on the unemployment report and Europe, the CME Group’s PR Department nearly created an all out panic with their announcement after the market close on Friday relating to futures maintenance margin. The original statement was vague and I was quite concerned until I checked out the CME Group’s web page and the PR Department sent an update clarifying their position. At this point I think the crisis has been averted, but this is just another reminder that we live in “interesting times.”

Keep in mind that if the CME starts raising margin rates across the board for futures contracts in order to protect themselves stocks and commodities could collapse. Silver recently has is margin rates increased and silver since then dropped 25% in value. So imagine if they raised the rates for more commodities…

The current price action in the marketplace pales in comparison to the world’s geopolitical tensions and deteriorating social mood. 

In my trading career, I have never seen the price action in the indices react so violently to intraday headlines and rumors. Risk is high and the types of traders profiting from this market are day traders and very short term traders with trades lasting just a couple hours to 24 hours in length. Aggressive trading which small position sizes is all that can be done right now. This is not meant to be investment advice, but more as a function of the market environment in which we find ourselves currently trading within.

Right now it is hard to say where price action in the broader indices heads in the short run.  One headline out of Greece or Italy could dramatically alter economic history. In the intermediate term I remain neutral to bearish for a number of reasons. One indicator I follow is the bullish percent index on the S&P 500 which at this point is arguing for lower prices.

The chart below illustrates the S&P 500 Bullish Percent Index:

As can be seen above, the S&P 500 Bullish Percent Index is presently at an overbought status. When looking at the relative strength and full stochastics indicators one would argue that a pullback is warranted. Historically when the S&P 500 Bullish Percent Index is this overbought, a pullback ensues which ultimately sees the S&P 500 Index selloff. The more arduous task is trying to determine just how deep the pullback on the S&P 500 Index might be.

It is critical to point out that while I do believe a pullback is likely, I will not rule out a rally into the holiday season. Much of the near term price action is going to be dictated by headlines coming out of Greece and the rest of Europe. In addition to Greece, Italy is also starting to see increased concern regarding an unsustainable fiscal condition. Depending on how the European Union handles the varying degrees of risk in the near term, we could see price action react violently in either direction.

With the market capable of moving in either direction, I wanted to point out some key price levels which should act as clues regarding potential future price action in the S&P 500. The two key support levels to monitor on the S&P 500 Index are the 1,240 and 1,220 price levels.

The daily chart of the S&P 500 Index below illustrates the price levels:

For bullish traders and investors the key price level to monitor is the recent highs on the S&P 500 around the 1,290 area. The weekly chart below demonstrates why this price level is critical and which overhead levels will offer additional resistance should the recent highs be taken out to the upside.

SP500 Weekly Chart Analysis:

While I am neutral in the intermediate to longer term presently, in the short run I have to lean slightly bearish simply because of the future headline risk and also because a major head and shoulders pattern has been carved out on the hourly chart of the S&P 500 Index. This type of chart pattern is synonymous with bearish price action.

The hourly chart of the S&P 500 Index is shown below:

Right now I remain slightly bearish, but should the head and shoulders pattern fail and/or we begin to see multiple positive reactions to news coming out of Europe a strong rally into the holiday season is likely. Unfortunately all we can do is monitor the key price levels and wait patiently for Mr. Market to tip his hand.

Until we see a breakout in either direction, we could see price action inhabit the 1,220 – 1,290 price range for several weeks before we get any more clarity of future direction. Until I see a breakout, I will remain relatively neutral with a slight short term bias to the downside based on price patterns in the shorter term time frames. This is a tough market to trade in, and I don’t want to get chopped around or do any heavy lifting. I’m going to focus my attention on high probability, low risk trade setups until directional biased trades make more sense.

In closing, I will leave you with the thoughtful muse of the late Texas Congresswoman Barbara Jordan,

“For all of its uncertainty, we cannot flee the future.”

Market Analysis and Thoughts By:

Chris Vermeulen – ETF Trading Videos & Trade Alerts

JW Jones – Options Trading videos & Options Alerts