Is The SP 500 Putting in a Top?

The past few months have been very difficult to navigate for retail investors and institutional money managers. The huge week to week price swings and increased volatility have made the current market conditions exceptionally difficult to maneuver. Day traders are about the only group of market participants that outperform during periods such as we have seen since the beginning of August.

Before I jump into the analysis, I would like to point out to readers that the S&P 500 Index (SPX) has rallied from 1,075 on October 4^th to 1224.50 on October 14^th. The S&P 500 has rallied almost 150 handles or 14% from the lows to Friday’s close in 10 calendar days. As an options trader and a market participant, I trade the market that I see, not the market that I want. With that said, ask yourself this question: Does a healthy financial construct rally 14% in 10 calendar days?

To put the recent price action into perspective, since the beginning of the year 2000 the S&P 500 would have had a poor track record on an annualized basis when compared to the past 10 calendar days’ trough to peak performance. Only in the years 2003, 2006, 2009, & 2010 would an investor have been able to best the previous 10 calendar days’ performance (Performance data courtesy of Wikipedia). The most amazing thing about the recent price action is that the S&P 500 Index is still underwater for the year even after rallying roughly 14%.

At this point two scenarios are likely to play out. One scenario involves a rally on the S&P 500 towards the key 1,250 – 1,270 resistance zone which is outlined on the chart below. The recent price action in the S&P 500 has been volatile and at this point it has gone nearly parabolic. The daily chart of the S&P 500 Index is shown below:

The resistance level shown in the chart above outlines the key 1,250 – 1,270 resistance zone that will be tested if the S&P 500 can breakout above the 1,230 resistance level. However, it is critical for traders to recognize that probabilities are starting to favor the short side. Let me explain.

If the S&P 500 is able to rally into the 1,250 – 1,270 level it would represent a gain of less than 4%. The bears will vigorously defend the S&P 1,250 – 1,270 resistance zone and it is unlikely that price action will be able to take out that resistance zone on the first breakout attempt.

With only 4% upside, the odds of some sort of correction are favorable at this point in time. Whether the correction begins early next week or whether we have to wait until the key resistance zone is tested, sellers will step back into the driver’s seat in the not so distant future.

McClellan Oscillator

A few data points that exemplify the overbought status of the S&P 500 are shown below. The first indicator is the McClellan Oscillator that my trading buddy Chris Vermeulen pointed out to me.

50 Period Moving Average Momentum Chart

The momentum chart shown below courtesy of www.barchart.com illustrates the number of domestic equities trading above their key 50 period moving averages:

Both charts above are warning signs that this rally is starting to get a bit overheated. I would point out that the past two times the McClellan Oscillator and the momentum chart peaked a nasty selloff occurred shortly thereafter. The one point that I would like to make clear to readers is that each time both indicators peaked prices eventually went much lower.

The evidence would lead astute traders to believe a top was near. The more arduous details about the future of the S&P 500’s price action revolve around where the topping formation will be. Will the S&P 500 find resistance on a second test of the key 1,230 resistance level?

The other scenario would involve higher prices next week that eventually reach the key 1,260 – 1,270 area on the S&P 500. Will price work roughly 4% higher before confirming a top at the key breakdown level that initiated the selloff back in August?

Conclusion

I am of the opinion that a topping formation or pattern is likely near, but the location of the top is unknown to me presently. More importantly the forthcoming selloff resolution will be very telling about the current trend of the marketplace.

The most constructive price action that we could see would be a selloff that results in a higher low on the daily chart. If that type of price action plays out a new bullish run could begin. However, if we form a top and price action breaks down below recent lows it would not be surprising to see another lower low form which would put the trend squarely in favor of the bears.

The most important aspect of coming weeks will not necessarily be where a top forms, but if and when a selloff begins. Ultimately the depth, momentum, and ferocity of the selloff are more important than where the topping pattern begins.

At this point I have no purely directional trades on the books, but I am developing a laundry list of shorts that make sense. After all, volatility has declined quite a bit and puts are starting to get a whole lot cheaper!

In closing, a top is likely in the cards in the near future. However, the strength and momentum of the forthcoming selloff will tell the real story about the future direction of stock prices. The next few weeks should be quite interesting!

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JW Jones

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Adam Hewison: Is This Rally For Real?

What is behind this market’s rally? The market has been going higher on light volume and admittedly to an area that has presented problems for the S&P 500 in the past, the 1220 area. It is an important policy to respect market action, as we believe that trumps everything in the long run. The market is at some very crucial levels.

Looking back at the past two months, you can see we have just been in a very broad trading range. I believe that professional traders will be shorting the S&P 500 against the highs that were seen just recently. The risk is maybe 10 or 15 points and the downside is maybe 200 points. So the risk reward ratio is really quite attractive from a trading standpoint.

There are “two flies in the ointment” we see right now. First, the S&P 500 is heavily overbought on the Williams% R indicator and at resistance. Secondly, our monthly Trade Triangle continues to be negative for this market. I believe that this combination will begin to put this market on the defensive, perhaps even later today and next week.

It has been an interesting week and it would appear that all of the markets we track are closing against the major trends. This is not to say the markets have reversed course, rather we are seeing a counter trend rally against the bigger trends.

Now let's look at the crude oil market......

The crude oil market continues to mirror the action in the equity markets. Providing the equity markets keep going higher, we should see oil go higher. Conversely, if we see the equity markets heading lower, we will see oil heading lower. At the moment, we believe the latter course is going to be the direction for this market in the next few weeks even though crude closed the week strong at 86.80. Both our long term and intermediate term Trade Triangles continue to be negative.

Monthly Trade Triangles for Long Term Trends = Negative
Weekly Trade Triangles for Intermediate Term Trends = Negative
Daily Trade Triangles for Short Term Trends = Positive
Combined Strength of Trend Score = – 55



Here's our week ending video covering the 6 major markets we track every day.

Rigzone: Crude Oil and Natural Gas Rally

Thanks in part to encouraging retail sales figures from the U.S. Government, light sweet crude oil for November delivery gained more than three percent Friday.

The WTI settled at $86.80 a barrel after peaking at $87.42 and bottoming out at $83.77.

Friday morning the U.S. Commerce Department reported that U.S. retail and food service sales for September rose by 1.1 percent (±0.5 percent) from the previous month. The advance monthly estimate of $395.5 billion is 7.9 percent higher than the comparable figure for September 2010, according to the agency.

The Commerce Department added that September gasoline stations sales gained 20.3 percent (±1.7 percent) year on year.

Also providing a boost for crude oil was optimism that a meeting of G 20 finance ministers in Paris over the weekend will advance a resolution to the euro zone debt crisis. As a result, the euro strengthened against the dollar and crude oil became a better value for investors holding currencies other than the greenback.

The Brent contract price gained 3.2 percent to end the day at $114.68 a barrel. It fluctuated from $113.80 to $114.74 during Friday's trading.

Posting a more impressive day on day percentage gain than crude oil was November natural gas, which rose nearly five percent to settle at $3.70 per thousand cubic feet. Gas futures, which recently hit their lowest levels for 2011, recovered as investors seized a buying opportunity as they prepare for anticipated growing demand for heating.

The front month contract for natural gas traded within a range from $3.51 to $3.74. November gasoline also ended the day higher, settling at $2.82 a gallon. The intraday range for gasoline was $2.75 to $2.83.

Posted courtesy of Rigzone.Com

Bloomberg: Crude Oil Climbs to Three Week High on G-20 Discussions and Retail Sales

Crude oil rose to a three week high as the Group of 20 began discussions in Paris on a solution to Europe’s debt crisis and U.S. retail sales climbed.

Futures increased 3.1 percent after G 20 and International Monetary Fund officials said the IMF may bolster its lending resources to help stem the crisis. U.S. retail sales advanced 1.1 percent last month, the Commerce Department said today. Brent oil in London traded at a record premium to West Texas Intermediate, the U.S. benchmark, for the second straight day.

“The debt crisis is far from over but it appears that they are making progress, which is bullish for oil,” said Michael Wittner, the head of oil market research at Societe Generale SA in New York. “Economic data, especially in the U.S., has improved recently. It’s now mixed, rather than negative.”

Crude oil for November delivery rose $2.57 to $86.80 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 20. Prices climbed 4.6 percent this week and have dropped 5 percent in 2011.....Read the entire Bloomberg article.


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Phil Flynn: Triple Crown Slowdown

Well the Department of Energy made is official as all three reporting agencies are seeing a slowdown in energy. First OPEC then the International Energy Agency and now the Energy Information Agency arm of our own Department of Energy! Yet what be a bit more unnerving to the oil market may be some slow data and ominous words out of China.

A report on China exports showed a 17.1 percent increase that was way below market expectations and from August reading of 24.5 percent growth. The reading was so disappointing that it came with a warning from the Chinese Custom Agency to be prepared for severe challenges going forward. Sprinkle on top more concerns coming out of the Euro zone and recent oil price surge might be coming under pressure.

The mood shift in the market has really been evident in the Brent WTI spread. The spread exploded again as the Slovakian vote seemed to suggest that Europe might not implode. At the same time we're rolling over with strength in the Brent as well as the market putting on a risk trade because of the rising tensions over the Iranian assassination attempt allegations.

The Energy Information Agency says the expected pace of global oil consumption growth for 2011 is slightly lower in this month's Outlook, while projected total supply in 2011 is higher, resulting in some easing of oil market tightness. Despite this easing, EIA continues to expect markets to rely on inventories to meet some consumption growth in 2011 and 2012.

Crude oil consumption growth from countries outside of the Organization for Economic Cooperation and Development (OECD) is projected to outpace the growth in supply from producers that are not members of the Organization of the Petroleum Exporting Countries (OPEC), implying a need for OPEC producers to increase their output to balance the market in 2011 and 2012.

Oil prices continue to face upward price pressure due to supply uncertainty and downward price pressure because of lowering expectations of economic growth. Upside uncertainty to the crude oil price outlook remains as a result of ongoing unrest in oil producing regions. Heightened turmoil in Syria, which produced an average 400 thousand bbl/d in 2010, and the potential for more sanctions on the country's energy sector is one source of risk to non OPEC supply.

At the same time, downside demand risks predominate, as fears persist about the rate of global economic recovery, contagion effects of the debt crisis in the European Union, and other fiscal issues facing national governments. On the supply side, there may be downward price pressure if Libya is able to ramp up oil production and exports sooner than anticipated.


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Adam Hewison: Here’s the Bottom Line, Nothing Has Really Changed

The light volume rally that exceeded everyone’s expectations in the equity markets has finally come to an end. We were surprised, like many traders, just how far this rally extended. The major trends always win out in the end, and the major trend for the equity markets, the oil market, the silver market, and the Reuters Jefferies CRB index are all still negative longer term. The long term trends came into play and proved how important they are in the scope of trading.

This morning I saw that Wall Street insider Raj Rayaratnam was sentenced to 11 years in prison for his insider trading. I’m all for putting people behind bars that break the security laws of the United States. The security markets have no place for individuals like this.

I’m also for putting incompetent politicians who waste our money behind bars. There should be consequences for their actions. When you have Senator Dick Durbin go on the Senate floor and say to everybody to pull their money out of Bank of America, it is an irresponsible statement and very dangerous for our fragile economy.

The reason Senator Durbin said what he did on the Senate floor, is because he cannot be prosecuted. Had he made that statement in a town hall meeting or any kind of public meeting, Bank of America could and should sue him. You can’t have politicians denigrating businesses who are elected officials. Unfortunately, most of these officials have zero shame and certainly would not resign over something like this.

Here’s the bottom line, nothing has really changed, the country and the world is in a heap of trouble and that just can’t be swept under the rug and forgotten about.

Let's look at the crude oil action for Thursday.....

The action in crude oil today signifies that we have more than likely put in an interim top for this market. A close in the December contract below $84 a barrel would be viewed as negative, indicating a move back down to the $80 a barrel level. Last Friday, December crude oil closed at $82.97. Let’s see how it closes this week. Intermediate and Long term traders should continue to be short the crude oil market.

November crude oil closed down $1.16 a barrel at $84.41 today. Prices closed near mid range today and profit taking from recent gains was seen. Bulls still have some upside technical momentum. The bulls have the slight overall near term technical advantage.

Monthly Trade Triangles for Long Term Trends = Negative
Weekly Trade Triangles for Intermediate Term Trends = Negative
Daily Trade Triangles for Short Term Trends = Positive
Combined Strength of Trend Score = – 55

Please note that we are switching to the December contract for crude oil.

Musings: NPC Is Extremely Optimistic About Natural Gas....If...

The National Petroleum Council [NPC] produced a draft report in mid September about the potential of North America's energy markets. The report titled: 'Prudent Development: Realizing the Potential of North America's Abundant Natural Gas and Oil Resources' highlights the prolific oil and gas resources available that may dramatically change the trend in domestic energy markets.

Although the report has not been officially reviewed by the NPC, which reserves the right to make significant changes to the draft report's conclusions (something we are not aware the NPC has ever done with previous reports), the message is that North America could become energy self sufficient, and possibly even an exporter of natural gas.

The message is that North America could become energy self sufficient, and possibly even an exporter of natural gas.

The report contained four conclusions about natural gas and oil and their impact on America's energy future. The conclusions were:

1) "the potential supply of North American natural gas is far bigger than was thought even a few years ago;"

2) "perhaps surprising to many – America's oil resources are also proving to be much larger than previously thought;"

3) "we need these natural gas and oil resources even as efficiency reduces energy demand and alternatives become more economically available on a large scale;" and

4) "realizing the benefits of natural gas and oil depends on environmentally responsible development." It is this latter conclusion that becomes the big "IF" in how America's and North America's energy market evolves.

Read the entire article at "Musings: NPC Is Extremely Optimistic About Natural Gas, If..."

Gold, Silver and Stock Prices at their Tipping Points

Over the past year we have been learning more about the financial situations across the pond in Europe. With international issues on the rise, investors are panicking trying to find a safest haven for their capital. This money has been bouncing from one investment to another trying to avoid the next major crash in stocks, bonds, currencies and commodities. It seems every 6 months there is a new headline news issue at hand forcing the smart money to withdraw from one investment class too another hoping to avoid the next meltdown.

To make a long story short, I feel the market (stocks, bonds, currencies and commodities) are about to see another major shift that will either make you a boat load of money or you lose a lot of money if you are not positioned properly.

So the big question is “Which direction will these investments move?”

Let’s take a look at the charts…...

Gold Weekly Chart – Long Term Outlook

Gold has just finished seeing a strong wave of selling this summer so it’s early to give any real forecast for what is next. That being said this long term chart may be telling us that gold’s rally could be nearing an end or a 12+ month pause could take place. If you have followed the market long enough then you realize that when everyone is in the same trade/position the market has a way of re-distributing the wealth to those who are savvy investors. Over the next 4-6 weeks there should be more price action which will allow me to get a better read for what is going to happen next.

Silver Weekly Chart – Long Term Outlook

Silver has been showing strong signs of distribution selling. Meaning the big money is moving out of this industrial and highly speculative metal. The interesting part here is that silver topped out much sooner than gold. Many times in the past silver has topped and or bottomed before the rest of the market reverses direction. So it is important to keep an eye on silver as we go forward in time because it tends to lead the market 1-2 months in advance some times.

SP500 Weekly Chart – Long Term Outlook

Stocks in general are still looking ripe for another major bull market rally. But if we do not get some follow through in the coming 1-2 months then this almost 3 year bull market could be coming an end.

Mid-Week Trend Trading Conclusion:

In short, the market as a whole is trying to recover from a strong bout of selling over the past few months. In my opinion the market is ripe for another leg higher. The reason I see higher stock prices is because decisions are being made across the pond to deal with their issues. Looking back it is similar to what the United States did in late 2008 – early 2009 just before the market bottomed.

Everyone right now seems to be saying Europe is screwed and that they are going about things in the wrong way, but if you think back that is exactly what took place in America not that long ago. And back then it was all over the news that the resolutions to fix the US would not work…. In the end, life continued, businesses continued to operate. Soon after decisions were made the stock market and commodities rallied and are still holding strong today.

Over the next week or two I am anticipating the market will provide some solid trade setups which I plan on taking advantage of using leveraged ETFS. During the volatile sideways market in August through till now I have navigated my subscribers using both bull and bear funds pocketing over 35% return in two months. If you would like to receive my pre-market morning videos, intraday updates and trade alerts visit my newsletter at: The Gold and Oil Guy.com

Chris Vermeulen

Adam Hewison: Harrisburg, PA. Seeks Bankruptcy..... Is America Next in Line?

It’s not difficult to believe that Harrisburg Pennsylvania is filing for bankruptcy with overwhelming debt of almost half $1 billion. It shows once again that politicians have no clue when it comes to spending money, particularly when it’s someone else’s money.

The question we must all ask ourselves is what’s next? In our home state of Maryland we have $20 billion unfunded liability for entitlements. I’m sure it’s the same across the country. We have had reckless politicians spending too much money and not being held responsible for when things go wrong. It was interesting to see what was happening in the Ukraine, where they’re jailing their former prime minister, Yulia Tymoshenko, to a seven year jail term for abuse of power during term as prime minister.

Just imagine how that would play out in other countries, including the United States. It certainly would make politicians think before committing and spending money that we don’t have. At the moment, no one is held responsible.

It also looks like the politicians in the Euro Zone have kicked the can down the road. This just moves the financial disaster to future generations. No one politician wants to assume responsibility for the incredible amount of future debt they are creating. What does this all have to do with the markets?

We will rely on our Trade Triangle technology to keep us in the loop and in the markets at the right time.

Let's check out the action in the crude oil markets today.....

With both weekly and monthly Trade Triangles in place, we see little enthusiasm to go long this market at the present time. Presently this market is overbought and we expect to see a pullback from current levels. As you know this market has been closely tied in to the movements of the S&P 500. Overall we still view the trend in this market as negative. Intermediate and Long term traders should continue to be short the crude oil market. Please note that we are switching to the December contract for crude oil.

Monthly Trade Triangles for Long Term Trends = Negative
Weekly Trade Triangles for Intermediate Term Trends = Negative
Daily Trade Triangles for Short Term Trends = Positive
Combined Strength of Trend Score = – 65

November crude oil posted an inside day with a slightly lower close on Wednesday as it consolidated some of the rebound off last week's low. The mid range close sets the stage for a steady opening on Thursday. Stochastics and the RSI remain bullish signaling that sideways to lower prices are possible near term. If November extends the rally off last week's low, September's high crossing at 90.69 is the next upside target. Closes below the 10 day moving average crossing at 81.64 would temper the near term friendly outlook.

First resistance is September's high crossing at 90.69.
Second support is July's high crossing at 101.39.

First support is the 20 day moving average crossing at 82.95.
Second support is the 10 day moving average crossing at 81.65.

Just click here to watch todays video that covers the 6 major markets we track every day and see how we can create and maintain your wealth in 2011.


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Will The S&P 500 and Gold Make up Theirs Minds Already

A lot of eyes were watching the Slovakian Parliament around the closing bell today as they voted on the European Financial Stability Fund (EFSF). The first vote failed to pass the pending legislation, but members of the opposition party have indicated that they will vote for the bill in a second scheduled vote. The S&P 500 E-Mini futures contract has not sold off sharply on the news, but the trap door risk for equity traders is that the second vote comes up short and the legislation fails unexpectedly.

The marketplace is expecting the second vote to pass without issue and if a different scenario plays out selling pressure could become extreme potentially. With earnings season now upon us, there is plenty of headline risk to go around and this Slovakian situation just adds more complexity to the news flow.
We have seen the S&P 500 Index rally more than 10% in five trading sessions which could potentially mean we have more downside work to accomplish before probing higher.

The flip side of that argument is that prices continue to rally and push towards key resistance levels overhead. At this point in time, I do not have an edge for a directional trade so I am sitting on the sidelines presently. I do have a few time decay based trades in place, but they do not have a directional bias so my book is flat here.

The S&P 500 is a tough buy after a 10% rally in such a short period of time, but the strength and momentum are tough to short. The buyers seem to be higher and the sellers appear to be lower which complicates a potential entry even further. Presently there appears to be two possible scenarios:

Bullish Scenario
The daily chart of the S&P 500 Index is shown below with key overhead resistance levels illustrated on the chart and the potential price action in coming days.......




Bearish Scenario


The daily chart of the S&P 500 Index is shown below with key support levels and the potential price action if price works lower.....





Overall, I do not have a real edge on the S&P 500 at this point. A pullback makes some sense here, but defined risk metrics and a trading plan must be used to reduce risk. Regardless of the price direction traders are considering, this is a situation where proper position sizing and stop orders can allow a trader to take on a defined risk that he/she is comfortable with.

This market has been tough to trade for several weeks. The price action has been choppy and volatility levels have been elevated since the early part of August. This type of market environment chops up a lot of traders and it sucks bulls and bears into the price action late in the game opening the door for potentially devastating losses if risk is not properly defined. 

My Trading partner Chris Vermeulen pocketed over 38% gain during these choppy times using bull and bear ETFs with his subscribers.

As an option trader familiar with a variety of spreads, recently I have been utilizing the elevated volatility levels to sell option premium and use the passage of time as a primary profit engine for my open positions. Currently I have 3 open positions which are all taking advantage of the passage of time as a profit engine.

Back on 9/26 I entered a $DIA Iron Condor Spread to take advantage of heightened volatility and capitalize on time decay leading up to the October monthly option expiration. On 10/06 I was able to close the $DIA position to lock in 15% based on maximum risk. Even though price action was excessively volatile during the past several weeks, my $DIA trade was never a major concern in terms of price action. No adjustments were necessary and members and I pocketed some relatively quick money watching the days pass by.

Gold Analysis
The recent price action in gold has been equally as tough to trade as the S&P 500 Index. After rallying sharply into early September, gold prices plummeted and price action has been consolidating ever since. Similar to the price action in the S&P 500, gold prices have just chopped around for several weeks. Gold is currently trading in a bear flag formation which if triggered could result in additional downside.



In the short-term more downside is always possible, but in the longer term I think higher prices are probable for both gold and silver as this money printing binge will one day end and inflationary pressures may present themselves at that time. The weekly chart of gold futures is shown below......


As can be seen above, gold has traded in a long term rising channel for over a year. Back in August and September gold prices broke out to the upside of the rising channel and went parabolic. In the beginning of September, gold prices sold off sharply back down into the previous rising channel. As it stands right now, gold prices remain near the upper resistance level of that channel and have not tested the lower support line since February.

If gold prices do begin to rollover in the days and weeks ahead, a logical entry point would be a test of the lower channel. The price level I would be watching for would be around $1,500 an ounce. If we get to that area, I would not be shocked to see an overthrow of that support level and a test of the 1,480 price level before reversing to the upside.

The other side of this story is that the U.S. Dollar Index falls out of favor again and its price gets crushed. If the U.S. Dollar gets hammered lower, it would make sense that U.S. domestic equities would rally along with other risk assets such as gold, silver, and oil. Right now I do not have a clear short term bias, but in the intermediate to longer term cycles I remain quite bullish. If the gold price does work back down to that support level, I will be looking to get long. Another possible long entry would present itself on a breakout to the upside back out of the upward sloping channel.

Gold is quite volatile and is impacted by a litany of outside forces such as foreign currency and the U.S. Dollar. For right now the short term bias could be to the downside, but when this period of malaise in the yellow metal ends the next bullish phase of this move higher is going to be quite strong.

As I have said many times, sometimes the best trade is no trade at all. Right now I do not have an edge in either the S&P 500 or gold so I am just going to sit and watch price action patiently while looking for high probability, low risk setups to emerge.

Subscribers of OTS have pocketed more than 150% return in the past two 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 our free occasional trade ideas and our free options trading strategy book.