Can the Stock Market Reverse and Rally to Highs?

Do the Bulls still stand a chance to make another run?

That is the question this weekend after we saw the 1340, 1322 pivots crashed right through following the “SP 500 Bear Case” weekend report on May 13th I sent to subscribers with a chart last weekend (May 13th SP 500 at 1353).

We ended the week with the SP 500 falling from 1353 to about 1292 and the US Dollar having rallied 13 of the past 15 days to the upside. We also have The Mclellan Oscillator at extreme oversold levels as in the November 2011 lows and close to the August 2011 lows. The Sentiment gauges are running at only 24% Bulls as opposed to the historic 39% averages, and the Percentage of NYSE listed stocks trading above the 50 day moving average plummeted to 12%. That is about as low as it has been during this bull market, other than last August when we hit 5%.

So that means that the sentiment/human behavioral ingredients are actually in place for a marked rally to the upside. What we examine this week is whether that can still happen and what type of Elliott Wave pattern would we need to see to validate it.

We can still make a case that this correction of 130 points from 1422 to 1292 (about 9.1% similar to many Bull market corrections since 2009 lows) is a wave 4 correction of waves 1-3. Wave 1-3 rallied in total from 1074-1422 and a 38% retracement of that entire cycle would put us right around 1291/92 pivots.

So below we have the chart that the Bulls would hang onto as possible for a dramatic recovery to new highs past 1422 and onward to 1454 or so. This needs to begin very shortly though and much below 1285 we can wipe this idea off the slate in my opinion.

So, last weekends Bear View is now a 50% probability and the Bullish count below is also 50%. The good news is I think we will know which one is taking control very early in the week. This is probably not a good time to place a big bet just yet in either direction, we are at an inflection point.

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Phil Flynn: Downgrade Dilemma

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The oil market wanted to believe that the worst was over for the global economy, bouncing back from a 6 month low but a downgrade of Japan means the market will have to struggle to find the lower end of our trading range. As the June contract trades its last, more drama will ensue as the market awaits talks with Iran and their nuclear program and perhaps a Japan downgrade won’t be enough to keep the oil down.

Oh Fitch, talk about the timing of you Japanese downgrade. Oil stated to fall resuming its massive retreat as Fitch lowered sovereign debt rating to A+ with a negative outlook. Oil traders reacted as the dollar rallied and demand expectations again began to fall. It appears that oil may not have found the absolute low of its trading range just yet.

Of course the offset to that will be worries surrounding Iran and the nuclear talks. The market has been hopeful that a conflict can be avoided. This comes after the US Senate keeps the pressure on by voting more sanctions on the sanction overwhelmed regime. Reuters News reported the U.S. Senate unanimously approved on Monday a package of new economic sanctions on Iran's oil sector just days ahead of a meeting in Baghdad between major world powers and Tehran.

The pressure became more apparent when Iran said that they would allow the International Atomic Energy agency to allow weapon inspectors into sites that are suspected to be producing materials needed to make a nuclear weapon. CBS and the AP reported that, “despite some differences, a deal has been reached with Iran that will allow the U.N. nuclear agency to restart a long-stalled probe into suspicions that Tehran has secretly worked on developing nuclear arms, the U.N. nuclear chief said Tuesday.

The news from International Atomic Energy Agency chief Yukiya Amano, who returned from Tehran on Tuesday, comes just a day before Iran and six world powers meet in Baghdad for negotiations and could present a significant turning point in the heated dispute over Iran's nuclear intentions. The six nations hope the talks will result in an agreement by the Islamic Republic to stop enriching uranium to a higher level that could be turned quickly into the fissile core of nuclear arms.”

Yet will oil stay optimistic if Iran at any point tries to limit what the inspectors can do? We have seen this cat and mouse game many times before not only with Iran, but the king of the cat and mouse, the late Saddam Hussein. While oil traders can remain optimistic can Israel?

The Wall Street Journal is asking whether some investors wagering on natural-gas prices are losing their spark. The Journal says that, “natural-gas prices have jumped as much as 44% since sinking to decade lows last month. Much of that rally had been powered by rising demand from utilities, which had taken advantage of the low prices by using more natural gas instead of coal. But the higher prices are making coal competitive once again. Coal prices are down 22% since the start of the year."

The Journal says that utilities are continuously fine-tuning how much coal and natural gas they're burning to generate electricity. In recent months, they've increasingly favored natural gas due to the steep drop in natural gas prices. Utilities keep the breakdown of their fuel use a trade secret. How utilities will respond to higher gas prices has spurred debate among investors. Some analysts and traders say the rally threatens to erode natural gas recent gains in market share as utilities switch back to coal, and that could limit any further price increases. A must read in the Journal Today!

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Warm Weather and Low Natural Gas Prices Dampen Spot Electricity Prices This Winter

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 The combination of one of the warmest winters (November-March) in decades and low spot natural gas prices contributed to low wholesale electric prices at major market locations during the winter of 2011-2012 (see chart below). Warm weather kept electric system load low across the East Coast and helped dampen the need for coal fired generation. Natural gas generation was up significantly to take advantage of low natural gas prices. Reduced nuclear generation due to outages and reduced hydropower generation both served to moderate declining electricity prices in much of the country.

• Spot Prices
• Weather
• Demand
• Coal vs. Natural Gas
• Hydroelectric
• Nuclear

On peak, wholesale electricity prices generally ranged from $20-$50 per megawatt hour last winter, with some exceptions. Electricity prices dropped during the winter, especially starting in January, as spot natural gas prices neared their lowest levels in the past decade.  

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Crude Oil Bulls Start the Week Higher, Bears Still Have the Advantage

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Crude oil closed higher due to short covering on Monday as it consolidated some of this month's decline. The high range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If June extends this month's decline, the 62% retracement level of the 2011-2012 rally crossing at 89.90 is the next downside target. Closes above the 20 day moving average crossing at 98.88 are needed to confirm that a low has been posted. First resistance is the 10 day moving average crossing at 94.53. Second resistance is the 20 day moving average crossing at 98.88. First support is today's low crossing at 90.84. Second support is the 62% retracement level of the 2011-2012 rally crossing at 89.90.

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Natural gas closed lower due to profit taking on Monday as it consolidates some of the rally off April's low. The low range close sets the stage for a steady to lower opening on Tuesday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If June extends the rally off last week's low, February's high crossing at 3.040 is the next upside target. Closes below the 20 day moving average crossing at 2.388 would signal that a short term top has been posted. First resistance is last Friday's high crossing at 2.759. Second resistance is February's high crossing at 3.040. First support is the 10 day moving average crossing at 2.535. Second support is the 20 day moving average crossing at 2.388.

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Gold closed slightly lower on Monday but remains above the 10 day moving average crossing at 1579.00. The mid-range close sets the stage for a steady opening on Tuesday. Stochastics and the RSI have turned bullish signaling a low might be in or is near. Closes above the 20 day moving average crossing at 1615.10 are needed to confirm that a short term low has been posted. If June renews the decline off February's high, the 38% retracement level of the 2008-2011 rally crossing at 1487.50 is the next downside target. First resistance is the 20 day moving average crossing at 1615.10. Second resistance is this month's high crossing at 1672.30. First support is last Wednesday's low crossing at 1526.70. Second support is the 38% retracement level of the 2008-2011 rally crossing at 1487.50.

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Saudi Arabia Edges Out Russia as the Biggest Oil Producer

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Saudi Arabia boosted crude production close to a 31 year high in March, overtaking Russia as the world’s largest oil producer for the first time in six years, according to the Joint Organization Data Initiative.

Saudi crude exports rose 3 percent in March, reaching the highest level in five years as Iran cut shipments, according to government statistics posted today on the initiative’s website.

Saudi Arabia, OPEC’s largest producer, increased daily output to 9.923 million barrels in March, up 0.7 percent to the second highest level since at least 1980, according to the initiative. That topped output from Russia, which pumped 9.920 million barrels a day, for the first time since February 2006, according to the data.

The initiative, known as JODI, is supervised by the Riyadh based International Energy Forum and compiles data provided by member governments. The IEF is a group of nations accounting for more than 90 percent of global oil and natural gas supply and demand, established as a forum for producing and consuming countries to discuss energy security.....Read the entire article.

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Where is Gold, Natural Gas and Crude Oil Headed This Week

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Is the gold rally for real or just a short covering bounce? CNBC's Sharon Epperson discusses the Friday's activity in the commodities markets and looks ahead to where crude oil and precious metals are likely headed next week.



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Natural Gas Consumption Reflects Shifting Sectoral Patterns

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U.S. natural gas consumption since 1997 reflects shifting patterns. Total U.S. natural gas consumption rose 7% between 1997 and 2011, but this modest growth masks bigger changes in individual sectors. Electric power is now the largest natural gas consuming sector and it shows perhaps the greatest sensitivity to price changes. The graphics below highlight key factors that influence natural gas consumption.

The electric power sector has the flexibility to shift some amount of baseload power generation, much of which has traditionally been fueled by coal, to underutilized natural gas generators without requiring additional investments in infrastructure.



Natural gas consumption for power generation is expanding. An earlier Today in Energy article noted that consumption of natural gas for electric power (or "power burn") has exceeded natural gas consumption in the industrial sector since early 2009. The power sector added a significant amount of new natural gas fired generating capacity over the last decade, much of which was in the form of efficient combined cycle units.

For many years, while coal fired generation was less expensive, those natural gas fired combined cycle units were used at relatively low rates. Recently, with natural gas prices declining and coal prices rising, dispatching natural gas generators in some parts of the country has become increasingly competitive with running coal generators. Competition between natural gas and coal appeared first in the Southeast, where coal fired power was more expensive due to the cost of transporting coal over long distances.

In the industrial sector, natural gas consumption increased in 2010 and 2011, reversing a trend of declining consumption that lasted from the mid-1990s to 2009. Natural gas is used in the industrial sector and manufacturing subsector for process heating, steam generation, onsite electricity generation, space heating, and petrochemical processing.

The downward trend in natural gas prices has lowered the cost of a key input for some industries. However, the short term flexibility to take immediate advantage of low natural gas prices is limited in this sector, because many manufacturers that relied heavily on natural gas as fuel or feedstock closed down or moved abroad in the late 1990s and early 2000s in the face of rising natural gas prices. For various reasons, some of the remaining firms may switch fuel to natural gas, and others may never switch regardless of fuel costs, leaving a wide range of dependencies on natural gas prices (see Tables 10.15 and 10.21 from EIA's Manufacturing Energy Consumption Survey).

Domestic and global macroeconomic trends affect industrial activity, which is often tracked by industrial indices. However, some U.S. manufacturers (e.g., petrochemicals) that use natural gas derived feedstocks (e.g., ethane) are enjoying a competitive advantage while international competitors consume more expensive, oil derived feedstocks.

Residential and commercial consumption of natural gas is primarily for space heating, water heating, and cooking; the most influential short term factor for these sectors is weather (quantified here as heating degree-days).

The residential and commercial sectors have limited short-term flexibility to take advantage of inexpensive natural gas, as heating systems can be expensive to modify and are replaced infrequently. Over longer timescales, the number of households using natural gas for space heating has increased, for example, in the Northeast, households are switching their heating fuel from heating oil to natural gas. However, the increasing efficiency of home heating systems (lower average gas use per customer) masks some of the effect of the increasing number of natural gas customers, even when normalized for weather.

Seasonal patterns in natural gas consumption appear in all sectors. Colder winter weather means more natural gas consumption for space heating, and warmer summer weather leads to increased consumption in the power sector with increasing demand for air conditioning.

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ONG: Crude Oil Weekly Technical Outlook

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Crude oil dropped further to as low as 90.93 last week and broke mentioned 92.52 support. Initial bias remains on the downside this week and further fall should be seen to 61.8% retracement of 74.95 to 100.55 at 88.55. Strong support is anticipated at this 88.55 fibonacci level to bring rebound. On the upside, above 94.16 minor resistance will turn bias neutral and bring recovery. But upside should be limited by 100.68 support turned resistance and bring another fall.

In the bigger picture, price actions from 114.84 are developing into a three wave consolidation pattern. And, the third leg should have already started at 110.55. Deeper fall should eventually be seen to 74.95 low and possibly below. Though, we'd likely see strong support from 64.23 cluster level, 61.8% retracement of 33.20 to 114.83 at 64.38 and bring another medium term rise. Hence we'll look for reversal signal below 74.95.

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.

Nymex Crude Oil Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

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It's a Wrap....Energy Futures End The Week Down

Make sure you understand the simple truth about trends.

The energy futures are down once again today and trading right near the lows of the trading week with crude oil down another $1.35 this Friday morning due to more pessimism about the European debt situation causing prices to be down around $5 dollars for the trading week from last Fridays closing price of 96.50 down around 4% for the week while unleaded gasoline for the June contract is higher by 150 points currently trading at 2.90 a gallon in a quiet trade so far in New York.

Heating oil futures are down slightly currently trading at 2.84 a gallon also sliding for the week around 1200 points from last Fridays close of 2.96 a gallon and in our opinion, like we have been stating in previous blogs, if you look back at 2010 when this problem came up for the first time crude oil prices plummeted on that news and then rebounded later in the year so prices are still relatively high if the situation gets worse but only time will tell.

Natural gas futures are sharply higher once again today up another 14 points in the June contract to seven week highs at 2.74 with renewed optimism that demand will come back into this market with the next major level of resistance around 2.90.

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Phil Flynn: Quantitative Conundrum

10,000 Trades have viewed this video this morning.... Here is the simple truth about trends

Gold and silver soars and oil sinks in what can be best described as a quantitative easing conundrum. Many people were confused how gold might rally after briefly dipping in bear market territory after the dollar rallied for a record 14 days. The day after the Fed minutes showed that several Fed Officials would be open to more economic stimulus if the economy turned worse all of a sudden it seemed that indeed thinks look worse.

Against a backdrop of Europe coming apart at the seams somehow contraction in the Philly Fed Manufacturing Index and Leading Economic Indicators that are leading us in the wrong direction the odds of quantitative easing are rising Howard Packowitz at Dow Jones “The Wizard of Fed Fund Future Odds” showed that Fed funds futures traders now believe that the FOMC will wait two years or longer before it begins raising the funds rate.

Packowitz pointed out that trading volume heavier than usual for longer dated contracts as July 2014 fed funds price in a 40% chance for the Fed to boost the rate to 0.5% by then, down from a 44% chance at Wednesday's settlement. November '14 fed funds see 88% chance for a 0.5% rate, down from a 96% chance at Wednesday's settlement.

Yet while those odds rise the dollar rises as it is clear that it won’t just be the US that will have to come to the printing presses. The pressure on governments around the globe are clear in the currency differentials as the British Pound and Euro falls and yen rises. China and other markets may have to stimulate. Gold now is pricing in easing.

The Brent Crude WTI spread came in as Japan announced the restart of some nuke plants and the historic reversal of the Seaway pipeline is ready to begin!

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Crude Oil May Fall as Seaway May Prove Insufficient to Ease Glut

Here is the simple truth about trends

Crude oil may decline next week on concern that the reversal of the Seaway Pipeline will not be enough to alleviate a record supply glut in the central U.S., a Bloomberg survey showed.

Nineteen of 34 analysts, or 56 percent, forecast oil will drop through May 25. Nine respondents, or 26 percent, predicted prices will rise and six estimated they will be little changed. Last week, 48 percent of surveyed analysts expected a decrease.

Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) completed the pipeline reversal yesterday and plan to start shipping oil this weekend from Cushing, Oklahoma, the delivery point for West Texas Intermediate oil futures traded in New York, to the Gulf Coast. U.S. oil inventories rose to a 22 year high and Cushing stockpiles peaked in the week ended May 11 as domestic output increased, according to the Energy Department.....Read the entire Bloomberg article.


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Crude Oil Falls Below 50% Retracement Level, Gold Bounces on Short Covering

Here is the simple truth about trends

Crude oil closed lower on Thursday extending this week's breakout below the 50% retracement level of the 2011-2012 rally crossing at 93.99. The low range close sets the stage for a steady to lower opening on Friday.

Stochastics and the RSI are oversold but remain bearish signaling that sideways to lower prices are possible near term. If June extends this month's decline, the 62% retracement level of the 2011-2012 rally crossing at 89.90 is the next downside target. Closes above the 20 day moving average crossing at 100.02 are needed to confirm that a low has been posted.

First resistance is the 10 day moving average crossing at 95.75. Second resistance is the 20 day moving average crossing at 100.02. First support is Wednesday's low crossing at 91.81. Second support is the 62% retracement level of the 2011-2012 rally crossing at 89.90.

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Natural gas closed lower due to light profit taking on Thursday. The mid range close sets the stage for a steady opening on Friday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term.

If June extends the rally off last week's low, the 25% retracement level of the 2011-2012 decline crossing at 2.757 is the next upside target. Closes below the 20 day moving average crossing at 2.327 would signal that a short term top has been posted.

First resistance is today's high crossing at 2.676. Second resistance is the 25% retracement level of the 2011-2012 decline crossing at 2.757. First support is the 10 day moving average crossing at 2.464. Second support is the 20 day moving average crossing at 2.327.

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Gold closed higher due to short covering on Thursday as it consolidates some of this month's decline. The high range close sets the stage for a steady to higher opening on Friday.

Stochastics and the RSI are oversold but remain neutral to bearish signaling sideways to lower prices are possible near term. If June extends the decline off February's high, the 38% retracement level of the 2008-2011 rally crossing at 1487.50 is the next downside target. Closes above the 20 day moving average crossing at 1619.60 are needed to confirm that a short term low has been posted.

First resistance is the 10 day moving average crossing at 1589.00. Second resistance is the 20 day moving average crossing at 1619.60. First support is Wednesday's low crossing at 1526.70. Second support is the 38% retracement level of the 2008-2011 rally crossing at 1487.50.

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Gold Bulls Continue to Get Bad News, Now it's Lack of Physical Demand

Here is the simple truth about trends

Jon Nadler, senior analyst at Kitco.com, says the demand for physical gold has plummeted and smaller miners may need to alter their plans.



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King Dollar Dominates, Crude Oil and Gold Continues the Free Fall

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Crude oil closed down $1.23 a barrel at $92.75 today. Prices closed near mid range today and hit a fresh 6 1/2 month low. The bears have the solid overall near term technical advantage. A stronger U.S. dollar index today was again bearish for the crude market.

Natural gas closed up 12 1/2 cents at $2.625 today. Prices closed near the session high again today and hit a fresh 10 week high. More short covering and bargain hunting buying were featured today. The bulls have upside near term technical momentum. The bears do still have the slight overall near term technical advantage, however.

The U.S. dollar index closed up 14 points at 81.52 today. Prices closed near mid range today and hit another fresh four month high. More safe haven buying of the greenback was seen today. Bulls have gained solid upside near term technical momentum and have the solid overall near term technical advantage.

Gold futures closed down $25.20 an ounce at $1,531.70 today. Prices closed nearer the session low today and hit a fresh 10 month low. The key “outside markets” were again in a bearish posture for gold today, as the U.S. dollar index was higher and the crude oil market was lower. Serious near term chart damage has been inflicted recently. Now, gold prices are nearing major psychological support at the $1,500.00 level.

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Petrobras Quarterly Profit Beats Estimates on Export Growth

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Petroleo Brasileiro SA (PETR4), the world’s biggest oil producer in deep waters, said first quarter profit topped analysts’ expectations because of increased revenue from crude exports and higher fuel prices.

Net income dropped 16 percent to 9.2 billion reais ($4.6 billion), or 71 centavos a share, from 10.99 billion reais, or 84 centavos, a year earlier, Brazil’s state controlled producer said late yesterday. Per share profit beat the 64 centavo average of four analysts’ estimates compiled by Bloomberg.

Petrobras increased prices for gasoline and diesel by 10 percent and 2 percent, respectively, on Nov. 1. The first boost in more than three years reduced the discount to international prices. Oil exports rose 20 percent to 497,000 barrels a day after the company sold inventories it accumulated in late 2011, Petrobras said in a regulatory filing.

“The company’s increase in oil exports and its use of inventories at lower prices mainly explained the better than expected operating performance in the period,” Bradesco SA analysts led by Auro Rozenbaum said in a note to clients distributed today.

Read the entire Bloomberg article




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Exiting an Option Position

From guest blogger Todd Mitchell.......

Once you own options, there are three methods that can be used to make a profit or avoid loss: exercise them, offset them with other options, or let them expire worthless. By exercising what you have purchased, you are choosing to take delivery of (call) or to sell (put) the underlying asset at the option’s strike price. Only buyers have the choice to exercise an option. Sellers, on the other hand, may experience having an option assigned to a holder and subsequently exercised.

Offsetting is a method of reversing the original transaction to exit the trade. If you bought a call, you have to sell the call with the same strike price and expiration. If you sold a call, you have to buy a call with the same strike price and expiration. If you bought a put, you have to sell a put with the same strike price and expiration. If you sold a put you have to buy a put with the same strike price and expiration. If you do not offset your position, then you have not officially exited the trade.

If an option has not been offset or exercised by expiration, it expires worthless. If you originally sold an option, then you want it to expire worthless because then you get to keep the credit you received from the premium. Since a seller wants options to expire worthless, the passage of time is a seller’s friend and a buyer’s enemy. If you bought, the premium is nonrefundable even if you let the it expire worthless. As it gets closer to expiration, it decreases in value.

It is Important to note that most options traded on u.s. exchanges are American style. In essence, they differ from European options in one main way. American style options can be exercised at any time up until expiration. In contrast, European style options can be exercised only on the day they expire. All the options of one type (put or call) which have the same underlying security are called a class of options. For example, all the calls on ibm constitute a class. All the options that are in one class and have the same strike price are called a series. For example, all ibm calls with a strike price of 130 (and various expiration dates) constitute a series.

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Crude Oil and Gold Continue Strong Down Trend, Natural Gas Enjoys the Stronger Dollar

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Crude oil closed down $1.70 a barrel at $93.08 today. Prices closed near the session low today and hit a fresh 6 1/2 month low. The bears have the solid overall near term technical advantage and gained still more power today. A stronger U.S. dollar index today was bearish for the crude market. With a Trade Triangle Technology Score of -100, this market is in a strong downtrend. All traders should be in short positions in crude oil with appropriate money management stops.

Natural gas closed up 7.0 cents at $2.501 today benefiting from the U.S. Dollars solid upside and near term momentum and overall near term advantage over other currencies. Natural gas prices closed near the session high today and saw short covering. And while the nat gas bulls still have some upside "near term" technical momentum, the nat gas bears do still have the overall near term technical advantage, however.

Gold futures closed down $4.20 an ounce at $1,556.80 today. Prices closed near mid-range today and hit another fresh 4 1/2 month low. The key “outside markets” were again in a bearish posture for gold today, as the U.S. dollar index was higher and the crude oil market was lower. Serious near term chart damage has been inflicted recently. Gold bears have the solid near term technical advantage. With a Trade Triangle Technology Score of -90, the gold market is in a strong downtrend. All traders should still be in short positions in gold with appropriate money management stops.

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Monday Brings Solid Downside Move in Crude Oil

Crude oil closed down $1.70 a barrel at $94.43 today. Prices closed near mid range today and hit a fresh 4 1/2 month low. The bears have the solid overall near term technical advantage. Prices today saw a downside “breakout” from a bearish pennant pattern on the daily bar chart.

Natural gas closed down 8.4 cents at $2.425 today. Prices closed nearer the session low today and saw a corrective pullback from recent gains. The bulls still have some upside near term technical momentum. The bears do still have the overall near term technical advantage, however.

Gold futures closed down $20.10 an ounce at $1,563.90 today. Prices closed nearer the session low today and hit a fresh 4 1/2 month low. The key “outside markets” were in a bearish posture for gold today aided by the U.S. dollar index moving higher. Serious near term chart damage has been inflicted recently. Gold bears have the solid near term technical advantage. A 2 1/2 month old downtrend is in place on the daily bar chart.