Gold and Stocks Rally But is it Time for a Little Pullback

It has been a very interesting week thus far. Monday kick started traders with a heart pounding equities sell off which sent money into the US Dollar, precious metals and bonds as the safe havens of choice.

A lot has happened this week on a technical analysis basis which I can’t really show in a written report like this. But can do so in detail within my video newsletter. There are just to many charts required and layers of analysis to cover… But I can cover some of the points and my thoughts using the charts below:

SPY 30 Minute Intraday Chart

This chart shows the volume traded at various price levels for the SP500 index. These high volume levels act as support or resistance depending if you are above or below them. On Wednesday we had large gap higher into a resistance level which the market could not break through. So I am expecting to see the market take a pause and fade back down to fill part or all of Wednesday’s gap window.

While most gaps tend to get filled. Gaps that occur right at the beginning of a new trend when momentum is strong. They generally do not fill all the way down to the bottom. I expect a couple days of sideways to lower price action. Buyers should step back in and send the market higher next week if this trend is to continue.

GDX – Gold Miner Stocks – Daily Chart
Gold stocks have been underperforming the price of gold bullion for several months. This typically is not a strong sign for physical gold prices. That being said I do feel the majority of investors are seeking true safety and want to own real gold and not some highly leveraged gold stock. This to me is more of a risk off trade for global investors and it explains the performance.

From the recent price action shown on the GDX chart I am expecting to see prices trade sideways or lower in the coming days. A sideways move would actually be bullish and would signal a possible breakout to upside. So that is what I am hoping will unfold in the coming days/weeks.

US Dollar Daily Chart
The dollar continues to get sold at a tremendous rate and the Fed is devaluing the currency as quickly as they can trying and save the world one dollar at a time…
The trend is strongly down but it’s starting to near a point where we should start to keep a closer eye on it for signs of a reversal to the upside. When the dollar makes a move higher and starts a rally it will put downward pressure on stocks and commodities. We must be prepared to move our protective stops ups and possibly take advantage of falling prices in the near future. Until then remain long equities and commodities.

Mid-Week Trend Conclusion:
In short, it looks as though stocks and commodities are in favor again. Monday’s panic sell off looks to have shaken the masses out of the market and the big money players were buying up all the shares they could. Members and myself are sitting nicely in our long positions and this could be the start of something exciting.

You can get Chris Vermeulens Pre-Market Trading Analysis Videos, Intraday Chart Updates and Trade Alerts with his Premium Newsletter The Gold and Oil Guy.Com

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

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

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

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

“Holier Than Thou” – Metallica

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

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

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

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

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

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

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

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

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

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

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

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

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

SPX illustrates the two key price levels:

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

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

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

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

The weekly chart of gold futures is listed below:

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

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

The weekly chart of oil futures is listed below:

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

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

Get all of J.W Jones opinions and analysis @ www.OptionsTradingSignals.com
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Are Stocks & Commodities About To Start Another Rally?

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

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

Now, let’s take a look at the charts…

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

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

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

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

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

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

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