The Unfortunate Truth About an Overbought Stock Market

Writing about financial markets is probably the most challenging endeavor I have ever immersed myself into. I am a trader first and a writer second, but I have really come to enjoy scribing missives about financial markets because it really forces me to concentrate on my analysis.

Writing for the general public has really enhanced my perception of the market and forced me to dig deeper and learn new forms of analysis. I find myself learning more and more every day and the beauty of trading is that even for the most experienced of traders there is always an opportunity to learn more. As members of my service know, I strive to be different than most of my peers as my focus is on education and being completely transparent and honest.

I want readers to know that I was wrong about my recent expectations regarding the European sovereign debt summit. I was expecting the Dollar to rally based on the recent price action and quite frankly I expected stocks to falter after running up nearly 15% into the announcement. My expectations could not have been more untimely and incorrect.

I share this with you because as I read and listen to market pundits discussing financial markets I find that too many writers and commentators flip flop their positions to always have the appearance of accuracy. In some cases, there have been television pundits that stated we were possibly going to revisit a depression in 2012 no more than 5 weeks ago. These so called experts have now changed their positions stating that we have started a new bull market in recent weeks. How can anyone take these people seriously?

Financial markets are dynamic and consistently fool the best minds and most experienced traders out there. Financial markets do not reward hubris. If a trader does not remain humble, Mr. Market will happily handle the humbling process for him. I was humbled this week. I was reminded yet again that  financial markets do not take prisoners and they show no mercy. I am sharing this with readers because I want you to know that I refuse to flip flop my position without first declaring that I was wrong.

When I am wrong, I will own up to it purely out of sense of responsibility. My word and my name actually mean something to me, and while I strive to present accurate analysis I am fallible and I will make mistakes. The key however to the mistakes that I make is my ability to learn from them and the past week was a great learning opportunity.

After regrouping and stepping back after the price action on Thursday, a few key elements really stood out to me regarding recent price action. First of all, in the short term we are extremely overbought. The chart below illustrates the number of stocks in domestic equity markets trading above their 20 period moving averages over the past 5 years:

Overbought Stock Momentum

What is apparent from the chart above is that prices are almost as overbought right now as they have been anytime in the past 5 years. The number of domestic equities trading above their 50 period moving average over the past 5 years is also nearing the highest levels seen during the same period as the chart below illustrates:

Trading Stock Market Momentum

Equities trading above the 100, 150, and 200 period moving averages are somewhat subdued by comparison meaning in the short run a possible correction appears likely. The longer term time frames are no longer oversold, but they have considerable upside to work with before we could declare that they are overbought.

Additionally, the details of the European Union’s supposed solution have not yet been released raising questions going forward. Every move that is made will create unintended consequences. As an example, since Greece had 50% of their debt written down why would Ireland or Portugal refuse to pay their debts in full?

The Irish and Portuguese governments are going to come under pressure from their constituents to renegotiate the terms of their debt based on the agreement that was made with Greece recently. Spain politicians will likely be under pressure as well. The decisions made in these so called bailouts reverberate across the geopolitical spectrum. Moral hazard still exists, it just evolves over time.

The risk premium of sovereign debt has to be adjusted since credit default swaps did not trigger payment as the write downs were considered “voluntary.” Thus credit default swaps are not the answer to hedge sovereign debt as it would appear that governments have the ability to write down debt without triggering a default based on the status of the write down. The long term unintended consequences could be severe and are unknown at this point in time.

In addition to the unknown factors impacting the European “solution”, next week the Federal Reserve will have their regular FOMC meeting and statement. There has been a lot of chatter regarding the potential for QE III to come out of this meeting. While I could be wrong, initiating QE III right after the Operation Twist announcement would lead many to believe that Operation Twist was a failure.

With interest rates at or near all time lows and the recent rally we have seen in the stock market, it does not make sense that QE III would be initiated during this meeting. It is possible that if QE III is not announced the U.S. Dollar could rally and put pressure on risk assets such as the S&P 500 in the short to intermediate term. If this sequence of events played out, a correction would be likely. The following is a daily chart of the S&P 500 with possible correction targets in place:

SPY Overbought Stock Market

Right now it is a toss up in the financial blogosphere as to the expectations of where price action will head. Are we near a top? Is this the beginning of a new bull market? I scanned through several charts Friday evening and Saturday morning and came to this realization. If the market is going to breakout and this is not a top but the beginning of a major bullish wave higher, then the Nasdaq 100 Index (NDX) has to breakout over the 2011 highs.

The Nasdaq 100 Index is comprised of stocks such as AAPL, GOOG, INTC, and YHOO. In order for a new leg higher to transpire, hyper beta names like AAPL and GOOG have to breakout higher and show continuation with strong supporting volume. If the NDX does not breakout over the 2011 highs, a top could potentially be forming. The daily chart of the Nasdaq 100 Index is shown below:

QQQ Overbought Market

In conclusion, the short term looks like a possible correction could play out. However, it is critical to note that the longer term time frames are more neutral at this time. Furthermore, if price action cannot penetrate the 2011 highs for the Nasdaq 100 Index, I do not believe that a new bull market will have begun. If the Nasdaq 100 Index cannot breakout above the 2011 highs, we could be putting in a potential top going into the holiday season.

In closing, I will leave you with the thoughtful muse of famed writer and minister Hugh Prather, “Almost any difficulty will move in the face of honesty. When I am honest I never feel stupid. And when I am honest I am automatically humble.”

Subscribers of OTS have pocketed more than 150% 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 our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

J.W. Jones

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Here's Evidence That Would Support the Possibility That a Pullback is Eminent

I am not one to discuss fundamentals or macro views, but this situation in Europe is beginning to morph into a media frenzy. Price action in the marketplace is changing rapidly in short periods of time based on the latest press releases coming from the Eurozone summit.

I cannot help but comment on the seemingly arbitrary actions coming from this high profile meeting. Nothing has happened that market participants were not already privy too. The European Union is going to strengthen their EFSF fund by levering it up roughly 4 : 1. I have yet to hear how exactly they plan on doing this, but this action was no surprise to anyone that has read an article about the sovereign debt crisis in the past month.

There was also discussion about backstopping European banks’ capital position. Since European banks are holding billions (Euros) of risky sovereign debt instruments, it would make sense that their capitalization is a primary concern of Eurozone leaders based on current fiscal conditions. I would argue that the banks should be well capitalized regardless of economic or fiscal conditions in order for a nation to have a strong, vibrant economy that has the potential to grow organically.

The final piece of this week’s political nonsense involves write-downs on Greek debt in the neighborhood of 50% – 60% in order to stabilize Greece’s debt to GDP ratio. Apparently Eurozone leaders want to structure the write down so as to avoid payouts by credit default swaps which act as insurance against default. How does a bond take a 50% – 60% valuation mark down without a creating an event that would trigger the payout of CDS swaps?

If a write down of that magnitude does not trigger the CDS swaps, then I would argue they are useless as a tool to hedge against the default risk carried by sovereign debt instruments. If the CDS swaps do not payout as projected by European politicians, the risk assumed by those purchasing government debt obligations around the world would be altered immediately.

The impact this might have on the future pricing of risk for government debt instruments could be extremely detrimental to their ability to raise funds in the private market. Additionally, the write downs would hurt European banks’ capital positions immediately. If the CDS swaps were to pay out, bank capital ratios would suffer as those who took on counter party risk would be forced to cover their obligations thereby straining capital positions even further potentially.

Price action today suggested that the equity markets approved of the package that European leaders were working on. However, the biggest push higher came when news was released that China was interested in purchasing high quality debt instruments as a means to help prop up poorly capitalized banks and sovereign nations in the Eurozone through an IMF facility.

The market did an immediate about face which saw the Dollar selloff while the S&P 500 rallied higher into the close reversing a great deal of Tuesday’s losses. Inquiring minds wish to know where we go from here? I would be lying if I said I knew for sure which direction Mr. Market favored, however that did not stop me from looking for possible clues.

It has been a while since I checked out the short-term momentum charts that are focused on the number of stocks in U.S. domestic equity markets that are trading above their 20 & 50 period moving averages. The charts below illustrate the current market momentum:

Equities Trading Above the 20 Period Moving Average

It is rather obvious that when we look at the number of stocks trading above their 20 period moving average that momentum is running quite high presently. This chart would indicate that in the short-term time frames equities are currently overbought.

Equities Trading Above the 50 Period Moving Average

A similar conclusion can be drawn when we look at the number of stocks trading above their 50 period moving averages. It is rather obvious at this point in time that in the short to intermediate term time frames, stocks are currently at overbought levels. This is not to say that stocks will not continue to work higher, but a pullback is becoming more and more likely.

Additional evidence that would support the possibility that a pullback is likely would be the  recent bottom being carved out in the price action of the U.S. Dollar Index. The U.S. Dollar has been under selling pressure since the beginning of October, but has recently started to show signs that it could be stabilizing and setting up to rally higher.

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

The U.S. Dollar Index is sitting right at major support and is oversold based on historical price action. If the Dollar begins to push higher in coming days and weeks it is going to push equity prices considerably lower. Other risk assets such as gold, silver, and oil would also be negatively impacted by higher Dollar prices.

Members of my service know that I focus on several sectors to help give me a better idea about the broader equity markets. I regularly look at the financial sector (XLF), the Dow Jones Transportation Index (IYT), emerging markets (EEM), and the Russell 2000 Index (IWM) for clues about future price action in the S&P 500.

During my regular evening scan I noticed that all 4 sector/index ETF’s are trading at or near major overhead resistance. With the exception of the Dow Jones Transportation Index (IYT), the other 3 underlying assets have yet to breakout over their August 31^st highs. The significance of August 31^st is that is the date when the S&P 500 Index put in a major reversal right at the 1,230 price level before turning lower. It took nearly two months to regain the 1,230 level and its significance continues to hold sway.

The daily chart of IWM is shown below illustrating its failure to breakout over the August 31^st highs:

The chart above illustrates clearly that IWM has failed to breakout above the August 31^st highs. I am going to be watching IWM, XLF, & EEM closely in coming days to see if they are able to breakout similarly to the S&P 500. If they start to rollover, it will not be long before the S&P 500 likely follows suit.

Currently the underlying signals are arguing for lower prices in the short to intermediate term. While it is entirely possible that the S&P 500 rallies higher from here, it is without question that current market conditions are overbought in the short to intermediate terms.

Key sectors and indices are not showing follow through to the upside to help solidify the S&P 500′s recent break above the key 1,230 price level. Additionally, the U.S. Dollar Index is currently trading right at key support in addition to being oversold. At this time I am not playing the S&P 500 in either direction, but I will be watching the underlying price action in the U.S. Dollar Index closely. I will be watching for additional clues in the days ahead.

Market and headline risk is high presently.

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 or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

Chris Vermeulen & J.W. Jones

Will Rhind: Euro Worries, Indian Weddings Boosting Gold

Will Rhind, Head of U.S. Operations at ETF Securities, says the Eurozone debt crisis and Indian wedding season are creating a base for gold to move higher.



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Is It Reversal Time For the Markets?

At the start of a new week, have we turned around or is this just a correction in a larger bear market?

I think you’ll find today’s video interesting as the S&P 500 has made a remarkable recovery. However, it is back at a crucial Fibonacci retracement level which could present major problems for this index.

In our recent survey we asked traders if they were concerned about what is going on in Europe. A remarkable majority, over 75% said they were, and they do watch events in Europe very closely.
At this point, Europe is really the tail that wags the dog and we are not optimistic that things are going to work out in a positive fashion.

They have had a total of 13 summits in a period of 20 months trying to solve this problem. With the likes of Berlusconi, can you imagine telling him what to do? And other players like Nicholas Sarkozy shouting to Brian Cameron of Great Britain to shut up and butt out. And that’s the stuff we hear about!

Imagine the stuff we don’t heard about.

Let's look at the Trend Analysis for the gold market......

The gold market rallied from the lows seen last week at $1603 and have now rallied back to a Fibonacci retracement level of $1,659. While the long term and intermediate term trends remain positive for this precious metal, it is still locked in the confines of a fairly significant trading range. I think most traders would be better off just watching from the sidelines. Only long term traders should maintain long positions with the appropriate money management stops in place.

Well, December gold futures closed up $15.30 an ounce at $1,651.50 on Monday. Prices closed near mid range today as trading remains choppy and sideways. It was a “risk on” trading day in the market place today, and those types of trading days have been bullish most commodity markets, including gold, recently. Bulls and bears are back on a level near term technical playing field.

Monthly Trade Triangles for Long Term Trends = Positive
Weekly Trade Triangles for Intermediate Term Trends = Positive
Daily Trade Triangles for Short Term Trends = Positive
Combined Strength of Trend Score = + 100

Now, let’s go to todays video and look at the charts of the six markets we publicly cover and see some of those important retracement levels.

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How to Trade Gold and Oil Prices This Coming Week

The past couple weeks have been tough for most investors. The recent light volume rallies which have taken place in gold, oil and stocks has been generating mixed signals for technical analysts like myself. In order avoid a large draw down on your trading capital you must focus on the long term intraday charts.

What is a long term intraday chart you ask?

It is simply a 4 or 8 hour candlestick or bar chart. For example the charts below in this report are 4 hour charts. So each candlestick represents 4 hours.

Why should you use these long term intraday charts instead of say a daily chart? There are four main reasons for this:

1. If you used a daily chart then this information would be condensed showing you the daily high, low, open and closing prices. While the 4 hour futures chart shows you large multi intraday chart patterns that most traders would never see…  Patterns not seen by the average investor have a higher probability of working in your favour. Also these patterns are much larger than just normal intraday patterns which you see on the 5, 10, or 60 minute charts. Remember the larger the pattern the more potential profit there will be.
2. These longer time frames allow us to follow gold, silver, oil and stock indexes around the clock 24/7 using futures contracts. Think about it… regular trading hours from 9:30am – 4pm ET only allows you to see 1/3^rd of the price action each day. That means you are only seeing parts of larger patterns while the 24/7 contracts show you ALL Price Action.
3. The last reason you must use futures charts is for the volume readings. Futures show real volume levels which can be used for trading. So the volume you see on ETFs will not have the proper volume levels for that specific commodity or index. More times than not it almost the opposite…
4. My last reason for trading long term intraday futures charts is because the price of the underlying commodity or index moves true while the ETFs which try to shadow these commodities generate false breakouts and breakdowns on a regular basis. 

Let’s take a look at the charts.......

Gold Futures Contract – 240 Minute (4 Hour) Chart

Gold finally broke down from the bearish rising wedge which it had been forming through late September until mid October. I know the majority of traders, investors, and financial newsletters have already positioned themselves either long or short the metal as they anticipate the next major move.

I will agree that a large move either up or down is just around the corner but what sets me apart from others is the fact that I don’t bet my hard earned money when the odds are 50/50. I don’t pick tops or bottoms; rather I wait for a clean break out or low risk entry point. Only then will I take action. Until the blue box on the chart has been broken with some type of retest I will continue to observe and analyze the chart of gold.

Crude Oil Futures Contract – 240 Minute (4 Hour) Chart

The past month crude oil trading has been very profitable for subscribers and me. We shorted crude oil using an inverse etf in September which moved over 20% in our favour within a few trading sessions. And just last week we shorted it again for a 7.5% move in less than 24 hours.

Overall I am still bearish on oil but have moved to cash until I see another high probability setup unfolding. The recent price action in crude oil makes the odds about a 50/50 bet as to which way it will break next. This is why I have moved back to cash and pocketed the quick gain.

SP500 Exchange Traded Fund – 240 Minute (4 Hour) Chart

This chart is not the SP500 futures contract. This is just the SPY ETF but what I wanted to show was how the market was showing mixed signals. The past couple weeks price has been broadening and this can be taken two different way.......

More times than not it is seen as a bearish pattern and price generally falls afterwards. But in rare situations which I think we could be experiencing now this broadening price action can be very bullish, meaning much higher prices ahead. So I continue to observe and prepare for a possible trade setup.

Weekend Gold, Oil and Stocks Trend Conclusion:

In short, I feel the market is on the verge of a strong move. The problem is that price action, market sentiment and economic news are all giving mixed signals......…

The best position right now is in cash and if something unfolds this week to our favor, then we will get involved but I am not going to take a 50/50 guess on what the next move is until the odds are in favour to one side or the other.

Chris Vermeulen

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August until now (October 24) the SP500 is down -3.7% and Gold is up 1.1%, Silver is down 20% and oil is down -7.2. Subscribers of my newsletter have pocketed over 38.5% in total gains using my simple low risk ETF trading alerts.

Gold Signals Additional Weakness Ahead

Gold closed higher due to short covering on Friday as it consolidated some of this week's decline. The high range close sets the stage for a steady to higher opening on Monday but Stochastics and the RSI are still bearish signaling that additional weakness is possible near term.

If December renews the decline off September's high, the 38% retracement level of the 2008-2011 rally crossing at 1476.20 is the next downside target. Closes above Monday's high crossing at 1696.80 are needed to confirm that a short term low has been posted.

Our Chart Analysis Score for gold has moved to +55 indicating a trading range for this precious metal in the near term. Longer term, our monthly Trade Triangle and our intermediate term weekly Trade Triangle remain in a positive mode. I think most traders would be better off just watching from the sidelines. Only long term traders should maintain long positions with the appropriate money management stops in place.


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SP500 Poised For A Sharp Pullback Near Term says Dr. Copper

Back on October 3^rd I wrote a public article forecasting a major market bottom at around 1088 on the SP 500 index.  I surmised we were about to complete a 5 wave move to the downside that commenced with the Bin Laden highs of 1370 in early May of this year.  The following day we bottomed at 1074 intraday and closed over my 1088 pivot and continued higher as we all know.  That brings us to the recent highs of 1233 intraday this week, a strong 159 point rally off the 1074 lows in just a few weeks.

Markets I contend move based on human behavioral patterns, mostly because the crowd reacts to good or bad news in different ways depending on the collective psychology of the masses.  There are times when seemingly bad news is ignored and the markets keep going higher, and there are times when very good news is also ignored and the markets go lower. This is why I largely ignore the day to day economic headlines and talking heads on CNBC, as they are not much help in forecasting markets at all.

Using my methods, I was able to forecast the top in Gold from 1862-1907 while everyone was screaming to buy.  I was able to forecast the April 2010 top in the SP 500 well in advance, the bottom last summer, and recent pivot tops at 1231 and 1220 amongst others.  All of this is done using crowd behavioral theory and a bit of my own recipes.  

That brings us forward to this recent rally from 1074 to 1233, which as it turns out is not all that random.

The rally to 1233 will have taken place within a 13 Fibonacci trading day window which ends today.  In addition, the rally is leading into the end of Options Expiration week which tends to mark pivot highs and pivot lows nearly every single month.  Also, at 1233 we have a 61% Fibonacci retracement level of the 1010 lows of July 2010 and the 1370 highs of May 2011.  1233 was my “Bear line in the sand” I gave out a few months ago to my subscribers as a likely bull back breaker.  

In essence, the market is having trouble breaking the glass ceiling at 1233 for a reason; it’s a psychological barrier for investors now.

Near term, I expect the market to have another sharp correction to work off the near 160 point SP 500 rally that has taken hold in just over two weeks and again on 13 Fibonacci trading days as of today.  In addition to that, we should follow copper as it tends to be an extremely good indicator for the SP 500 index long and short term.

Right now, Copper has dropped 8% this week while the SP 500 levitates on a magic carpet ride within a 30 point range.  Copper looks like it has begun a 5^th wave down, which will likely take it to the $2.70’s per pound from $3.46 last week on its recent bounce from $2.99.  Below I offer a few charts showing the projected copper pattern and also one showing the SP 500 relating to Copper.

In any event, we are due for what I call a “B wave” correction of sentiment in the SP 500 and market indices, which should take the SP 500 to the 1149-1167 ranges minimally, and perhaps set up another entry for a C wave to the upside.  Caution is warranted near term is my point.  If you’d like to receive these types of regular updates during the week covering Gold, Silver, and SP 500 and more, check us out for a coupon or free weekly update at Market Trend Forecast.Com

David Banister

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Oil N' Gold: Gold Daily Technical Outlook For Thursday Oct. 20th

Gold's break of 1627.6 minor support suggests that the choppy recovery from 1535 is possibly finished at 1696.8 already. Intraday bias is back on the downside for a test on 1535 low first. Break there will confirm resumption of the whole decline from 1923.7 and should target 1500 psychological level next. On the upside, while another recovery cannot be ruled out yet, we'd maintain that with 1705.4 double top neckline intact, outlook remains bearish and the decline from 1923.7 is expected to resume sooner or later.

In the bigger picture, current development indicates that gold has made a medium term top at 1923.7, ahead of long term projection level of 161.8% projection of 253 to 1033.9 from 681 at 1945.6 and 2000 psychological level. While the fall from 1923.7 is steep and deep, gold is still holding inside long term rising channel from 681 and above 55 weeks EMA at 1513.3. Hence, we're not too bearish in gold yet. Strong support is anticipated at 1478.3/1577.4 support zone to contained downside, at least initially, and bring rebound. However, note that sustained break of 1478.3 will strongly suggest that the long term up trend has already reversed.

Visit Oil N'Gold.Com for Comex Gold Continuous Contract 4 Hour, Daily and Monthly Charts.

Will Rhind: Gold Searches for a Catalyst

Will Rhind, head of US operations for ETF Securities, breaks down gold's recent trading, why it is not acting like a safe haven and how gold investors are reacting.



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The SP 500, Apple Earnings and Feeding The A.D.D. Monster

The last hour of trading was intense on Tuesday and then all eyes were focused on Apple’s earnings which were released around 4:30 ET. The initial reaction to the earnings release is negative although as I write this AAPL is bouncing sharply higher in after market trading on strong volume.

To put the final hour’s volatility into perspective, at 3 P.M. Eastern Time the S&P 500 Index was trading at 1,217. A mere 12 minutes later the S&P 500 Index pushed 15 handles higher to trade up to 1,232. Then sellers stepped in and pushed the S&P 500 lower by nearly 12 handles in the following 20 minutes.

The price action was like a roller coaster and I was sitting watching the flickering red and green bars in real time with the anticipation of a child. It was the most excitement I have had in quite some time, but please don’t hold that against me. I don’t know whether reading my previous line makes me laugh or cry, but the truth must be heard I suppose.

Enough self deprecation, I want to get down to business with some charts and what is likely to happen in coming sessions. The sell the news event in AAPL has the potential to really change the price action tomorrow. If prices hold at lower levels, the indices could roll over sharply tomorrow. The S&P 500 E-Mini futures contracts are showing signs of significant weakness after the earnings miss by Apple in aftermarket trading.

Some other potentially game changing news items came out of Europe where Reuters reported earlier today that the Eurozone will likely pass legislation that will ban naked CDS ownership on sovereign debt instruments. Additionally, Treasury Secretary Timothy Geithner stated this morning that a forthcoming FHA announcement involving a new housing refinance plan was going to be made public in coming days. The statement regarding the new FHA plan helped the banks and homebuilders show relative strength during intraday trading and likely were behind much of the intraday rally.

I would point out that the S&P 500 Index (SPX) broke out slightly above the August 31 highs before rolling over. The reason that is critical is because the S&P 500 E-Mini futures did not achieve a breakout, but tested to the penny the August 31^st highs. I am going to be totally focused on tomorrow’s close as I believe it will leave behind clues about the future price action in the S&P 500 leading up to option expiration where volatility is generally exacerbated. The daily chart of the S&P 500 Index is shown below:



If Wednesday’s close is below the recent highs near 1,230 we could see this correction intensify. The price action on Tuesday helped stop out the bears and if we see a significant reversal tomorrow the intraday rally today will have been nothing more than a bull trap. The price action Tuesday & Wednesday could lead to the perfect storm for market participants where bears were stopped out and bulls are trapped on the potential reversal.

Another interesting pattern worth discussing is the head and shoulders pattern seen on the SPY hourly chart. The strong rally to the upside may have indeed negated the pattern, but if prices don’t follow through to the upside in the near term and the neckline of this pattern is broken to the downside we could see serious downside follow through. The hourly chart of the Spider SPY Trading ETF is shown below:

Ultimately there are two probably scenarios which have different implications going forward. The short-term bullish scenario would likely see prices breakout over recent highs and push higher toward the key resistance area around the 1,260 price level. The 1,260 price level corresponds with the neckline that was broken back in August that led to heavy selling pressure.

Bullish Scenario
If we do breakout to the upside, the longer term ramification may wind up being quite bearish as most indicators would be screaming that price action was massively overbought at those levels and a sharp selloff could transpire into year end. The daily chart of the S&P 500 Index illustrates the bullish scenario below:




Bearish Scenario
The short term bearish scenario would likely involve a break below Monday’s lows that would work down to around the 1,140 level or possibly even lower. If a breakdown took place, a higher low could possibly be carved out on the daily chart which could lead to a multi month rally that would likely see the neckline mentioned above tested around the holiday season. The daily chart of the S&P 500 below shows the bearish scenario:



There are a variety of reasons why either scenario could unfold. Most of the analysis that I look at argues that the bearish scenario is more probable. However, based on what happened in the final hour of trading on Tuesday and the surprise earnings miss from Apple anything could happen.

I will likely wait for a confirmed breakout either to the upside above recent highs or to the downside below the neckline of the head and shoulders pattern illustrated above before accepting any risk. I am of the opinion that risk is exceptionally high in the near term. I am not going to try to be a hero, instead I am just going to wait patiently for a high probability setup to unfold.

Until a convincing breakout in either direction is confirmed, I am going to sit on the sidelines. I am quite content just watching the short-term price action without taking on any new risk. For those that want to be heroes or feel they have to trade, I would trade small and use relatively tight stops to define risk. Risk is excessively high!

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 or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

JW Jones

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Mihir Dange: Where Gold Prices Make a Stand

Mihir Dange, founder of Arbitrage, reveals why $1,550 is the line in the sand for gold and how he is trading recent volatility.



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How Gold & Stocks are About to Repeat the 2010 Bottom

In May of 2010, immediately following the flash crash many investors started to become bearish (nervous) regarding their position in gold and equities. Once the general public became aware that the stock market could fall 10% in a matter of minutes, investors became very cautious. Suddenly protecting their capital and current positions was at the forefront of their investment process.

A couple days later the market recovered most of its value, but it became clear that investors were going to sell their long positions if the market showed signs of weakness. It was this fear which pulled the market back down to the May lows and beyond over the next couple months which caused investors to panic and sell the majority of their positions. It is this strong wave of panic selling that triggers gold and stock prices to form intermediate bottoms. Emotional retail traders always seem to buy near the top and sell at the bottom which leads to further pain.

Now, fast forward to today........

This past August we saw another selloff similar to the “Flash Crash” in May of 2010. I warned followers that gold was on the edge of topping and that stocks would take some time for form a base and bottom. Over the past couple months gold, silver, and stocks have been trying to bottom but have yet to do so.

Just a couple weeks ago we saw gold, silver, and equities make new multi month lows. This has created a very negative outlook among investors which I highlighted in red on the chart below. Since the panic selling low was formed just recently we have seen money pile back into gold and stocks (more so stocks).

This strong bounce or rally which ever you would like to call it may be the beginning stages of a major bull leg higher which could last several months. Before that could happen, I am anticipating a market pullback which is highlighted with red arrows on the chart below.

Chart of SP500, Gold and Dollar Index Looking Back 18 Months

Reasons for gold and stocks to pullback:

• Stocks are overbought and generally retracements of 50% or 61% are common following large rallies.
• The dollar index looks ready to bounce which typically means lower gold and stock prices.
• Gold continues to hold a bearish chart pattern pointing to lower prices still.

Weekly Trend Trading Ideas

A few weeks ago I warned my followers that stocks and gold are forming a bottom and that we should be on the lookout for further confirmation signs. I also mentioned that I was not trying to pick a bottom, rather that I was looking to go long once the odds were more in my favor.

This is a potentially very large opportunity unfolding and there will be several different ways to play this. However, right now I continue to wait for more confirming indicators and for more time to pass before getting subscribers and my own money involved.

From August until now (October 17) the SP500 is down -6.3% and gold is down -8.1%. Subscribers of my newsletter have pocketed over 35% in total gains using my simple low risk ETF trading alerts.

I can email you my bi-weekly reports and videos by joining my free newsletter here at The Gold and Oil Guy.com

Chris Vermeulen

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 gold market......

The spot gold market is up over $30 for the week. Unlike Silver, the gold market has a positive long term Trade Triangle indicating that the longer term trend is still positive. With a Chart Analysis Score of +65, we expect this market to continue to remain in a trading range. Gold has reached the midpoint of the Donchian trading channel, which will probably halt its upward momentum for the time being.

 We would not be surprised to see this sideways action continue for another week or so. I think most traders would be better off just watching from the sidelines until the volatility subsides. Only long term traders should maintain long positions with the appropriate money management stops in place.

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



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

Prepare for a Multi-Month Correction in Gold

David Banister, chief investment strategist at The Market Trend Forecast.com, says he is bracing for a multi month correction in gold before prices enter their final bull run.



Get David Banisters Free Weekly Index & Commodity Forecast

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

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.