The Fed, the S&P 500, & Why Gold Is Shining Bright

Well here we are, caught between resistance in the S&P 500 around the 1,330 area and support around the 1,300 price level. My last two articles have discussed why I was expecting a top in the coming days and weeks ahead, but prices just continued to work higher.

One of the things that I pride myself in as a person who trades and writes about financial markets in public is that I am always honest. If I blow a call I fess up and admit it. When I have made mistakes in the past, I always try to learn something new from them and I discuss losing trades publicly with readers and members of my service.

This time is different. I honestly do not know if I am going to be right or wrong. The price action in the S&P 500 Thursday was certainly bearish short term, but a back test of 1,300 or possibly even 1,280 could give rise to a Phoenix. Granted, the Phoenix is nothing more than Ben Bernanke’s pet, but that is a topic for a different time.

I have scanned through my list of indicators which discuss sentiment based on momentum, put/call ratio, the advance/decline line, Bullish Percent Indicators, and several ratio based indicators and they are all SCREAMING that a top is near. The interesting thing about the previous statement is that it would have been true a week ago and mostly true two weeks ago, yet prices have continued to climb.

The daily chart of the S&P 500 Index demonstrates the recent price action that has continued to climb the “Wall of Worry” for several weeks:

S&P 500 Daily Chart

 

The culmination of the massive run higher for the S&P 500 was the dovish comments coming from Ben Bernanke during Wednesday’s press release and press conference.

The U.S. & European Central Banks are seemingly in a perpetual race to debase their underlying fiat currencies. The race will not end well. In fact, this type of situation smells like a Ponzi scheme where Ben Bernanke and Mario Draghi (ECB President) are the wizards behind the curtains. Their loose monetary policies and forced reflation are synthetic drugs that juice risk assets higher and ultimately Mr. Market will have his vengeance in due time.

At this point, it seems like Ben Bernanke will do anything to juice equity prices higher. I think his hope is that they will be able to artificially keep the game going until the recovery is on a more sound footing. However, when the entire recovery is predicated on cheap money and liquidity and is not supported by organic economic growth it just prolongs the inevitable disaster.

As an example, the daily chart of the Dow Jones Industrial Average is shown below. I would point out that that Dow came within 35 points (0.27%) from testing the 2011 highs. Furthermore, the Thursday high for the Dow was only 1,356 points (10.55%) from reaching the all-time 2007 October high.

Dow Jones Industrial Average Daily Chart

 

I have argued for quite some time that the economy and the stock market are two different things. If Bernanke and his cronies succeed in reflating the financial markets and the Dow reaches its October 2007 high in the near term, more retail investors will regard equity markets as being rigged.

Who could blame them for viewing financial markets as a giant rigged casino that stands to win while they continue to lose their hard earned capital? We all recognize that the current economy is nowhere near as strong as it was in 2007. But alas, the regular retail investor does not recognize that the stock market and the economy do not portray the same meaning.

One specific underlying catalyst that has gone largely unnoticed by most of the financial media during this sharp run higher in stocks is the total lack of volume associated with the march higher. The NYSE volume over the past 2 months has been putrid when compared to historical norms.

As a trader, I am forced to take risk through a variety of trade structures. However, the idea that a crash could be coming seems hard pressed as long as Big Bad Ben is at the wheel.

If the Russell 2000 drops 10%, I am convinced that Ben will be out making announcements that the Fed stands ready to intervene with all of the supposed tools they have at their disposal. Let’s be honest here, they really have one tool comprised of 3 separate functions which are all a mechanism to increase liquidity in the overall system. To express this liquidity, the following chart from the Federal Reserve shows the M2 money supply levels:

Current M2 Money Supply

 

The 3 functions are the printing of currency, the monetization of U.S. Treasury debt (QE, QE2, QE2.5, Operation Twist), and exceptionally low interest rates (ZIRP) near 0 for an “extended period of time (2014).” Since monetary easing is all that the Federal Reserve has done since the financial crisis began, it begs to reason that the Federal Reserve has no other solutions or tools available. If they did, they seemingly would have used them by now.

The first bubble they created due to loose monetary policy was the massive bubble in oil in 2008. Fast forward to the present, and they are currently supporting another bubble in U.S. Treasury obligations. The bubble that they will create in the future when the game finally ends will be in precious metals. The precious metals bubble will be building while the Federal Reserve and the U.S. Treasury attempt to keep the Treasury Bond bubble from bursting.

At this point in time, if we continue down this path stocks will not protect investors adequately from inflation should the Treasury bubble burst. I would argue that the central planning and monetary policy we have seen the past few years continues in the United States and Europe that gold, silver, and other precious metals are likely to begin their own bubble of potentially epic proportions.

As the weekly chart of gold futures illustrates below, gold has recently pulled back sharply and has broken out. I will likely be looking for any pullbacks in gold as buying opportunities as long as support holds.

Gold Weekly Chart

 

In closing, for longer term investors the stock market might have some serious short term juice as cheap money and artificially low interest rates should juice returns. However, eventually equities will start to underperform. At that point, gold will be in the final stages of its bubble and the term parabolic could likely be applied.

If central banks around the world continue to print money there are only a few places to hide. Precious metals and other commodities like oil will vastly outperform stocks in the long run if the Dollar continues to slide. The real question we should be asking is who will win the race to debase, Draghi or Bernanke?

By: Chris Vermeulen – Click here to get Chris' Free Weekly ETF Reports & Analysis
Co-Author: JW Jones – Click here to get J.W's Free Weekly Options Reports & Analysis

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Gold Has Started to Break Out of it's Down Trend, Can it Hold up into Friday’s Close?

The stock markets had a very solid session. Most charts shot higher after Apple beat estimates Tuesday night surging over 10%. This set the tone for stocks Wednesday. Also the FOMC said they would keep interest rates low until mid 2014 and projected a 2% inflation rate which took the market by surprise. Looking at the 10 minute intraday charts of gold, silver, oil, and the SP500 you would think it was the 4rth of July with everything shooting higher.

My gut feeling before the FOMC meeting was that there would be no QE3 announced. This I figured would trigger the dollar to rise which in turn would put pressure on stocks and commodities. But the low interest rates until mid 2014 was the wild card trumping that scenario.

Trading around FOMC meetings always brings a heightened level of uncertainty to traders and investors. The news is unpredictable making that much more of beast to try and out smart. I personally do not trade on any news because of the added risk involved.

Let’s take a quick look at gold and silver...

The Weekly Gold Chart:

Gold has started to break out of its down trend and if it can hold up into Friday’s close then it will be a very positive sign for the shiny metal. It is still mid week and a lot can happen, so let’s see how it holds up and go from there.

The Weekly Silver Chart:

Silver has some work to do before it’s back in an uptrend on the weekly chart. I would not be surprised to see it catch up with gold and run toward the $35 resistance level in the next couple days.

Mid-Week Trend Conclusion:

In short, gold is on the move and in the next few weeks I figure we will be getting involved. Silver I think will unfold a little different from a chart pattern point of view, but I do feel there will be a buying opportunity soon also.

Looking more broad based we are seeing the stock market continue to make new highs with solid volume behind it while Crude oil continues to tread water.

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Chris Vermeulen

Are Gold Bulls Ready to Throw in the Towel?

April gold closed lower due to profit taking on Tuesday as it consolidates some of the rally off December's low. The low range close sets the stage for a steady to lower opening on Wednesday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term.

If April extends the rally off December's low, the 50% retracement level of the September-December decline crossing at 1725.80 is the next upside target. Closes below the 20 day moving average crossing at 1625.60 would confirm that a short term top has been posted.

First resistance is Monday's high crossing at 1684.50. Second resistance is the 50% retracement level of the September-December decline crossing at 1725.80. First support is the 10 day moving average crossing at 1655.60. Second support is the 20 day moving average crossing at 1625.60.

We believe that gold is at the top of a trading cycle similar to what happened last year in September and November. We are reluctant to chase gold at these current levels. That factor along with our negative monthly Trade Triangle, continue to act as an inhibitor for this market on the upside.

With a Chart Analysis Score of +70, this market is in an emerging trend. Long term term traders should be in short positions in gold with appropriate money management stops. Intermediate term traders should be on the sidelines.

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Anthony Neglia on Why He is Shorting Gold

Anthony Neglia, president of Tower Trading, reveals why he is shorting gold ahead of the Federal Reserve meeting and into options expiration.



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Gold Starts The Week on a Positive Note

April gold closed higher on Monday and above the 38% retracement level of the September-December decline crossing at 1678.70 as it extends the rally off December's low. The high range close sets the stage for a steady to higher 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 April extends the rally off December's low, the 50% retracement level of the September-December decline crossing at 1725.80 is the next upside target. Closes below the 20 day moving average crossing at 1622.90 would confirm that a short term top has been posted.

First resistance is today's high crossing at 1684.50. Second resistance is the 50% retracement level of the September-December decline crossing at 1725.80. First support is the 10 day moving average crossing at 1649.80. Second support is the 20 day moving average crossing at 1622.90.


Check out our gold trend forecast for the 1st Quarter of 2012

ONG: Gold Weekly Technical Outlook For Sunday January 22nd

Gold's upside momentum as a bit unconvincing as it spent last week struggling around 1650 level. Nonetheless, with 1605.7 support intact, the near term bullish outlook remains unchanged. That is , fall from 1804.4 should have completed at 1523.9 already. Whole fall from 1923.7 might be finished too. Further rise is expected to 1767.1 resistance. Break will affirm this case and target 18044 and above. However, break of 1605.7 will dampen this bullish view and flip bias back to the downside for another low below 1523.9 instead.

In the bigger picture, price actions form 1923.7 high are viewed as a medium term consolidation pattern only. Current development is slightly favoring the case that such consolidation is finished with three waves down to 1523.9. Sustained trading above 55 days EMA will affirm this case. Further break of 1804.4 will indicate that the long term up trend is resuming for another high above 1923.7. In case of another fall, we'd continue to expect strong support from 1478.3/1577.4 support zone to contain downside to finish the consolidation and bring up trend resumption eventually. However, sustained break of 1478.3 indicates that deeper correction is to be seen through 38.2% retracement of 681 to 1923.7 at 1449.

In the long term picture, with 1478.3 support intact, there is no change in the long term bullish outlook in gold. While some more medium term consolidation cannot be ruled out, we'd anticipate an eventual break of 2000 psychological level in the long run

Comex Gold Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts


Gold Trend Forecast for the 1st Quarter of 2012

Gold Trend Forecast for the 1st Quarter of 2012

Over the past five months gold has fallen sharply and is no longer headline news which it once dominated back in 2011 when it was making new highs every day. The shiny metal has been under pressure because traders and investors started to pull some money off the table to lock in gains. 

Gold prices had surged so fast most advanced traders knew that final high volume surge was not sustainable. But the main reason gold topped out in my opinion was because the US Dollar index had put in a bottom and started to build a base. As we all know a rising dollar typically means lower stocks and commodity prices.

I have posted some charts below covering gold in detail using multiple time frames. The weekly which is long term, daily which is the intermediate trend and the 4 hour chart which shows gold momentum and intraday action. At the very bottom I talk about the US Dollar and what is happening with that.

Gold Weekly Long Term Trend Analysis

The weekly chart is not the most exciting time frame to follow as you will grow old watching it. That being said it is crucial for understanding the long term trend, price and volume analysis.

Below you can see that gold’s recent pullback has been a 3 wave correction, which is a normal pullback for any investment. But taking into account the rally from 2008 – 2011 I feel this pullback will have one more low put in before bottoming out. This would make for a 5 wave correction much like what happened in 2008.

Daily Chart of Gold Showing the Intermediate Trend

The daily chart allows us to see gold intra week price action and use the 150 moving average which is my preferred daily moving average. As you can see we are getting a similar pullback as 2008 with gold now trading under the 150 MA.

I would like to see gold make another lower low in the next 2-3 months. If that happens I feel it complete the correction and trigger a strong multi month or multiyear rally in gold.

4 Hour Intraday Chart of Gold

The 4 hour chart of gold allows us to see all the intraday price action which would normally not be seen with a daily chart. It also gives us enough data to build our analysis upon.

My preferred setup for gold which I feel if happens will trigger major buying in the yellow metal. If/when we get a rally in gold would also likely mean some more economic uncertainty has entered the market either from within the USA, Europe or China…

Weekly Dollar Index Long Term Analysis

The dollar has the potential to rally to the 87 – 88 level before putting in a major top. For this to happen we will need to see the Euro crumble (both currency and countries divide) in my opinion.

If you look at the weekly chart of gold and this chart of the dollar index you will notice that gold topped when the dollar bottomed. Over the past couple year’s gold and the dollar have had an inverse relationship to each other.

With all kinds of crap about to hit the fan overseas I think it’s very possible gold will rally with the dollar. Reason being there is way more people overseas who want to unload their euro’s and with all the negative talk and doubt with the US Dollar individuals will naturally want to buy more gold.

Weekend Trend Trading Conclusion:

In short, I expect a bumpy ride for both stocks and commodities in the first quarter of 2012. With any luck gold will pull back into my price zone shaking the majority of short term traders out just before it bottoms.  And we will be positioning ourselves for a strong rally buying into their panic selling.

To just touch base on the general stock market quickly. I have a very bearish outlook for stocks. If the dollar continues to rise it is very likely the stock market will fall into a bear market. So I am VERY cautious with stocks at this time.

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Chris Vermeulen

Gold Pops Over Upper Donchian Levels

On Thursday the gold market popped over the upper levels of its Donchian Channel. We suspect that the top of the Donchian Channel acts as resistance for gold. Only the monthly Trade Triangle is still red. With a Chart Analysis Score of +60, this market is in an trading range. With our monthly Trade Triangle in a negative position we are no longer quite as bullish on this metal. Long term term traders should be in short positions in silver with appropriate money management Intermediate term traders should be on the sidelines.

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Why China Might Stop Buying Gold

Jon Nadler, senior analyst at Kitco.com, breaks down China's recent inflation and gold import data to reveal why demand might slow.




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Gold Becoming Overbought But Remain Neutral to Bullish

Gold closed higher on Tuesday extending the rally off December's low. The high range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are becoming overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term.

Closes above the reaction high crossing at 1643.70 are needed to confirm that a low has been posted. If February renews the decline off November's high, July's low crossing at 1482.60 is the next downside target.

First resistance is today's high crossing at 1641.40. Second resistance is the reaction high crossing at 1643.70. First support is December's low crossing at 1523.90. Second support is July's low crossing at 1482.60.


Could Crude Oil Prices Intensify a Pending SP 500 Sell Off?

Could Crude Oil Prices Intensify a Pending SP 500 Sell Off?

Last week we received reports that the unemployment rate in the United States was improving markedly. In addition, sentiment numbers were released that confirmed my previous speculation that market participants were becoming more and more bullish as prices in the S&P 500 edged higher. The exact numbers that came in demonstrated that bullish sentiment had not reached current lofty levels since February 11, 2011. The table below illustrates the most recent sentiment survey:

Chart Courtesy of the American Association of Individual Investors

Clearly investors are growing considerably more bullish at the present time.  The bullishness being exhibited by market participants is rather interesting considering the notable headwinds that exist in the European sovereign debt markets, the geopolitical risk seen in light sweet crude oil futures, and the potential for a recession to play out in Europe.

To further illustrate the complacency in the S&P 500, the daily chart of the Volatility Index is shown below:

The VIX has been falling for several weeks and is on the verge of making new lows this week. If prices work down into the 16 – 18 price range a low risk entry to get long volatility may present itself. For option traders, when the VIX is at present levels or lower there are potentially significant risks associated with increases in volatility.

My expectations have not changed considerably since my article was posted last week. However, I continue to believe that the bulls will push prices higher yet in what I believe could be the mother of all bull traps. Let me explain. As shown above, we have strong bullish sentiment among market participants paired with general complacency regarding risk assets.

As I pointed out last week, my expectation if for the S&P 500 to top somewhere between 1,292 and 1,325. A lot of capital is sitting on the sidelines presently and if prices continue to work higher I suspect that a move above the 1,292 price level will trigger a lot of long entries back into stocks or other risk assets.

We could see prices extend higher while the “smart” money sells into the rally. Retail investors and traders will point to the inverse head and shoulders pattern on the daily chart of the S&P 500 and the breakout above the key 1,292 price level. The pervasive fear of missing a strong move higher will help fuel long entries from retail investors.

At the same time retail investors begin buying, a lot of committed shorts will be stopped out if prices push significantly above the 1,292 area or higher toward the more the obvious 1,300 price level. Thus, there will be few shorts to help support prices should a failed breakout transpire. A perfect storm could essentially be born from the lack of shorts to hold prices higher paired with the trapping of late coming bulls.

The daily chart of the S&P 500 Index below illustrates what I expect to take place in the next few weeks:

I want to reiterate to readers that it is not totally out of the question that the 1,292 price level could hold as resistance or that we could roll over early this coming week. Additionally a breakout over 1,330 will certainly lead to a test of the 2011 highs around the 1,370 area.

If the S&P 500 pushes above the 1,370 area we could witness a strong bull market play out. Ask yourself this question, what reasons could produce such a rally and what are the probabilities of that outcome transpiring in the next few weeks?

Obviously earnings season is going to be upon us shortly and if earnings come in below expectations a potential sell off could intensify. Furthermore, economic data in Europe continues to weaken and slower growth appears to be manifesting within the core Eurozone countries like Germany and France. If most of Europe plunges into a recession, deficits will widen beyond economic forecasts and the strain in the sovereign debt market of the Eurozone will increase dramatically.

One key element that many analysts are not even discussing is the potential for higher oil prices to present additional economic headwinds for developed western economies.

Clearly the situation in the Middle East is unstable, specifically what we are seeing taking place in the Strait of Hormuz involving Iran. If a “black swan” event occurs such as a military conflict between the United States and Iran or Israel and Iran the prices of oil will surge.

In a recent research piece put out by SocGen, nearly every scenario that is referenced involves significantly higher oil prices. According to the report, the Eurozone is considering the banning of imported Iranian oil which could cause Brent crude oil prices to surge to a range of $120 – $150 / barrel according to SocGen.

The other scenario involves the complete shut down of the Strait of Hormuz by Iran. If this shutdown were to persist for several days the expectation at SocGen for Brent crude oil prices is in the $150 – $200 / barrel price range.

Clearly if either of these two scenarios play out in real time, the impact that higher oil prices will have on European and U.S. economies could be catastrophic.

The daily chart of light sweet crude oil futures is shown below:

I want readers to note that I am not suggesting that oil prices are going to rise or fall, just outlining the report from SocGen about where they expect oil prices to go should either of the two scenarios presented above play out. If oil prices were to work to the $125 / barrel level and remain there for a period of time, I would anticipate a very sharp decline in the S&P 500.

Currently there are a lot of headwinds for bulls, some of which could persist for quite some time. I intend to remain objective and focus on collecting time premium as a primary profit engine for my Options Trading service.

Once I see a confirmed move in either direction I will get involved. For now, I intend to let others do the heavy lifting until a low risk, high probability trade setup presents itself. Risk is increasingly high.

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JW Jones

ONG: Gold Weekly Technical Outlook For Monday Jan. 9th

Gold rebounded further to as high as 1632.3 last week but lost some momentum ahead of 1643.7 resistance. Initial bias is neutral this week and some sideway trading would be seen. Focus remains on 1643.7. Break there will indicate fall from 1804.4 should be finished with bullish convergence condition in 4 hours MACD. Also, this will be the first signal of completion of whole consolidation from 1923.7. In such cases, stronger rebound should be seen to 1804.4 resistance first. On the downside though, below 1563.2 minor support will flip bias back to the downside for another low below 1523.9 instead.

In the bigger picture, price actions form 1923.7 high is viewed as a medium term consolidation pattern only with fall from 1804.4 as the third leg. At this point, deeper decline could still be seen. But we'd expect strong support from 1478.3/1577.4 support zone to contain downside to finish the consolidation and bring up trend resumption eventually. However, sustained break of 1478.3 indicates that deeper correction is to be seen through 38.2% retracement of 681 to 1923.7 at 1449.

In the long term picture, with 1478.3 support intact, there is no change in the long term bullish outlook in gold. While some more medium term consolidation cannot be ruled out, we'd anticipate an eventual break of 2000 psychological level in the long run

Comex Gold Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

Anthony Neglia Selling Into Golds Rally

Anthony Neglia, president of Tower Trading, says that gold prices still have more to prove and that he would be selling into strength.



Five Best Trade Ideas for the Next Two Weeks

First Gold and Silver Trading Commentary For 2012

February gold closed higher due to short covering on Tuesday as it consolidated some of the decline off September's high. The high range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are oversold and are turning neutral to bullish signaling that sideways to higher prices are possible near term. Closes above the 20 day moving average crossing at 1632.60 are needed to confirm that a low has been posted. If February extends the decline off November's high, July's low crossing at 1482.60 is the next downside target. First resistance is the 20 day moving average crossing at 1632.60. Second resistance is the reaction high crossing at 1643.70. First support is last Thursday's low crossing at 1523.90. Second support is July's low crossing at 1482.60.

March silver closed higher due to short covering on Tuesday as it consolidated some of the decline off October's high. The high range close set the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are turning bullish signaling that sideways to higher prices are possible near term. Closes above the 20 day moving average crossing at 29.913 are needed to confirm that a short-term low has been posted. If March extends the decline off October's high, the 75% retracement level of the 2010-2011 rally crossing at 25.527 is the next downside target. First resistance is the 20 day moving average crossing at 29.913. Second resistance is the reaction high crossing at 33.300. First support is last Thursday's low crossing at 26.145. Second support is the 75% retracement level of the 2010-2011 rally crossing at 25.527.


Five Best Trade Ideas for the Next Two Weeks