Why the U.S. Dollar is Critical for the S&P 500 Index this Week

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Recently I have been advising members of my service to be cautious as the market appears to be at a major crossroads. The U.S. Dollar Index is on the verge of a major breakdown. If a breakdown occurs it will be clear that the Federal Reserve will have officially stopped any potential rise in the U.S. Dollar. Over the past few months the Dollar has been producing a series of higher highs and higher lows, however the current cycle may break the pattern as can be seen below.

If the U.S. Dollar pushes down below the recent lows and we get continuation to the downside, we will break the recent bullish pattern. Furthermore, if the Dollar starts to weaken it should benefit equities and other risk assets such as oil. Higher energy prices would not be long term bullish for equity markets so there is concern if the Dollar really starts to extend lower.

However, if the Dollar finds a bottom and rallies it clearly would create a headwind for equities. We should know whether we have a major breakdown on the daily chart in the next few weeks. Until then, the Dollar could go either way and obviously the price action in the Dollar will have a major impact on risk assets and stock market returns in the near future.

From a macroeconomic viewpoint, risk assets such as the S&P 500 Index could be in trouble in the months ahead. U.S. gross domestic product (GDP) came in lower than expected with revisions likely in the near future. Unemployment claims appear to have bottomed and are rising week after week even though the major media fails to report it appropriately as it would appear that the Bureau of Labor Statistics has stumped media pundits with data revisions.

Additionally, there are two other macroeconomic data points which need to be mentioned. The Citigroup Economic Surprise Index has moved below zero and is showing a negative reading. This index is generally a leading indicator regarding equity prices and the recent decline shown below is problematic for the bullish case.

Chart Courtesy of Morgan Stanley

As can be seen above, fundamental data is starting to skew towards the downside which is likely a result of the recession that is in the process of developing over in Europe and potentially in China. Time will tell if the index can reverse, but the bulls need to see a major reversal in the near future.

The chart below illustrates the relationship between metal prices and industrial productivity. Demand for metal increases when economies are expanding and prices generally contract when economies retract. The chart below demonstrates global metal demand. The chart speaks for itself.

Chart Courtesy of Morgan Stanley

Clearly if industrial production contracts (reduction in Global Manufacturing PMI) the impact on the global economy will be felt across multiple countries’ economies. The chart below illustrates the MSCI World Index compared to global manufacturing PMI. Similarly to the chart above, this chart also tells a significant story about what investors and traders should expect if the PMI numbers come in light   against expectations.

Chart Courtesy of Morgan Stanley

As quoted from the zerohedge.com article entitled, What do Metal Prices Tell us About the Future of the Stock Market, “In other words, for those who still believe in logical, causal relationships (even in a time of ubiquitous central planning) unless something drastically changes to push fundamental demand of metals higher, one could say the the outlook for equities is not good.”

Essentially, the data shown above is certainly not bullish in the intermediate to longer term. However, it generally takes time for macroeconomic data to permeate all the way through to equity markets. For right now, the story regarding global growth is at the very least questionable based on the data illustrated above.

In the short term anything is seemingly possible. The S&P 500 Index closed above the key 1,400 price level on Friday. I would not be shocked to see prices extend up to the recent highs near 1,420. Ultimately I think we are in a long term topping formation that might require another higher high up to around 1,440 before we see a deeper correction.

The past few weeks have produced a very mild correction compared to the monster rally we have seen since October of 2011. This is a bullish signal, but we need to see prices continue higher and climb a serious “wall of worry” that is coming out of a variety of places. The European situation continues to worsen overall and we have lower than expected GDP numbers in the US paired with concerns about growth in China.

The S&P 500 has some negative headlines to deal with, but so far it has been able to shrug off poor economic data and we could see an extension higher that would shake out the shorts and run stops above the recent highs. However a move lower remains possible. The daily chart of the S&P 500 illustrates the recent correction and the 1,420 highs.

I believe that the next few weeks are going to be critical and the S&P 500 may trade in a consolidation zone between recent lows and the 1,420 highs while traders await more economic data. Fundamental data is starting to indicate that a slow down may be beginning. In contrast, the topping pattern that we appear to be carving out may require higher prices to suck in more longs before moving into a deeper correction.

In the short run, the Dollar will likely hold clues regarding the immediate future for risk assets. However, the longer term picture for equities is quite murky based on the economic data points we are seeing paired with additional concerns stemming from the European sovereign debt crisis. Right now I am looking at time decay based strategies in the near term and will likely stay away from directional biased trades. I would urge readers to be cautious regardless of which direction they favor.

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J.W. Jones

Will Fed Ride to Gold's Rescue?

20 Survival Skills for the Trader

Phil Streible, Sr. commodities broker at RJO Futures, says gold is suffering from Europe's woes, but the Fed could reverse the trend.



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Gold Prices Are Set for Further Decline

In the not so distant past arguing that precious metals prices were setup to fall generally elicited a response which was not real pleasant. In fact, during gold’s infamous bull market rally on several occasions I called for pullbacks which regardless of the accuracy of my call generated hate mail that seemingly never ended.

Fast forward to the present and hardcore gold bugs remain transfixed on the idea that precious metals must rise. The gold bull market has ended, at least for now and those still holding the bag are looking at large losses from the all time highs set back in 2011.

These same gold bugs will cite a litany of reasons why gold should be moving higher from the unprecedented printing of money by global central banks to the deficit spending and eventual fiscal day of reckoning facing most Western nations. I do not disagree with the gold bugs that in the long run gold prices will rally above the all time highs, but in the short to intermediate term there are several forces which have the potential to drive gold prices lower.

Gold prices cannot rise continually,regardless of the macro-economic backdrop. Nothing, not even Apple Computer (AAPL) or Priceline.com (PCLN) will rise forever. Eventually prices will come back down to earth and revert to the long term mean. It has happened in gold and it will happen to Apple Computer and Priceline.com at some point in the future, it is simply a matter of time.

Before I discuss my reasoning as to why gold and silver are likely to pullback in the intermediate term, I need to remind readers that I remain long term bullish of precious metals. While the long term remains bright, the short term is especially murky and dark.

The first primary concern for gold bugs should be the price behavior of the U.S. Dollar Index recently. The Dollar has rallied sharply higher after carving out a higher low on the daily chart (bullish). The Dollar is on the verge of breaking out above a major descending trendline on the daily chart. Once that breakout to the upside has occurred it will become likely that the recent highs will be tested and possibly taken out. The daily chart of the Dollar Index is shown below.

Dollar Index Daily Chart

The U.S. Dollar’s price action shown above is not indicative of bearish expectations. In fact, I would argue that the Dollar is, and likely will remain in a bull market in the short and intermediate time frames. However, it is important to recognize that strong periods of volatility will persist as Ben Bernanke and the Federal Reserve will continue to try to break the Dollar’s rally as it tries to grind higher.

The Federal Reserve hates deflation, and a stronger Dollar will push risk assets like equities lower and right now that is not part of the Federal Reserve’s election playbook. QE III will likely be announced at some point in the future as an attempt to break the Dollar’s rally and to put a floor underneath stock prices.

The Federal Reserve has used QE I and QE II to help prevent economic disaster. Recently “Operation Twist” has also been used to increase liquidity while keeping the bullish game going. Low interest rates and additional easing adjustments have staved off disaster before and they will likely be utilized again by the Federal Reserve.

Ultimately the free market and cycles will exert their will and the Federal Reserve will be left helpless. The day where monetary easing has no major impact is coming, but we are not quite there just yet.

In addition to the strength in the Dollar Index, the gold miners have been under major selling pressure. In fact, the gold miners have recently broken down out of a major consolidation zone that will likely lead to lower prices in the near term.

Unless gold miners can regain the breakdown level on a major reversal this coming week, the most we can hope for is a backtest of the support trendline sometime in the near future once the miner’s become significantly oversold. The weakness in the miners is just another example as to why lower prices for gold appear to be likely in the short to intermediate time frames. The weekly chart of the gold miners ETF is shown below.

Gold Miner’s (GDX) Weekly Chart

The gold miners are likely to lead equity markets lower in the near term, but lower prices for gold miners is certainly not positive for gold either. Obviously there are several economic factors which could still see gold prices working higher such as a collapse of the Eurozone, however at this moment the likelihood of that outcome in the short to intermediate term is not likely.

The European Central Bank and the Federal Reserve are not going to give up that easily. The process of admitting defeat will take time and global central banks will print money until they feel they have papered over the issue. It is the culmination of either QE III or other monetary easing around the world that will eventually move gold back above the all time highs. Unfortunately the short term price action of gold will most certainly remain under selling pressure barring any major unexpected announcements. The daily chart of gold futures is shown below.

Gold Futures Daily Chart

As shown above, I believe that short term targets to the downside are likely somewhere in the 1,475 – 1,525 price range. I think gold will find a major bottom near these levels and a strong bounce will play out. For long term buyers, I would take advantage of the forthcoming pullback. However, I would be mindful that further selling is quite possible before gold finds a major bottom.

As I said before, the longer term is bright for gold. However, the short to intermediate term will likely see more selling pressure. Until either the Dollar tops or some form of major quantitative easing is announced, I would anticipate lower prices in the yellow metal.

In the near term gold does not look attractive, but the longer term the catalysts for a major move above recent highs are present. The real question has become when and where will the Dollar top? When the Dollar tops and gold finds a major bottom, the potential for a monster move higher will become likely.

Until then, risk remains high.

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J.W. Jones

Is it safe to start buying Gold Stocks yet?

From guest blogger David A Banister- Active Trading Partners.com

One of the most common questions I field from my forecast and trading subscribers is can we buy Gold stocks yet? We have seen Gold consolidating and correcting following a 34 fibonacci month rally that I discussed last fall was going to top out around 1900 per ounce. This type of rally went from October of 2008 to August of 2011 and we saw Gold rally from $680 to $1900 per ounce during that time.

In order to work off the bullish sentiment that was at parabolic extremes, Gold is required to spend a reasonable amount of time in relation to the prior 34 month move to wash out the sentiment and create a strong pivot bottom. While this continues, the Gold stock index has taken it on the chin as money rotates out and into other hot areas like Technology and the Internet 2.0 social media boom. To wit, the GDX ETF peaked out last fall around 67 and current trades under 47 as of this writing.

However, there may be a silver lining developing in those dark mining stock clouds very soon. It does appear that we are in the 5^th and final wave of this pessimistic decline in Gold stocks per my GDX ETF chart below. A typical bottoming pattern ends after 5 clear waves have taken place, and in this case I have targets between $43-$47 per GDX share for a likely pivot low in Gold stocks. Contrarian investors may do well to begin picking the better names in the sector and “scaling in” over the next short period of time.

Gold itself has recently corrected from 1793 per ounce to 1620 in the last several weeks. This has spooked the crowd out of Gold and put further pressure on the Gold mining stocks as well. Should Gold hold the $1620’s area and rebound past $1691 you will see the Gold stocks take off just ahead of that and from these 43-46 levels on the GDX ETF provide very strong returns to investors with the iron stomachs.

The best way to make money long term in the market and to grow your capital is to develop a method where you can define your risk levels within reason near the apex of a downside move, and then scale into that final apex and catch the rally on the upside. This is difficult to do but at my ATP service we have developed a strong methodology that takes advantage of “herd behavioral characteristics” and takes advantage of typical panic selling and panic buying to do just the opposite. We have not yet bought into the Gold Stock sector but I assume fairly soon we will be dipping our toes in the water while others have all rushed out of the sector right near the apex lows.

Take a look at Davids MRM method

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Gold crashes....no surprise. We show you where we think this precious metal is headed in today’s video

Gold crashes....no surprise for our readers. We show you where we think this precious metal is headed in today’s video.

And did a “bearish divergence” yesterday signal a top for the equity markets?

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Using 3X ETF $NUGT to Trade Gold and our Momentum Reversal Method

After a few years of testing with both ETF’s and then individual stocks, we rolled out our MRM (momentum reversal method) platform at my ATP subscription service in November 2011.  This is now beginning to get alot of attention in the trading community as in addition to the ATP service, I have shared some of the real time MRM type plays online with some very top notch traders.

In essence, my work revolves around crowd psychology or what I call “Crowd Behavior”.  If there is one thing in the stock markets that never changes, it’s how crowds react to news, events, and also how they over react more importantly.  My MRM system helps to define where the crowd may be over reacting on the upside and also obviously the downside of a move in a security.  Knowing roughly where that upside and downside exhaustion point may be, can obviously be a huge tool in a traders tool box.

Let’s be honest, the Holy Grail of investing and or position trading would be to buy low and sell high as often as possible with as few mistakes as possible right?  The ATP MRM crowd based timing method is what that aims to do, a lofty goal but one we feel we are achieving on a regular basis.  The major problem most investors have is selling out of a position at the extreme areas of “Pain”, where your emotions take over and you cant take the paper loss any longer and you sell.  The other issue is chasing stocks higher because the adrenaline and excitement of owning a stock that is rushing higher is too hard to pass up.

Both of those investor psychology based decisions are made in panic buy and panic sell modes.  That leads to a recipe for disaster for a trading account over time.  Instead, what we want to do is the opposite right? We want to calmly buy shares in a stock that has become oversold due to emotional responses from the crowd, and sell into a huge rally where the crowd has become overly exuberant.  What if you could do that on a regular basis all the time with cool and calm nerves of steel?

Our MRM trading system at ATP allows us as best as we can to cooly and calmly enter into oversold stocks right near the apex of the lows, and then quietly exit into the rush as the stock reverses back to the upside.

Recent examples include the ETF NUGT.  This is a 300% leveraged ETF to the Gold Stock Index.  Now we all know the Gold Stocks have been under severe pressure of late as the GDX ETF has cratered from its highs over the last many months.  My MRM system though kept us out of the gold stocks, until very recently when we saw the idea entry point for a swing.  Based on the GDX falling into the 49 and below level, my MRM targets said we were at an extreme emotional bottom using my 1 day, 3 day, and weekly crowd indicators.  We therefore entered calmly into NUGT at 15.61, and within 48 hours we saw that ETF rally to 17.81!  We sold at 16.80 and 17.10 for 1/2 and 1/2 tranches to pocket 7-10% gains inside of 2 days.   

The move from 15.61 to 17.81 was a 14% move inside of 48 hours!!  We also knew to sell into that rally because just a few short days later the NUGT had fallen all the way back to 15.30 per share.  My MRM method then said 15.31 was another entry buy, and 24 hours later NUGT was up another 7%!  So in the span of 6 trading days, MRM gave out an 8.5% blended return, and then followed it up with another 7% return.  Thats 15.5% of return with low downside risk in 6 trading days on just one ETF position!

We usually apply this type of work to MRM Positions that we actually intend to position ourselves in weeks not days.  However, if we do get extreme moves in a short period of time, we always look to trim back some of those profits in the position.  The samples above are what I call “Active Trades” at my ATP service, these are intended to days not weeks in holding period.  Keep in mind alot of our work is in an Active MRM portfolio where again, we are holding swing positions for weeks and not days, so it does not require as much daily work by our partners.

Some additional recent samples include CVV which we entered twice for profits inside of a few months.  We banked 13-16% gains on one swing, waited weeks and entered again.  The stock actually dropped below our MRM entry and we held on knowing that it was likely bottoming out amidst panic emotional selling at 10.66 per share.  A few weeks later our patience paid off as the stock rose to 13.80 per share.  Most traders would have taken the loss below $11 per share, and missed the reversal back up for 25% or more.  When you take a loss that way, you must then replace that position with another trade that gains 25% or more in this case.  MRM helps to avoid panic selling, and often to take advantage of panic drops in a stock to buy more.

Consider joining us for 90 days trial period and play along.  We provide all the alerts in real time via Email and internet posting. We provide daily updates on all positions and 24/7 Email access to me for any questions. Learn more and sign up at The Active Trading Partners.com