Two Short Term Scenarios for the S&P 500 Index

For the first time since the last week of December of 2011, the S&P 500 Index closed lower on the weekly chart. Recently I have been discussing the overbought nature of stocks based on a variety of indicators. However, the real question that should be asked is whether last week was just a short term event or if we see sustained selling in coming weeks.

The issues occurring in Greece spooked the markets somewhat on Friday as Eurozone fears continue to permeate in the mindset of traders. The U.S. Dollar Index is the real driver regarding risk in the near and intermediate term future. If the Dollar is strong, market participants will likely reduce risk. However a weakening Dollar will be a risk-on type of trading event which could lead to an extended rally in equities, precious metals, and oil.

Friday marked an important day for the U.S. Dollar Index futures as for the first time in several weeks the Dollar held higher prices into a daily close. The U.S. Dollar appears to have carved out a daily swing low on the daily chart from Friday. Furthermore, the potential for a weekly swing low at the end of this week remains quite possible. The chart below illustrates how the 100 period simple moving average has offered short term support for the past few weeks.

U.S. Dollar Index Futures Daily Chart

I would also point out that the MACD is starting to converge which is a bullish signal and the full stochastics are also demonstrating a cross on the daily time frame. As long as the 100 period moving average holds price, a rally is likely in the U.S. Dollar Index in coming weeks.

Should that rally play out, it will likely push risk assets lower. My primary target for the S&P 500 would be around the 1,300 – 1,310 price range if the selloff transpires. It is important to note that  headlines coming out of Europe could derail this analysis in short order.

Assuming that a selloff in the S&P 500 occurs it will present a difficult trading environment for market participants. Market participants are going to be in a tough position around the 1,300 price level. A rally from 1,300 could  serve to test the 2011 highs. In contrast, a confirmed breakdown of the 1,300 price level could initiate a more significant selloff towards the 1,250 area.

Should price move towards the 1,300 price level the bulls and bears will be battling it out for intermediate control of price action. This is my preferred scenario for the short term time frame, but I would only give it about a 60% chance of success at this point in time. We simply need more time to see how price action behaves the first few session of the forthcoming week.

S&P 500 Index Bearish Scenario

The alternate scenario which has about a 40% chance of success would be a sharp rally higher which likely would be produced by news coming out of Greece and/or the Eurozone that pushes the Euro higher. Right now risk is high due to the sensitivity of price to headline risk. With that said, the bullish alternative scenario is shown below.

S&P 500 Index Bullish Scenario

At this point we just do not have enough price information to give us clarity regarding the most probable outcome. The price action in the Euro is going to drive price action for the S&P 500 and other risk assets in weeks ahead.

Anything is possible in the short term, but I have to give a slight edge to the bears simply based on the price action Friday and the fact that almost every indicator I follow is screaming that the equities market is severely overbought. The price action this week should be telling. Headline risk is excruciatingly high, trade safely in the coming week!

By: Chris Vermeulen – Get Chris' FREE Weekly ETF Reports & Analysis
Co-Author: JW Jones – Get J.W.s FREE Weekly Options Reports & Analysis

Oil N Gold: Gold Price is Expected to Gain Supports from Festive Buying in India

WTI crude oil price fell from a 2-week high in European session as Hurricane Irene has done less damage on oil infrastructure than previously expected. As pipelines, terminals and refineries did not seem to get hurt by the storm, oil production should remain intact. Gold price changed little at 1785/1800 level. Price may gain supports and rise as Indians extend purchases during the festive season.

Indian festivals are clustered in the second half of the year: Eid this month, Diwali in October and the wedding season later in the year. The chart below shows that gold performed better in the second half of a year over the past 30 years. This might be helped by the festive season in India. Rajesh Exports, India's biggest jewelry maker, expected that gold buying (jewelry, coins, bars and medallions) may rise to 250 metric tons in the 3 months ending November 30, up +25% from the same period last year. Elevated gold prices have not dented investors' interest in the yellow metal.

The global economic outlook does not go as strong as what recent price movements have suggested. Christine Lagarde, the new managing director of the IMF, warned that the world economy is in a 'dangerous new phase' and we are at risk of 'seeing the fragile recovery derailed'. The IMF revised lowered its economic forecasts. The world GDP will probably grow +4.2% in 2011, down from June's estimate of +4.3%, and +4.3% in 2012, down from 4.5% projected previously. Most of the expansion will be driven by emerging markets as downside risks growth in advanced economies are increasing. In the US, GDP growth is trimmed to +1.6% for 2011 and +2% for 2012 from ++2.5% and +2.7% respectively. The fund also revised down Eurozone's growth rates to +1.9% for 2011 and +0.4% for 2012 from +2% and +1.7% respectively.

Eurozone's confidence deteriorated sharply in August. With exception of consumer confidence, all other indices fell much more than the market had anticipated. Consumer confidence dropped to -16.5 (consensus: -16.6) in August from a revised -11 in July. Economic confidence slipped to 98.3 while July's reading was revised lower to 103. Industrial confidence fell into the negative territory (-2.9) in August while the reading in July was revised down to 1. Services confidence dropped to 3.7, more than halving July's 7.9. In the US, the S&P/Case-Shiller Composite-20 Index probably contracted -4.9% y/y in June after declining -4.5% a month ago. Consumer confidence in the country might have dipped -7 points to 52.5 in August. The Fed will also released minutes for the August FOMC meeting today.

Posted courtesy of Oil N Gold.Com

Gold Demand Higher as Driven by China

Crude oil retreats after the rally over the past 2 days. Yet, price continues hovering around 82 ahead of US' inventory report. Concerning dataflow, the market will focus on the ADP and services PMI in the US. The ADP will probably report +36K addition in employment in July after an increase of +13K in the prior month while ISM services Index is expected to have eased to 53.3 in July from 53.8 in June. Any disappointment should weaken oil prices.

In the Eurozone, the services PMI rose to 55.8 in July from 55.5 in the prior month. A composite index surveying purchasing managers in both the services and manufacturing sectors improved to 56.7 in July from 56 in June. In Germany, accelerated growth was also seen in both sectors with the services and manufacturing PMI soaring to 57.3 (June: 54.8) and 61.2 (June: 58.4), respectively in July. However, these data were upstaged by worries over a US slowdown. Stocks in Asia and Europe dropped with the MSCI Asia Pacific Index losing -0.6% and Stoxx600 Index down -0.7%.

Gold price continued to be boosted by China's deregulation in gold market. The benchmark contract touched 1200.2 for the first time in 2 weeks. The liberalization in gold trading should boost both private and public demands, though effect from the latter should be rather gradual.

Yu Yongding, member of the state-backed Chinese Academy of Social Sciences and a former central bank adviser, expressed concerns over the safety of US Treasuries in the medium- and long-run as a 'scary trajectory' of budget deficits and an increasing supply of dollars may depreciate their values. In mid-July, Yu warned that China should reduce its USD holdings to diversify risks of 'sharp depreciation'. While these comments were in contrary with what SAFE mentioned last month that US government bonds have 'relatively good' safety, liquidity, low trading costs and market capacity, suggestions of reserve diversification do trigger speculations of higher official demand for gold in China.

Although China is the world's largest gold producer and the second largest consumer, its gold market is in deficits and it still depends on external sources to satisfy the needs. Currently the Chinese central bank is the 6th largest gold holders, with 1054.1 tons as of June 2010. However, the holdings only represent 1.6% the country's total reserve. If it's to increase its holdings comparable to other Asian counterparts, it will need to increase holdings by almost +50% (eg, Singapore has gold holdings 2.4% of total reserve).

Rising production cost in Australia is hurting profits in the countries' mining companies. As unveiled at the Diggers & Dealers conference, the cost to produce gold in Australia, the second largest producer after China, was running at around $1000/oz, compared with $400-500 in West Africa. Some large producers in the country admitted they are looking for opportunities in West Africa and other low-cost regions. Should gold price fall below 1000, Australian producers are likely to cut production and they should help support price.

From Oil N' Gold Focus Reports

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