“The paranoia gripped us, The rain turned engines to rust
The panic set in like a cancer to our hearts; Spreading through
We bet on finite genius; Or prayed for God to save us
But there was no antidote, Disease tore us apart
We left bodies in the fields, So numb that we forgot how to feel.”

~ Rise Against: Endgame Lyrics ~

The price action in U.S. financial markets on Wednesday was the culmination of fear and disease. Fear was represented by a breakout in the Volatility Index (VIX) and the disease was related to the sovereign debt crisis unfolding in the Eurozone. The violent reaction by the Greek citizenry to proposed austerity measures paired with grumblings coming from multiple Eurozone nations ignited fear among traders and investors alike.

I am not an expert on debt instruments, but it seems that there is a considerable amount of systemic risk within the debt structure of the Eurozone. When the notional derivatives such as credit default swaps are factored into the equation the risk to the global financial system intensifies significantly. The real question is who is holding the counterparty risk on the other side of the Greek debt? Even if the Greek situation is resolved without default, what is going to happen to Spain and Portugal’s debt?

The solvency of many of the Eurozone nations has come under question and the price action in the Euro currency is indicative of the fear present among market participants. I believe that the economic disaster that is unfolding in Europe currently will eventually manifest itself stateside. Austerity measures either through higher taxes, monetization of our public debt, and a complete restructuring of entitlement programs is likely to occur. However, in the meantime domestic markets will struggle to gain their footings in the face of a strong U.S. Dollar. The strength of the U.S. Dollar Index represented by the ETF UUP on Wednesday helped place selling pressure on U.S. equities and commodities alike. The daily chart of UUP is shown below:

If the U.S. Dollar continues to rise, the impact the increase in value of the Dollar will have on U.S. financial markets could be debilitating for equities. Poor economic data, continued housing problems, and the political uncertainty surrounding the debt ceiling all make for a potentially dangerous situation for U.S. capital markets. With this much fear and uncertainty in the marketplace and volatility stemming from a variety of issues related to the Eurozone, investors are fearful. The spreading disease of the sovereign debt contagion is rapidly infecting global financial markets and if handled inappropriately could drastically alter the entire capital market construct.

Instead of worrying about all of the fear and uncertainty in the market place, I look at market internals, market cycles, fundamentals, and technical analysis as guides for shaping my approach to trading. We are on the verge of a major inflection point for financial markets, specifically equities. While it might surprise readers to know, I am leaning towards a near term bottom in the S&P 500. The S&P 500 could rally to the 1,305 (SPX) price level (20 Period Simple Moving Average) which represents an increase of 3%. It is also feasible that we may witness a test of the 50 period moving average on the daily chart of the S&P 500 (SPX)which would represent an increase from Wednesday’s close of over 5%. Markets do not move in a straight line. While investors and traders may expect a breakdown in price action, rarely is the crowd correct.

The daily chart of the S&P 500 with its annotations shown below illustrates my thought process as it relates to near term price action for the index:

If price action breaks below the March pivot lows a panic induced selloff could begin and the next leg of the secular bear market will likely be underway. We may have already initiated the secular bear with the recent downturn, but I will remain neutral until the March pivot lows are broken. If price action breaks through the March lows and we see multiple days with daily closes below the 1,250 (SPX) price level I will become very bearish. The chart below illustrates the key price levels if the SPX breaks down:

While many readers may find this interesting, today members of my service at OptionsTradingSignals.com were able to lock in gains on an SPY position we initiated late last week. I initiated a SPY 125 Put Calendar spread which I converted to a double calendar spread on Tuesday. The position will produce profits if price action on the SPY remains between around $123.50 / share and $130.21 / share at the close this Friday (June Expiration).

During the nasty selloff today, the implied volatility of the SPY Double Calendar Spread was juiced and we were able to take profits on the position and lock in a 13% gross return based on maximum risk. We have the remainder of the position on currently with stop levels in place. If price cooperates, the trade offers a potential return of around 20% near the close this Friday.

Calendar spreads work great in an environment where volatility levels are rising and they profit from time decay (Theta) which is a mathematical certainty. Recently the service has been producing solid gains for members using calendar spreads during this choppy price action. While I like to use other trade constructions, calendar spreads have produced outstanding risk / reward opportunities for astute option traders and I will not hesitate to use any tool that is working in a particular market climate.

A Brief Trading Lesson

Members of my service know that I regularly watch a variety of underlying indices and sectors to get a feel for the broad market. Besides the VIX, one of the most critical ETF’s for traders to monitor is the financials. If you are new to trading or are trying to learn, it is critically important to understand that the S&P 500 has an arduous time rallying if banks are selling off.

In contrast, when the financials are holding up well or are working higher and the broader tape is trading flat or slightly in the red it offers a clue that the broader market may be preparing to move higher later that session or the following day. Yesterday (Tuesday) the financials were warning traders and investors into the close that today could be troublesome. The daily chart at the close on Tuesday shows the financial ETF XLF’s recent price action:

The ugly close for financials was a warning and investors and traders who did not pay attention to the financials had a rough day today. The only long position that I was holding today was a long GLD position. Gold held up nicely today and we have some nice gains for the trade, but the key point to make is that by noticing the price action in the financials late Tuesday afternoon prevented me from initiating a poorly timed long trade.

Conclusion

Given the amount of uncertainty and risk associated with current price action in the S&P 500, I would urge readers to monitor risk closely and review open positions. While I do not necessarily believe a horrific selloff or a Black Swan event is waiting in the shadows for unsuspecting traders and investors, it is impossible to rule out a breakdown of the key pivot lows from March of this year. I am leaning toward the mindset that a short to intermediate term bottom may be forming, but I will not be doing any of the heavy lifting.

I will wait patiently for signs that price action is going to reverse before getting involved. Trying to pick tops and bottoms is a fool’s game, particularly when the game is changing rapidly based on news coming from Europe which can dramatically alter the tape. Risk is extremely high at inflection points such as the one we are currently near. Some of the best traders I know are successful because they refrain from trading when price action is volatile and risk is abnormally high. Sometimes sitting on the sidelines and listening to Mr. Market talk can be the best trade of all!

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Article by JW Jones, optionstradingsignals.com

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

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

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

SPX illustrates the two key price levels:

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

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

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

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

The weekly chart of gold futures is listed below:

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

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

The weekly chart of oil futures is listed below:

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

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

Analysis & Opinions of:
J.W Jones – www.OptionsTradingSignals.com
Chris Vermeulen – www.TheGoldAndOilGuy.com

Many readers might remember that exactly two years ago the S&P 500 tagged the infamous 666 price level before putting on a monster 2 year rally that saw it surge over 100% to the February 2011 highs. Investors today are staring at a rising wall of risk while corporate credit spreads remain bullish, corporations have been able to expand margins and produce increasing profits, and Federal Reserve Chairman Ben Bernanke has declared that there are no inflationary concerns. Quite frankly I am going to leave Ben Bernanke alone simply because so many other people will do a better job of declaring him incompetent and the creator of massive bubbles in risk assets, but I digress.

Right now investors have to weigh rising oil prices, geopolitical conflict in the Middle East, the threat of higher interest rates and inflation against the bullish backdrop discussed above. The price action in the broader market place is talking, but we have to listen with an open mind currently. There are two key price levels that are obvious when we look at a daily chart of SPX. First of all, the SPX 1331-1332 price level is acting as major resistance and holding the bulls in check. Should this level be breached to the upside on a daily close, we could see prices extend higher to test recent highs. The chart below illustrates the key upside level around 1331-1332.

However, it is important to note the bearish wedge forming on the SPX daily chart. If price can push below the recent lows around 1294, we should see an extension lower to the 1260-1280 area before support comes back into focus. If we were to test the 1260-1280 price level, it is hard to say where price action could go. We could see an extension higher which pushes to higher highs or we could rollover and test the 1250 price level below. I will wait until we get confirmation in either direction before making any major assessment, but for right now those are the key levels for traders to watch. The chart below illustrates the bearish wedge located on the SPX daily chart.

My bias remains to the downside due to what I am seeing in the Volatility Index (VIX) and what I refer to as the “usual suspects”. The usual suspects include small caps represented by IWM, transports represented by IYT, and the financials represented by XLF/KBX. I look at all of these metrics daily in order to facilitate my view of the marketplace and where I expect price action to be headed. Of course I take into consideration other analysis metrics such as market internals and chart formations, but the crux of my daily analysis is derived from the analysis of the VIX and the suspects.

Take for example the Volatility Index (VIX) daily chart and it is obviously trending higher and is well above key moving averages. I believe that in the future we will see the VIX test the 200 period moving average and potentially breakout. The test I am sure about, the breakout remains to be seen. The key levels on the VIX are shown below:

IWM has a similar trading pattern as the S&P 500 index but at current price levels it is well off of the recent highs. It is also building a bearish wedge and I will be watching it closely to see which way it breaks. If IWM breaks down ahead of the SPX it is likely that the SPX will follow suit. The transports (IYT) have gotten banged up the worst as the rise in oil price negatively impacts the entire sector. Transports are also trading well below recent highs and also have a bearish wedge formed on the daily chart.

The financials (XLF/BKX) exhibit a bearish wedge but they also have head and shoulders patterns forming on their daily charts. Should price break the neckline we could see heavy selling pressure set in on the financial complex. Most regular readers know that I put a lot of emphasis on the price action in the financials (XLF) and as such should they breakdown the broader indices will move in tandem. The daily chart of XLF is listed below:

Interestingly enough the U.S. Dollar Index futures appear to have formed a short/long term bottom on the daily chart. It is obviously unknown whether this is just a bounce to work off oversold conditions or the beginning of a longer term move higher. The primary point for traders to consider is that a rising dollar could place additional selling pressure on the S&P 500, crude oil, and precious metals.

By now I’m guessing most readers are starting to get the theme here. We have bearish wedges forming on key indices, however that does not mean that they will follow through to the downside. We could see a failure and a breakout higher just as easily as a bearish breakdown, thus the reason why the key levels are so important on the S&P 500. I am going to wait for a clear breakout/breakdown and will accept directional risk on the broad indices at that point. Until then, I am not going to get involved in the daily chop.

Get My Trade Ideas Here: www.optionstradingsignals.com/profitable-options-solutions.php

JW Jones

Trading with multiple time frames – Every now and then it’s always a good idea to look at some different time frames to be sure you have a solid understanding for the longer term trends in play. I will admit that it’s easy to get caught up in trading the shorter time frames like the 1, 10, and 60 minute charts especially when there are large intraday movements. But every night you must reset your thinking by looking at the bigger picture.

Below are weekly and daily charts which I think provide a big picture view of things.

SPY – SP500 Index Fund – Weekly Chart
You will see that in both 2009 and 2010 we saw a 5-8% correction down to the key moving averages. I feel that we are in store for a similar pullback in 2011. After that we will most likely continue higher.

US Dollar Index – Weekly Chart
The dollar is trading down at a key support level which I am keeping a close eye on. If we get a close below this trend line then we should see the dollar sell off sharply which in turn will trigger another leg higher in commodities across the board.

Crude Oil – Weekly Chart
Crude oil has really taken off because of the fears coming out of the Middle East. From the looks of it the next key pivot level is the $110 level.

Gold – Daily Chart
Both gold and silver have made new highs but after such a run I expect we see a quick pullback before they go higher. Gold and silver are the two investments I think everyone should hold a core position for the long run no matter what happens to the price. But, if we do get a nice quick pullback into the key moving averages then I think it’s a great spot get involved with more money.

Mid-Week Trend Report:
In short, I am bullish on stocks and commodities and bearish on the dollar and bonds. The one issue I see going forward is that if the dollar breaks down it will most likely help boost oil prices which in turn puts downward pressure on stocks… So depending on how things unfold in the Middle East and a falling dollar, we may not see higher stock prices. Some individuals are forecasting $150-220 per barrel and I know if it gets back up there it will definitely slow the economy and stock prices down…

That’s it for now, but if you would like to these reports sent to your inbox be sure to join my free newsletter: http://www.thegoldandoilguy.com/trade-money-emotions.php

Chris Vermeulen

By Chris Vermeulen, thegoldandoilguy.com

Yesterday I pointing out how any weakness would most likely get bought back up into the close ahead of Obama speaking and we did get that. I also figured today the market would hold up or close positive also (post Obama) so the general public thinks and feels good about the USA and the financial markets.

Watch the Video Version of this report: http://www.thetechnicaltraders.com/ETF-trading-videos/TTTJ25/TTTJ25.html

Well today the market just happened to gap above yesterday’s key resistance level ans we all know that once we are above resistance be becomes support. After the gap up this morning the SP500 pulled back to this new support level which happens to be Friday’s, Mondays and Yesterdays high then it bounced, actually rallied up on solid volume almost like someone was making a point that this market is going up today and not to mess with it…

Personally I don’t get worked up over market manipulation because of two reasons:

1. There is Nothing you can do about it
2. If you see it and understand the idea behind it, then you can make really good money day trading it.

Chart of SP500 10 minute chart

As for our dollar position I still like the trade but I will admit that its really starting to drag out (wear us out of the position so we give up on it). Keep in mind that waiting for a trade to breakout and hopefully go in your direction is part of the excitement of trading… The suspense sure keeps are emotion flying high, which is why it is important to only trade position sizes which you can stomach during volatile times. Also the reason we scaled in at first key support and added more on the deeper pullback.

Posted below and in the member’s area is the chart:

Gold and silver have bounced a little and are trading back at resistance where they were in my pre-market video this morning.

Now, take a look at the different indexes below and you will see how the dow of only 30 stocks shows bullishness, while the key indexes for trend and strength are under performing…

As I mentioned a few weeks back, actually just before Christmas.. I figured the market would start to top out the second half of January. It looks as though that is unfolding but remember topping is a process and it become VERY difficult to trade and time and this is why I am taking my time here…Tops and bottoms are designed to suck traders into the wrong side one final time just before price reverses.

On another note it looks like metals are losing some ground here and may go lower… I’m figuring the dollar should bottom in the next couple days at most. Again tops and bottoms are a process and they always take much longer than we anticipate. If the market does not shake you out, it will wear you out..

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Chris Vermeulen

In the fine print of most investment advertisements or in the softly spoken disclaimer at the end of a commercial, we generally read or hear the phrase “past results are not indicative of future performance”. While those exact words may not be written or uttered, something along those lines is found on almost any piece of investment literature or in investment product commercials.

In the 2nd half of 2009 all the way through 2010 a variety of asset classes performed quite well.

Investors who purchased stocks, gold or silver, and bonds anytime in 2009 were handsomely rewarded in 2010 if they held their positions. How long will these assets continue to perform well? How long can gold pump out double digit returns before suffering a bad year? How high can stocks climb when uncertainty seemingly surrounds the marketplace? Price action is never wrong, but history reminds us that a particular asset class does not outperform all other asset classes consistently over long periods of time. Trees do not grow to the sky.

Since 2009 stocks, precious metals, and bonds have all had tremendous performance records. Most economists point to actions by the Federal Reserve as the primary reason because these interventions lowered interest rates to extremely low levels which caused investors to take more risk for better returns. High levels of liquidity paired with low interest rates moved nearly every asset class higher, with stocks and precious metals earning outstanding year over year returns.

With 2011 just starting, will stocks, bonds, and precious metals continue rallying? When looking at probabilities and statistics the odds are not favorable that all 3 asset classes will remain outstanding investments. In fact, it is possible and arguably likely that at least one of the asset classes if not more than one will face headwinds in 2011 and beyond. While Tuesday was only the second day of 2011, precious metals are under significant pressure and the fundamental picture for bonds and stocks is uncertain.

S&P 500

The Stock Market is overbought currently on nearly every time frame. Some pundits are calling for another outstanding year while others believe a correction is likely to unfold. I for one am totally unsure about the future, but what I am certain of is that I would be cautious at this current juncture in time. I would not be afraid to take profits and adjust stops to protect my trading and investment capital at these levels. Risk seems excruciatingly high and when we look at a longer term chart of the S&P 500 it is rather easy to surmise that a pullback may take place.

Precious Metals
If price action yesterday is any indication of what may be in store for gold and silver investors a nasty correction or pullback may be likely. I have been warning about the possibility of such an event and as usual have received countless emails and even some veiled threats. Gold may go up for years, but most assets do not trade straight up. Price ebbs and flows with the marketplace and buyers and sellers come together in the process of price discovery.

If this is the start of a correction in gold, a potentially outstanding purchasing opportunity is possible for patient traders and investors. While the gold bugs fill up my email inbox with hate mail, I wait patiently to enter at lower prices while they remain in denial. The daily charts of gold and silver futures below illustrate key support levels which would likely offer solid risk / reward entries.

Gold Futures Daily Chart

Silver Futures Daily Chart

Bonds

For most traders and investors that started their careers in the 1980′s, they have witnessed a bull market in bonds as yields went from double digits to the lowest interest rates in history over the past 20-30 years. New all time records could be set in the future, but strong fundamental headwinds exist. Overexposure to bonds could prove dangerous and diversification regarding duration, currency exposure, and geography remains paramount.

Many pundits and economists are showing considerable concern with regards to municipal and treasury bonds. Defaults are being discussed openly in the municipal space and there is additional concern that interest rates could continue to rise on U.S. Treasury obligations against the Federal Reserve’s wishes. Both scenarios are not pleasant and certainly would impact bond pricing. Municipals have been under pressure which is evident from the daily chart of MUB shown below. Additionally I have displayed a weekly TLT chart with additional technical analysis.

MUB Daily Chart

TLT Weekly Chart

I have no idea what is going to happen over the next 12 months in financial markets. What I do know is that equities, precious metals, and bonds have been providing outstanding returns for over a year. While I realize that there are fundamental and technical drivers impacting the price action, I would be remiss if I did not remind traders and investors that taking profits is never a bad strategy. While all three asset classes may power higher by the end of the year, at some point in 2011 it is possible that all three asset classes may potentially go through a pullback. By taking profits, traders allow themselves the opportunity to put fresh capital to work at potentially lower prices sometime in the future.

A patient trader who uses fresh capital to buy assets at lower prices compounds his/her returns while selling when prices are relatively high and buying when prices move lower. By no means am I saying to sell everything and move to cash, but when bullish sentiment is so pronounced and the price action looks extremely overbought, taking profits is something worth considering. At some point we know at least one of these asset classes will lag going forward simply because it has been working well for such a long time.

Statistical probability dictates that every month that passes with higher prices brings us closer to a correction or pullback. Those who are prudent and take profits while raising cash levels along the way will have capital to take advantage of lower prices. In addition to taking profits, investors should also consider moving stops and limiting their risk profile. There will always be new opportunities, but replenishing capital is seemingly harder by the day.

The great thing about options is that if you know all the strategies available then you can make money in virtually any market condition. Our recent trades in Dec and Jan thus far using options have been: AMZN 8%, USO 15%, TBT 58%, SPY break-even, IBM trade is currently open.

If you would like to receive my Free Options Strategy Guide & Trade Ideas join my free newsletter: www.OptionsTradingSignals.com/profitable-options-solutions.php

J.W Jones

The end of 2010 is rapidly approaching and the pundits and commentators continue to make their 2011 market predictions. I for one believe predicting future market moves is a futile endeavor where if you are right one year later you are viewed as a sage; if you are wrong nobody seems to remember or care.

In fact, I try not to read any predictions for fear that it might place a bias in my subconscious. I am a trader and thus have no need for emotions, bias, or opinions when trading. I try to stay away from the media and the pundits as often as possible.

With that being said, the managed money crowd will be finishing up their window dressing and the performance anxiety of 2010 will slowly shift to assessing their portfolio risk and making appropriate adjustments for the coming year. Based on current market sentiment it would make sense that most money managers are bullish as cash levels remain quite low when looking at mutual funds and institutional money managers’ portfolios.

S&P 500

The S&P 500 is extremely overbought in almost every time frame and headline risk remains high. At current price levels I would not be interested in being long the S&P 500, in fact I would likely be taking some money off the table before 2011 rolls in.

I think opportunities are going to present themselves in 2011 for outstanding longer term entries into the equities market, however a disciplined approach will be required. Headline risks such as continued monetary and fiscal issues in the Eurozone, municipal budget concerns and potential defaults, potential for rising interest rates, inflation / deflation, and rising energy prices to name just few. Unfortunately some, if not all of the headline risks listed above will likely come to pass. Having fresh capital ready to deploy and developing a trading plan ahead of time for solid entry points will likely lead to a positive trading outcome in 2011.

I believe there are going to be some outstanding trading setups in 2011 regardless of market conditions or economic factors, but in order to be prepared we need to have trading capital available and a trading plan prepared. The weekly chart below illustrates some key support levels on the S&P 500 e-mini contract.

At some point in the future, the S&P 500 is going to suffer from a correction and I intend to be prepared to take advantage of lower prices in my longer term investment accounts as well as in my short term option trading accounts. While I am generally a contrarian when sentiment and bullishness are this high, deep down I am hopeful that the economic recovery continues. However, I am not blind to believe that the worst is over and it is smooth sailing from here. There is nothing about financial markets that is ever easy, and when the directional bias is this strong I tend to step back and develop contrarian strategies just in case the crowd is wrong.

Oil

I try to stay away from opinions and focus on facts when conducting analysis regarding financial markets. However I am going to break my rule briefly to point out that in my humble opinion, the single largest threat to the U.S. domestic economy is not unemployment or housing, but energy. If energy prices continue rising, it causes nearly everything to rise in price in the United States as producers and manufacturers pass down rising fuel costs to the consumer. Essentially we have leveraged the ability to support our substantial population and tremendously high standard of living with the ability to use cheap and plentiful oil.

Some of the reasons that oil prices could rise have fundamental and technical foundations. From a fundamental standpoint, supply appears to be declining and will continue to decline going forward unless some oil fields that are currently unknown are discovered and make available immense supplies of oil. Additionally, the basic principles of supply and demand are present as emerging market countries are needing more and more energy to keep their economies growing and to satisfy the concurrent rising standard of living. Countries like China, India, and Brazil are only going to see their need for energy increase and other countries in the world need to recognize that demand is rising and supply is falling.

While the argument among economists rages on regarding inflation versus deflation, if inflation were to rise suddenly this would also be bullish for energy. Most investors may not have considered that oil prices are over $90/barrel and the economy is relatively sluggish. Where would prices be if the economy were to boom in 2011?

From a technical standpoint, the Great Recession pushed oil down from the all time highs in 2008. Many economists believed that the rise in oil prices is what really caused the market to crater in early 2009. If we view a weekly chart of oil, it would appear that we are continuing to trend higher and that in the longer term this trend will likely persist.

I would be shocked if oil prices do not reach at least $100/barrel in 2011. Some analysts are saying that it could reach $115-$120 by the summer and could probe all time highs as early as 2012. The fundamental and technical analysis is mutually supportive and in the longer term I think rising energy prices is not only a near certainty, but also a major threat to the global recovery.

Gold

The recent pullback offered a nice entry around the $133/share on GLD. In full disclosure, I purchased GLD around 133.25 and sold a slew of naked puts on silver and gold which I have closed for solid gains. Argument surrounds gold and silver as economists bicker over whether we are going to see hyperinflation or deflation in 2011. I for one do not know or claim to know. What I do know is that gold appears to be nearing a final wave of buying which could push it to all time highs.

However, I do believe without question that the volatility in the price of gold is likely to increase dramatically. Large price swings are likely in 2011 as headline risks will drastically impact the price of gold and silver and cause volatility to increase. While this is somewhat speculative, the various headline risks in Europe and in the United States will have a significant impact on precious metals prices.

Gold continues to trend higher and fighting the trend makes little sense and could be a great way to lose precious trading capital. I will continue to play the rising trend until it fails which at some point in the future is inevitable. Neither gold, nor any other asset can continue rising forever. A pullback at some point is not only likely, but would be healthy. Obviously gold remains in a bullish uptrend as illustrated by the weekly chart below:

I do believe that gold is a solid hedge against currency risk and higher inflation based on recent price action, but I am not willing to buy into the world is ending philosophy that many gold bugs envision.

I do not believe that the entire financial construct will fail and that a barter system will be created with gold becoming currency. Through a variety of emails from all over the world I have been presented with all kinds of analysis and data that all fiat currencies fail, that gold is a store of value, and that gold will protect investors from currency manipulation and inflation. While all of these things may be true, I am unwilling to abandon hope for peace, prosperity, and a better future.

Conclusion

I am optimistic about the domestic and global economy in the long term. I believe that great opportunities for long term investment will be offered in 2011 and I intend to take advantage of the price action. I am an options trader at heart, but in the end I am an eternal optimist. Being pessimistic is not only depressing, but it offers very little in the form of solutions. Consequently an absolute pessimistic forward looking view serves to only create biases that are not conducive to success in financial markets. Let’s forget about predictions and pundits and focus on what really matters – price action.

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J.W Jones

It’s that time again when volume dries up and prices rise into the new year. A lot of individuals are scrambling to prepare for the holidays, even though we had a year to prepare. The big money has already done most of their year end shuffling and will be taking it easy until January.

The market is overbought and sentiment readings are at extreme levels which in the past have been the start of large sell offs and even bear markets. While I am keeping a close eye for a top, there is not much we can do but stay long stocks and commodities until the market tips its hand and distribution selling is in control. The U.S. federal government is the only wild card going into year end that should be on traders’ radars. They have been doing a great job boosting prices in the equities and commodities market, but can they continue to hold things up when the big money and the proverbial herd start unloading positions in 2011?

SP500 Holiday Grind – Daily Chart
This chart shows the slow and steady grind higher that we have seen in the S&P 500. I expect this to continue into 2011 The market in my opinion is on the verge of some serious selling so long positions should be small going forward.

US Dollar On Pause For A Couple of Weeks
This 4 hour candle stick chart of the dollar shows price testing resistance (a previous high). I am expecting to see the U.S. Dollar trade sideways or possibly move closer to the previous high as we enter the new year. A sideways dollar will allow the equity and commodity markets to rise.

Weekend Conclusion:
In short, I think we could see an intraday pullback early this week and then a grind higher. The pullback would shake out some weak positions before the holiday march higher takes place. I typically don’t trade much going into the holiday season and new year. I may put on a small long position if I like what I see forming on the charts, but that would likely be about it. Light volume can be very dangerous to trade because sharp price spikes up or down can occur in a blink of an eye catching traders off guard.

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Chris Vermeulen

By Chris Vermeulen – Investors around the globe are concerned with the economic outlook, not only with the United States but with virtually every country. This has caused not only investors but banks and countries to start buying gold & silver in order to be protected incase of a currency melt down in the coming years.

While the majority is concerned about the eroding economy, we have seen the opposite in the financial market. Gold and equities have risen… That being said the volume in the market remains light simply because the average investor is no longer putting money into the market for long term growth. Instead individuals are now focusing on saving and paying down debt.

That being said we all know light volume market conditions allow Wall Street powerhouses to bid the market up. Not to mention with quantitative easing taking place I’m sure that has also helped the market of late. While we don’t know for sure that QE is taking place as we speak, the sharp drop in the dollar and strong move up in gold are pricing this into the market.

Let’s take a look at some charts…

HUI – Gold Stock Index

This long term monthly chart of the HUI index provides valuable trading signals for both gold stocks and gold bullion. As you can see below this index is trading at a key resistance level after forming a bullish 3 year Cup & Handle pattern. The next 1-2 months for the precious metals sector will be interesting as it tries to break above key resistance. I would really like to see the HUI:GLD ratio break to the upside to confirm if the breakout occurs.

SPY – Daily Long Term Trend

The broad market looks to be forming a short term topping wedge. If this is to occurI expect it to take several weeks to play out. Looking at the chart if we use Fibonacci retracements along with trend line support we can get a feel for where this pullback should correct to.

That being said the broad market breadth and internals seem to be holding up indicating higher prices over the long run. While the short term price action is overbought and I expect a pullback to form, my analysis is pointing to higher prices as we go into year end.

UUP – US Dollar Daily Price Action

Although the majority of investors have a bearish outlook on the economy, we have seen a large price appreciation in equities and precious metals. This is largely due to the fact that the US dollar is quickly getting devalued. Simply put, as the dollar drops, it helps boost commodities and stock prices.

While a rising stock market is great to see, at some point the dollar will become so cheap that it will start to have a very negative affect on the US economy, commodities and stocks. Being from Canada it has always been more expensive to take holidays in the United States, and I remember paying $1.50-$1.70 for every $1 green back. But now the dollar is almost at par making holidays very affordable. The big question/concern is when will they ease off on the printing? At the rate which they are printing the greenback will be at par with peso… well not that extreme but you get the point Eh!

Weekend Market Conclusion:

As we all know the market has a way of making sure the majority of traders miss major turning points. The saying is, “If the market doesn’t shake you out, it will wear you out” and it seems we are getting the later…

The never ending grind higher in precious metals has not had any big shakeouts, rather its wearing out any short positions before rolling over to take a breather. As for the stock market, we are getting much of the same thing as the market grinds higher day after wearing out the shorts before rolling over.

That being said, there is more at work here than just regular market movements. With the light volume in the market we know there is price manipulation and QE (quantitative Easing) which is helping to boost prices and exaggerate market movements.

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Let the volatility and volume return!

Chris Vermeulen

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