Custom Index Charts Suggest U.S. Stock Market Ready for a Pause

Weeks after the Election Rally initiated a moderately strong upside breakout rally, our Custom Index charts suggest the US stock market may be ready for a brief pause in trending before any new trends continue. Global traders and investors jumped into the US stock market just days before the US elections expecting something big to take place. The rally that initiated just days before the US election pushed our Custom Index charts well into the upper range of the 2016 to 2018 upward sloping price channel. This suggests the US stock markets have ended the downward price reversion and are now attempting to extend into the upward price channel....attempting to resume the upward trending that started after the 2016 elections.

Weekly Smart Cash and Volatility Indexes

The Weekly Smart Cash Index, below, highlights the impressive rally recently and the upward sloping price channel that is back in play for price. The highlighted range of the upward sloping price channel is actually the lower half of the std deviation range of the 2016 to 2018 price channel. So, as of right now, the Smart Cash Index price level has yet to really breach the middle of this channel and is still only within the lower half of the channel. Still, the support near the lower boundary of this level has been retested two or three times over the past six months and held. This suggests the lower channel level (the lower heavy BLUE line) is now acting as moderate price support....Continue Reading Here.

Revisiting Black Monday 1987

Back in the day, for those of you that are old enough to remember and have experienced one of the most incredible trader psychology driven stock market decline in recent history. The difference between “Black Monday” and most of the other recent stock market declines is that October 19, 1987, was driven by a true psychological panic, what we consider true price exploration, after an incredible price rally.

It is different than the DOT COM (2001) decline and vastly different than the Credit Market Crisis (2008-09) because both of those events were related to true fundamental and technical evaluations. In both of those instances, prices have been rising for quite some time, but the underlying fundamentals of the economics of the markets collapsed and the markets collapsed with future expectations. Before we get too deep, be sure to opt-in to our free market trend signals newsletter.

Our researchers believe the setup prior to the Black Monday collapse is strangely similar to the current setup across the global markets. In 1982, Ronald Reagan was elected into his second term as the US President. Since his election in 1980, the US stock market has risen over 300% by August 1987.

Reagan, much like President Trump, was elected after a long period of U.S. economic malaise and ushered in an economic boom cycle that really began to accelerate near August 1983 – near the end of his first term. The expansion from the lows of 1982, near 102.20, to the highs of 1987, near 337.90, in the S&P 500 prompted an incredible rally in the US markets for all global investors.

This is very similar to what has happened since 2015/16 in the markets and particularly after the November 2016 elections when the S&P500 bottomed near 1807.5 and has recently set hew highs near 3026.20 – a 67.4% price rally in just over 3 years.

One can simply make the assumption that global investors poured capital in the US markets in 1983 to 1986 as the US markets entered a rally mode just like we suspect global investors have poured capital into the US markets after the 2016 US elections and have continued to seek value, safety, and returns in the US markets since. These incredible price rallies setup a very real potential for “true price exploration” when investors suddenly realize valuations may be out of control.

So, what actually happened on October 19th, 1987 that was different than the last few market collapse events and why is it so similar to what is happening today?

On October 19, 1987, a different set of circumstances took place. This was almost a perfect storm of sorts for the markets. The US markets had risen nearly 44% by August 1987 from the previous yearly close – a huge rally had taken place. Computer trading, which some people suspected may have been a reason for the price decline on October 19, was largely in its infancy.

Floor traders were running the show in New York and Chicago. The London markets closed early the Friday, October 16, because of a weather event that was taking place. The “setup” of these events may have played a roll in the liquidity issues that became evident on Black Monday and pushed the US markets down 22.61% by the end of trading.

The US markets had set up a top near 2,722 in early August 1987 after rising nearly 44% from the 1986 end of year closing price level of 1,895. The SPX rotated lower from this peak to set up a sideways price channel near 315 throughout the end of August and through most of September. On October 5, 1987, the SPX started a downward price move that attempted to test the lower support channel near 312. On October 12, one week later, the SPX broke below this support channel and closed at 298.10 (below the psychological 300 level). The very next weekend was October 17 & 18 – the weekend before Black Monday.

Sunday night, October 18, in the US, the Asian markets opened for trading and a price sell-off began taking place in Hong Kong. Because the London markets has closed early on the 16th due to the storm, by the time they opened the UK markets began tanking almost immediately. Early in the day on Monday, October 19, the FTSE100 had collapsed over 136 points.

Our researchers believe the declines in the US markets in early October 1987 set up a breakdown event that, once support was broken, prompted a collapse event where liquidity issues accelerated the price decline volatility – much like the “flash crash”. Global investors were unprepared for the scale and scope of the price decline event and panicked at the speed of the price collapse.

In fact, at the height of the 1987 crash, systemic problems (mostly solvency and brokerage house operations) continued to threaten a much larger financial market collapse. Within days of Black Monday, it became evident that margin accounts and solvency issues related to operating capital, large scale risks and continued fear that the markets may continue to collapse presented a very real problem for the US and for the world. Have we re-entered another Black Monday type of setup across the global markets?

As new economic data continues to suggest the global markets are economically contracting and stagnating, the US Federal Reserve has started buying assets again while the foreign central banks continue to push negative interest rates while attempting to spark any signs of real economic growth. The US stock market has continued to push higher – almost attempting new all-time highs again just recently. The US stock market is up nearly 68% over the past 3.5 years since Trump was elected and as of Friday, October 18, 2019, the US stock markets fell nearly 0.75% on economic fears.

In Part II of this article, we’ll explore the potential of another Black Monday type of setup that may be playing out before our very eyes right now in the US stock market.

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short term swing trading and long-term investment capital. The opportunities are massive/life changing if handled properly.

I urge you visit my ETF Wealth Building Newsletter and if you like what I offer, join me with the 1-year subscription to lock in the lowest rate possible and ride my coattails as I navigate these financial market and build wealth while others lose nearly everything they own during the next financial crisis.

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Chris Vermeulen
The Technical Traders

How To Consistently Make Money Day/Swing Trading

This has been the best week in a long time for intraday trades. The last 4 days the SP500 gave us 8 trades and all 8 turned into winners. Each days turning generating between $300 a $1250 per ES mini contract, although these can be traded using the SPY or 3X index ETFs.

Subscribers who day trade are taking this pre-market analysis and setups and making a weeks wage within 1 – 3 hours in the morning before lunch.

What makes these trade triggers is that they are the BROAD market SP500 so if you day trade other stocks knowing the short term market direction each morning add so much power to your other day trades for timing entries and exits.

SPY ETF 10 MINUTE CHART

This chart focuses on today’s spike higher and gap lower. both these played out once again and are based strictly on technical analysis and statistical analysis.

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Simple Day Trades - Gap Windows and Price Spikes

IMPORTANT NOTE: Pre-market trades like these are posted in our morning update and video only. We don’t want to blanket all our longer term traders with day trades. So if you are an active trader be sure you read our morning update and watch the video with your morning coffee.

The morning gap has filled and our spike targets are being reached as well. Keep in mind, these are short term trade setup which will be implemented into our member’s area in the near future that auto update and post for those of you who want to take advantage of early day trades and be done by 11 am most trading sessions. Once we have things implemented there will be a detailed PDF on how trading these along with a video.

For you longer term traders we are also working on having our swing trade charts and signal post and update automatically in the member’s area as well. Each trading strategy, chart, and signals will run in a separate member’s area page and you will be able to follow and trade the strategies that fit your personality and trading style.

This is going to take us 30 - 60+ days to get things fully set up and running and it’s going to add a lot of value and opportunities for you – Subscribe Now!

Chris Vermeulen
Chief Investment Strategist

Technical Analysis Confirms Support Level on the SPX

This week presented some interesting price rotation after an early upside breakout Sunday night. The Asian markets opened up Sunday night with the ES, NQ and YM nearly 1% higher this week. This upside breakout resulted in a clear upside trend channel breakout that our researchers believe will continue to prompt higher price legs overall. Our researchers, at Technical Traders Ltd., have issued a number of research posts over the past few weeks showing our analysis and the upside potential in the markets that should take place over the next few weeks.

We expected a broad market rally this week, yet it has not materialized as we expected this week. We consider this a stalled upside base for a new price leg higher. Take a look at this Daily SPY chart to illustrate what we believe the markets are likely to do over the next few weeks. There are two downside price channels that have recently been broken by price (RED & YELLOW lines). Additionally, there is clear price support just below $272.00 that was recently breached. These upside price channel breakouts present a very clear picture that price is attempting to push higher and breakout from these price channels.

Current price rotation has tested and retested the price support level near $272.00 and we believe this recent “stalled price base” will launch a new upside price rally driving price well above the $280.00 level.

With the holiday weekend setting up in the U.S. and the early Summer trading levels setting up, it is not uncommon for broader market moves to execute after basing/staging has executed. This current upside price action has clearly breached previous resistance channels, so we continue to believe our earlier research is correct and the US majors will mount a broad range price advance in the near future.

The VIX, on the other hand, appears poised to break lower – back to levels below $10 as the US major price advance executes. The VIX, as a measure of volatility that is quantified by historical price trend and volatility, should continue to fall if our price predictions are correct. If the US major markets continue to climb/rally, the VIX will likely fall to levels well below $10.00 and continue to establish a low volatility basing level – just as it did before the February 2018 price correction.

A holiday weekend, the start of lighter Summer trading and the recent upside breakout of these downward price channels leads us to believe the market will continue to push higher over time with the possibility of a massive upside “melt up” playing out over the next 2 - 6+ weeks. We believe this move will drive prices to new all time price highs for the US majors and will surprise many traders that believe the recent price rotation is a major market top formation.

Our exclusive Wealth Building Newsletter provides detailed market research, daily market video analysis, detailed trading signals and much more to assist you in developing better skills and greater success in your trading. One of our recent trade in natural gas using UGAZ, [check it out here] is already up over 26% and we believe it will run another 25-50% higher from here! We provide incredible opportunities for our member’s success. We urge you to visit The Technical Traders to learn how we can assist you in finding new success.

Our 53 years experience in researching and trading makes analyzing the complex and ever changing financial markets a natural process. We have a simple and highly effective way to provide our customers with the most convenient, accurate, and timely market forecasts available today. Our stock and ETF trading alerts are readily available through our exclusive membership service via email and SMS text. Our newsletter, Technical Trading Mastery book, and 3 Hour Trading Video Course are designed for both traders and investors. Also, some of our strategies have been fully automated for the ultimate trading experience.

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2018 First Quarter Technical Analysis Price Forecast

As 2017 draws to a close, our analysis shows the first Quarter of 2018 should start off with a solid rally. Our researchers use our proprietary modeling and technical analysis systems to assist our members with detailed market analysis and timing triggers from expected intraday price action to a multi-month outlook.

These tools help us to keep our members informed of market trends, reversals, and big moves. Today, we are going to share some of our predictive modelings with you to show you why we believe the first three months of 2018 should continue higher.

One of our most impressive and predictive modeling systems is the Adaptive Dynamic Learning system. This system allows us to ask the market what will be the highest possible outcome of recent trading activity projected into the future. It accomplishes this by identifying Genetic Price/Pattern markers in the past and recording them into a Genome Map of price activity and probable outcomes.

This way, when we ask it to show us what it thinks will be the highest probable outcome for the future, it looks into this Genome Map, finds the closest relative Genetic Price/Pattern marker and then shows us what this Genome marker predicts as the more likely outcome.

This current Weekly chart of the SPY is showing us that the next few Weeks and Months of price activity should produce a minimum of a $5 – $7 rally. This means that we could see a continued 2~5% rally in US Equities early in 2018.

Additionally, the ES (S&P E-mini futures) is confirming this move in early 2018 with its own predictive analysis. The ADL modeling system is showing us that the ES is likely to move +100 pts from current levels before the end of the first Quarter 2018 equating to a +3.5% move (or higher). We can see from this analysis that a period of congestion or consolidation is expected near the end of January or early February 2018 – which would be a great entry opportunity.

The trends for both of these charts is strongly Bullish and the current ADL price predictions allow investors to understand the opportunities and expectations for the first three months of 2018. Imagine being able to know or understand that a predictive modeling system can assist you in making decisions regarding the next two to three months as well as assist you in planning and protecting your investments? How powerful would that technology be to you?

Our job at Technical Traders Ltd. is to assist our members in finding and executing profitable trades and to assist them in understanding market trends, reversals, and key movers. We offer a variety of analysis types within our service to support any level of a trader from novice to expert, and short term to long term investors.

Our specialized modeling systems allow us to provide one of a kind research and details that are not available anywhere else. Our team of researchers and traders are dedicated to helping us all find great success with our trading.

So, now that you know what to expect from the SPY and ES for the next few months, do you want to know what is going to happen in Gold, Silver, Bonds, FANGs, the US Dollar, Bitcoin, and more?

Join The Technical Traders Right Here to gain this insight and knowledge today.

Chris Vermeulen

Could There Be a Reversal Coming to the Major U.S. Markets?

Technically speaking, this week could be very important for the major U.S. equity markets. There is an appearance of a “TOPPING PATTERN” forming. I am now awaiting confirmation by the actions of the equity markets, this week. Expect downward pressure beginning this month of August of 2017.

The Only Chart You Need To See!

There is currently limited upside potential in the SPX relative to potential downside for the months of August, September and the early part of October 2017.

There are signs for the short, intermediate and longer term trends returning for the best six months of trading officially inaugurated in November of 2017! This is the timing framework when ‘The Next Runaway Leg Up In The Stock Market Will Resume.’

In last weeks’ market action as the profit taking rotation out of the high-tech sector rotated into the Dow Industrials, it reflected

a more defensive approach while being invested in “Blue Chips” during which time it achieved a new high. Sector rotation increased especially noticeable in the transports and technology sectors that were leading the markets higher. If they continue lower, more sectors will join the decline. I am expecting a coming pop in the VIX on Aug 4, Aug 23, Sept 11 or 12 and finally Sept 28 or 29. 2017. There was a flight to safety in the Yen as well as a strengthening of the price of Gold, Silver, Bitcoin and WTI Crude Oil.

An Unusual Anomaly

Over the past couple of weeks, there was this unusual Anomaly which occurred, as you can see in the chart below. It now makes me more cautious about our long understanding of “risk interconnectivity”.

How can the equity, gold, silver, crude oil and bitcoin markets ALL go HIGHER together?

Tune in every morning for my video analysis and market forecasts at The Gold & Oil Guy to know where the main ‘asset classes’ are headed tomorrow, this week, and next month.

In short, the major equities trend remains to the upside but its likely to take shape in a slow grinding process with downward pressure starting in August fora couple months.

Be sure to follow my daily pre-market video forecasts and ETF trades by visiting here at The Gold and Oil Guy

Chris Vermeulen

New Video: How You Can Profit with ETFs from the Unexpected Move in the Dollar

You've seen us talking about a new Options strategy that John Carter was working on recently...and he is finally sharing it with us.

Video: My Favorite Way to Trade Options on ETFs

This strategy is the "sleep at night as you trade options" strategy. And we ALL need that!

Here's just a taste of what John shows you in this video:

*  Why trading options on ETFs cuts your risk so you can sleep at night

*  How you can profit with ETFs from the unexpected move in the dollar

*  Why you avoid the games high frequency traders play by trading ETFs

*  Why most analysts have the next move in the dollar wrong and how to protect your investments

*  What are some of the markets that will be impacted by the dollars next move

Here's the link to watch the video again

Enjoy the video,
Ray's Stock World


Reserve your seat now for John's next FREE webinar "Why You Should Trade Options on ETF's"....Just Click Here!

Are Your Bullish Calls Plagued with Divergences?

By now everyone has a prediction about where the S&P 500 Index (SPX) is going to be heading in the future. Most of the sell side and their ilk are all rolling out the green bullish carpet and predicting that a major bull run is right around the corner.

If you are a contrarian investor by nature and tend to sell when others are buying this will be of great interest to you. When retail investors are buying and the professional sell side is quickly reducing their long equity exposure we get increasingly more bearish.

This recent report was accompanied by some eye opening charts...... 

View report and charts courtesy of Bank of America Merrill Lynch


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The Market Trend Forecast....Our Latest Market and Gold Views

The staff at TMTF have continued to correctly project the wave patterns for months now for their subscribers in the SP 500 Index. Their latest views were to look for a minor wave 3 top at 1698 with a pullback minor wave 4. They hit that on the nose with a 23.6% fibonacci retracement of minor wave 3 as the index hit 1676.

Since that point, TMTF outlined a Wave 5 pattern that should take the SP 500 to 1736-1771. Several weeks ago they patterned out 1768-1771 as a perfect target for a Major wave 3 high. This will be followed by a 125-200 point SP 500 correction if we are correct.

Below is the latest chart update outlining what we project ahead. A run to 1736-1771, followed by a 120-200 point correction for Major Wave 4 in the SP 500. Subscribers get multiple updates each week.

Click here to join us today for a 33% discount at Market Trend Forecast




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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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The Proof is in the Earnings and the Dollar. The Top is Near for the SP 500

Can we still look to the financials to guide us on market movements?

Earnings season is now upon us and so far the only major earnings component that has been released is the J.P. Morgan earnings report that came in Friday before the market opened. After the report was digested by the marketplace, prices fell dramatically.

While the charlatans in Washington try to sell the American public into believing that the U.S economy is starting to firm up, the underlying truth is that the recovery has been relatively weak. If it were not for the massive liquidity injections provided by the Federal Reserve through multiple quantitative easing adjustments, risk assets would likely be priced significantly lower.

Inquiring minds combed through the data provided in the J.P. Morgan earnings release and a few major outcomes were placed front and center. Earnings disappointed overall due to a massive decline in investment banking activity. Investment banking profits represent a large portion of all of the major banks’ earnings.

On Friday the guys at Zero Hedge provided the following chart in its article titled, “Charting Disappearing Investment Banking Revenues And Profits, JPM Edition.” The chart below illustrates the massive decline in investment banking revenue:

To make the chart a bit easier to follow, the blue bars represent investment banking revenue. It is rather obvious that investment banking revenue is in free fall having dropped nearly 50% since the first quarter of 2011. In addition, I would point out the sharp declines in total net income (purple) and the massive decline in equity market revenue (green).

It is without question that the other major banks that have a large investment banking presence are likely to experience similar revenue losses. A significant reduction in investment banking gross revenue puts tremendous pressure on total bank revenues in this quarter and looking ahead.

I am of the opinion that major money-center banks like Bank of America and Citigroup are likely to experience similar revenue reductions. We will know for sure in the coming weeks as most of the large banks are set to report earnings in the near term. Clearly this expected reduction in overall revenue will likely have a major impact on the financial sector of the economy.

The financial complex is absolutely critical when looking at broad index returns. It is common knowledge that broad indexes such as the S&P 500 and the Dow Jones Industrial Average struggle to rally when the financial complex lags. The same can be said for the semiconductor sector as well.

Recently financials (XLF) and the semiconductor (SMH) sectors have worked considerably higher on relatively light volume. Both XLF and SMH are trading into major resistance and both are starting to show signs that they are nearing a potential top  The daily charts of XLF and SMH are shown below:

XLF Daily Chart

SMH Daily Chart

Both the XLF and SMH daily charts illustrate that a major top may be forming in both sectors. It is widely noted that if the financials and semiconductors are not showing strength in a rising market, a correction or major reversal may not be far away.

I have been writing about the potential for a major top to be forming for several weeks now and I find that I am not in the majority in this viewpoint. Recent sentiment and momentum in U.S. equities demonstrate that we are very overbought at this time. Retail investors are extremely bullish and the Volatility Index (VIX) is trading near recent lows.

I am unsure whether this is a major top that leads to strong selling pressure or whether a correction is a more likely outcome. What I do know is that tops are a process, not a singular event and at this point more and more evidence is supporting the viewpoint that equities may be getting tired and some profit taking is likely.

In addition to the lackluster price action in the charts above, earnings releases have been revised lower in the 4^th quarter of 2011. In fact almost 3.5 companies have announced earnings revisions to the downside for every company that has indicated a stable to rising earnings announcements. This type of scenario has not been present since the first quarter of 2008 which as we know was not exactly a great time frame to be looking to put cash into risk assets.

Furthermore, Goldman Sachs analysts came out with the following commentary, “While the 4^th Quarter is typically the strongest quarter for earnings, estimates have fallen 9% since the summer and are now below both realized 2^nd and 3^rd Quarter results.” Goldman Sachs is also expecting significant price pressure coming from a weak U.S. economy and the fears of a European recession in 2012. Overall, the estimates are far from bullish and are in fact quite concerning when looking at the current valuation of U.S. equities.

The impact that a stronger U.S. Dollar will have on domestic companies which are used to having a competitive advantage when looking at earnings due to currency adjustments could produce negative surprises. Typically positive earnings adjustments are likely to be revised to the downside as the U.S. Dollar has rallied sharply higher in light of the weakening Euro currency. The weekly chart of the U.S. Dollar Index is shown below:

The U.S. Dollar Index is consolidating directly beneath resistance which is generally seen as a bullish development. I expect a breakout over new highs is only a matter of time. It is unlikely that in the long term the U.S. Dollar can rally while stocks trade flat or work their way higher. While this is always possible, the likelihood of that scenario is unlikely due to earnings pressures that would occur if the Dollar pushes higher in the intermediate term.

In addition to the variety of above mentioned factors which could have a major impact on equity valuations, the S&P 500 Index is trading into major resistance. Unless the S&P 500 Index can work above the 1,325 area it is unlikely that a new bull market has begun.

If the S&P 500 Index manages to work above the 1,325 level then my analysis may be proven completely incorrect. However, right now the S&P 500 Index has a lot of overhead resistance at the 1,292, 1,300, and 1,310 price levels. The daily chart of the S&P 500 Index is shown below’

Ultimately we are coming into the final week for the January options contracts which are set to expire at the close of business this coming Friday. I would not be shocked to see some volatility late this week and potentially even higher prices for equities.

However, my expectation is that once the January expiration hangover is behind us, increased volatility and lower prices are likely ahead for U.S. equities. The earnings announcements this week will likely have a large impact on the price action. Heads up, risk is exceptionally high!

To learn more about Options Trading Signals visit J.W. Jones Options Newsletter website.

Check out J.W.s latest articles

Is This December Similar to 2007 & 2008 for Gold & Stocks?

Thus far in 2011 the overall stock market movement has been much different from what we had in 2010. This year we have seen nothing but sideways to lower prices with wild price swings on a day to day basis. There just has not been any really solid trends to take advantage of this year. Instead we had to actively trade the oversold dips and sell into the overbought rallies to just pull money out of the market on a monthly basis. Last year we saw 3 major rallies that lasted several months making it easy for anyone who bought into the trend to make money if managed properly.

Looking forward to 2012 it looks as though we are going to see some major changes unfold globally that will change the way we do things live our lives. Unfortunately its a very negative outlook but I do have hope that something will be done to perserve are somewhat normal lifestyles. I’m not one to talk doom and gloom, there are enough of those guys out there already so lets stick with the charts and focus on what is unfolding now in the present and how to take advantage of it.......

The charts below show what I feel is likely to happen going into the new year IF we don’t get any major headline news in Europe that triggers another selloff.

Intermarket Analysis:

There are a lot of different things unfolding within stocks, commodities, currencies and bonds right now. And it is imporatnt to know that investments are inter-connected in some way. For example,  if one investment moves sharply in one direction it will have an effect on other investment classes.

My eye is focused on the US Dollar Index which has recently had a strong run up in price. For the past couple years we have seen stocks fall when the dollar moves up. So with the dollar index now trading at a key resistance level we should see the dollar top out for a few weeks and spark a Christmas rally into year end. After that, all bets are off and we re-analyze…

On the flop side of things, if Europe comes out with major negative headline news we could see the dollar index continue its rally and breakthrough this resistance level. If the dollar moves higher from here we could easily see a multi month run up in the dollar. You do not want to be long stocks if this happens, get short stocks and hold on tight.

Gold Daily Chart Analysis:

Here is my positive out look for gold and what I feel is likely to unfold near term. But keep in mind what I just said about the US dollar index above. If the dollar continues its rally and breaks out it could actually put some pressure on gold. I know gold is a safe haven so I do expect it to hold up, but a strong dollar will neutralize a lot of the buying in gold in my opinion.

SP500 Daily Charts:

Stocks should have a solid bounce this December if the dollar finds resistance and pulls back in the coming weeks. I am expecting a bounce of 5-10% if all goes as planned.

Christmas Holiday Rally Trading Conclusion:

In short, we are entering a tough time to trade the market. Volatility is low, there are a few holidays and typically we see volume thin out as December unfolds. Light volume generally favors higher prices for stocks and commodities which is one of the reasons we get the holiday lift in prices.

The recent selloff in stocks is looking overdone to the down side and ready to bounce any day. So I am looking for signals to get long the SP500. Overall risk remains very high as sellers are still in control of the market and because we are looking to put on a trade against the intermediate trend which is down.

On Friday morning myself and my followers exited our short position on the SP500 at the open locking in 13.5% profit. We exited the position because the intraday charts are showing signs of a potential bottom and we want to avoid the tear your face off short covering rally that I feel is just around the corner. Now we are waiting for a another low risk setup and will take action to go long or short depending how things unfold in Europe.

I hope this report helped shed some light on the current market condition for you. Remember you can!

Get my daily pre-market trading videos, intraday updates , and trade alerts with my premium newsletter at  The Gold and Oil Guy

Chris Vermeulen

Check out Chris' recent article "How to Trade Using Market Sentiment & the Holiday Season"

Is The SP 500 About to Stage a Multi Month Rally?

J.W. Jones of Options Trading Signals tells us where he sees this market headed...... 

The S&P 500 must have taken notice of the multitude of headlines coming at market participants and proceeded on a path of pure chaos. Since October 4th, the S&P 500 Index (SPX) managed to trade in a range that spanned from 1,074 to as high as 1,171 in 4 days. To put the past 4 days price action into perspective, the S&P 500 Index rallied 97 points or 9% in less than 96 hours.

Since late July, market participants have been dealing with a whipsaw that has been wrought with headline risk coming from Europe and huge swings in the price action of the volatility index. A few short days ago I was calling for a bounce higher in the SPX as every time frame was oversold. After the jobs number came out Friday morning domestic equities rallied sharply higher and in the short term prices were excessively overbought prompting some profit taking.

Around lunch time the news wires broke that Spain and Italy had their sovereign debt downgraded by Fitch Ratings. The downgrade put U.S. banks under pressure quickly and the price action started to rollover. By the end of the day price action was starting to work higher but a sharp selloff played out in the final 30 minutes of the session putting the major indices back into the red at the closing bell. So the real question that lies ahead is where do we go from here?

There is no easy answer to that question as the headline risk coming out of Europe over the weekend could have a dramatic impact on prices on Monday. Just as a reminder, U.S. bond markets will be closed on Monday for Columbus Day, but equities markets will be open as usual. At this point in time my short term bias is to the downside.

It would be healthy to see the S&P 500 roll over here and find a key support level where buyers step in and support prices. A higher low would be constructive and could lead to a more prolonged intermediate term rally which could last into the holiday season. However, before we can see any sort of rally we need to see a bottom form. While I do believe we have initiated that process, until I see a higher low carved out on the daily chart I will consider the current price structure to remain bearish.

In order to break to new lows, the SPX would have to push through several layers of support. I am of the opinion that we are unlikely to see the recent lows broken, but the chart below illustrates the key support levels going forward. A test of the 1,040 – 1,050 price range remains possible, but the price action the past week makes it seem less likely. Within the context of a hyper volatile period of time, just about any possible outcome remains feasible. The daily chart of the SPX below illustrates key support levels for the index:

In addition to the weak price action into the close on Friday, several other clues are pointing to potentially lower prices in the near future. Members of my service know that I focus daily on several underlying ETF’s which help me get a grasp of the overall market conditions. On Friday, the financials (XLF), the Dow Jones Transportation Index (IYT), and the Russell 2000 Index (IWM) all showed relative weakness against the S&P 500. The chart below illustrates the relative performance on Friday:

The financials and the Dow Jones Transportation Index are excellent sectors to monitor when trying to determine the future price action of the S&P 500. Most of the trading session on Friday the financials (XLF) were exhibiting relative weakness versus the S&P 500 Index. Later in the session, the Dow Jones Transportation Index (IYT) started to roll over as well and once both ETF’s were under pressure it was not long before the S&P 500 Index flipped the switch to the downside.

The financials (XLF), the Russell 2000 (IWM), and the Dow Jones Transports (IYT) all put in large reversal candlesticks on the daily chart by the close of business on Friday. This is an ominous signal that lower prices for domestic equities may be forthcoming. The fact that key sectors are showing signs of weakness is a negative omen for the S&P 500 and the early part of next week. However, there is a bright side to this scenario.

If support levels can hold up prices next week and we see a higher low on the daily chart form, the bottoming process could be underway which could lead to a strong rally into year end. Obviously a probe to new lows is possible, but I believe that we are in the beginning stages of forming a bottom and a base for a rally to take shape.

If support levels hold up prices, a bottoming formation will likely get carved out on the daily chart of the SPX. The chart below illustrates two potential outcomes that could cause prices to rally sharply. In one case, a higher low is formed and we see prices take off to the upside. The other scenario involves an intraday selloff down to the 1,040 – 1,050 price level that gets snapped back up and a huge reversal candlestick would be formed. These scenarios are common during bottoming processes. The daily chart of the S&P 500 Index is shown below with the two scenarios highlighted:

The other scenarios would involve prices blowing through support and possibly knifing down to test the S&P 500 1,000 – 1,008 support area. While I find this scenario to be less likely at this time, anything could happen in this trading environment.

The key in the short run is the utilization of defined risk through the use of stop orders. In addition, a trading plan with stop orders and profit taking levels planned ahead will help remove emotion in a volatile tape. The price action is wild, but from my perch the likely scenarios all involve some short term selling pressure. If my analysis is right, this could be a huge turning point for price action the rest of the year.

The next few weeks are going to provide us with clues about the rest of 2011. 

The question traders should really be asking is whether support will hold, or will we break below the recent lows? Right now, the upside looks limited, but in this trading environment the best thought out plans can turn out to be useless if price action does not cooperate. Be nimble and define your risk, as volatility is not likely to subside anytime soon.

Subscribers of OTS have pocketed more than 150% return in the past two months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at Options Trading Signals.com and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

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