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

Chart Courtesy of the American Association of Individual Investors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Get these weekly reports and trade ideas free here: www.Optionnacci.com

JW Jones

Courtesy of Joshua Brown, The Reformed Broker

Mr. Madison, what you have just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.

- Principal, Billy Madison

Wall Street Chief Strategists are smarter than you are.  They went to fancier schools and have more access to research, information and data.  They’re also probably better looking than you, too.  But don’t feel bad – as a whole, they’re of little more practical utility than that octopus in Spain who picks soccer match winners.  I’m not sure if the chief strategist position is classified under “marketing” in the human resources departments of the large banks but it wouldn’t be very incongruous with reality if it were.

Were they wrong about 2011?  Sure they were.  Too bullish?  What what’d you expect – their job is to suck up investable assets!

Wall Street’s “Chief Market Strategists” – were wrong on their forecasts for 2011, but not alarmingly so.  I pulled the below hilarious quotes from a December 2010 issue of Barron’s below (my responses in red)…

Collectively, the 10 strategists and investment managers surveyed by Barron’s see the S&P 500 finishing next year near 1373, roughly 10% higher than Friday’s close at 1244. (Wrong!)

A majority sees 2011 as the year when a sustainable economic recovery takes root, winning over skeptics and persuading both companies and consumers to relax their stranglehold on squirreled-away cash.  (Wrong!)

Against this backdrop, nine of the 10 strategists we polled are penciling in stock-market gains ranging from 7% to 17% for next year.  (Almost!)

Nearly all the strategists expect stocks to outperform bonds, especially Treasuries.  (Oy vey!)

“We’ve just started a secular bear market in bonds” – Henry McVey, Morgan Stanley.  (Yeah, maybe a year too early so far.  Wrong!)

Only Doug Cliggott of Credit Suisse was appropriately restrained in his outlook for 2011 a year ago.  The game of forecasting a year-end S&P target 12 months ahead of time is obviously ridiculous, I certainly don’t think it’s something I could do myself, but we’ll give Cliggott credit for essentially nailing the flat close.

As for some of the others, I award you no points…

Source:

Outlook 2011 (Barron’s)

Read Also:

Barry’s piece at the Washington Post on The Folly of Forecasting is great too, read it here.

Tim Iacono

It still pales in comparison to what was done a few years ago, but, at its current pace, the Federal Reserve’s generous central bank liquidity swaps now aiding European banks will soon rival that of the 2008-2009 financial crisis as shown below, another $37 billion being added last week to bring the total up to just shy of $100 billion.

For those of you new to this story, see this WSJ commentary by Gerald P. O’Driscoll the other day and his appearance on CNBC on the same subject.

HAPPY NEW YEAR!
I hope this week’s price action didn’t catch you off guard? It was profitable but you really had to be on the ball to pocket the gains…

Anyways, I just wanted to wish you a New Year and thank you for being part of my success in 2011 before it’s too late.

Have you heard of Chris Vermeulen? He is a trader that I have followed for a couple years and he can trade indexes, commodities and the dollar with amazing accuracy every week. His daily pre-market technical analysis videos are interesting, timely and educational.

Chris is doing his onetime new year’s special offer giving his premium trading & education service away at half price until Dec 31st at midnight. At that price you just cannot go wrong.

Read Chris’ Trade Ideas for 2012 BY CLICKING HERE

Have a happy and safe New Year’s!

Jeff “Stockmarketnewz”

The last week of the year volume tends to be light due to the fact that big money traders are busy enjoying the holidays and waiting for their yearend bonuses.

I was not planning on doing much this week because of the low volume but after reviewing some charts and risk levels on my top 5 trading vehicles I could not help but share my findings with everyone last Friday.

You can see what I talked about on Friday here: http://www.thegoldandoilguy.com/articles/holiday-short-squeeze-oil-trade-idea/

This Wednesday turned out to be an exciting session with all 5 of my trade ideas moving in our favour right on queue.

Charts of the 5 investments moving in the directions we anticipated …
- Dollar bounced off support

- Stocks are topping and selling off today

- Oil looks to have topped and is selling off

- Gold and Silver are moving lower

- VIX (Volatility Index) just bounced

Many of my readers took full advantage of my recent analysis and trade ideas which is great to hear.  All the different ways individuals used to make money from Friday’s analysis is mind blowing…

The most common trade is the oil one with most traders adding more to Tuesday when the price reached its key resistance level on the chart. Also many traders took partial profits Wednesday locking in 3% or more in two days using the SCO ETF.

It’s amazing how many people like to trade the vix using ETFs. The best trade from followers thus far was an 8% gain in TVIX which was bought 4 days ago anticipating the pop in volatility which I had been talking about last week. Keep in mind ETFs for trading the vix are not very good in general. I stay away from them, but TVIX is the best I found so far.

Currently stocks are oversold falling sharply from the pre-market highs. Meaning stocks have fallen too far too fast and a bounce is likely to take place Thursday.

Also we saw some panic selling hit the market today with 14 sellers to 1 buyer. That level tells me that the market needs some time to recover and build up strength for another selloff later this week or next. We will see this pause unfold when the SP500 drifts higher for a session or two with light buying volume. This will confirm sellers are in control and give us another short setup.

In my Wednesday morning video I explained how/where to set stops when using leveraged ETFs because I know 90% of traders using them do not have a clue as to how to do this and they get shaken out of their trades just before a top or bottom. So if you want to learn more about it watch this morning’s video please: http://www.youtube.com/watch?v=lDagN5Vpvys

I hope this helps you understand things more… Over time you will pickup on a lot of new trading tips, tools and techniques with this free newsletter so just give it time and keep trades small until you are comfortable with my analysis.

Get My FREE Weekly Newsletter Here: http://www.GoldAndOilGuy.com/

Chris Vermeulen

Typically, the week before Christmas, stocks and commodities drift higher due to the lack of participants.  Light volume favours higher prices, which is why stocks want to rise going into the holiday season.

The big money players, like hedge fund managers, are finished for the year.  They’re sitting on the sidelines enjoying the holiday season while waiting for their year-end bonus checks.

Let’s take a quick look at how the week finished…

Friday was an interesting session as stocks and oil reached some key resistance levels.  Below are my thoughts, charts, and a possible trade idea for next week.

Gold & Silver Thoughts:

Looking at the long term charts of gold and silver, I feel they could head much lower in the first quarter of 2012.  The inverse relationship between the dollar index and gold makes me think this is a high probability scenario.

The weekly dollar index chart remains strong at this point and could start another very strong rally any day. Once the dollar starts heading higher, expect precious metals to move down along with equities.

SP500, Dollar and Volatility Index

Below are three charts stacked on top of each other.  They are marked with my analysis and thoughts for next week.  Personally, I don’t feel shorting stocks is a safe play.  The last week of the year, we can see the volatility index (VIX), and the dollar, rise without putting pressure on stocks.  So be aware of that.

TRADE IDEA – View Chart:

Crude oil looks like a great low risk opportunity (a real “Christmas” present!) from Mr. Market. SCO would be the ETF for US based traders.  HOD, which is listed on the TSX, is good for Canadians.  I favour this setup because I don’t feel that oil will be as affected from the holiday bulge as will American equities.

Pre-Holiday Trading Conclusion:

I was planning on avoiding the market Friday, but the charts were calling my name…  The session ended with what looked to be a short squeeze. The remaining short positions didn’t get their expected drop in price.  Consequently, when the traders all started to cover their shorts (buy) just before the close, it caused a strong surge higher.

I do not recommend shorting stocks next week because of the light volume.  However, oil looks good to me.

- HOLIDAY SPECIAL -
New Subscribers can GET 50% OFF by Joining Today
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Just thought I would share my end of the week thoughts, and wish you a Merry Christmas!

Cheers!

Chris Vermeulen

The past few months have been tough for those holding precious metals stocks, PM futures contracts or physical bullion. With silver is trading down 41%, precious metals stocks down 30% and gold 15%. It has people scratching their head.

The question everyone keeps asking is when can I buy gold and silver?

Unfortunately that is not a simple answer. With what is unfolding across the pond and the bullish outlook for the US Dollar index the next move is a coin toss. That being said, I do feel a large move brewing in the market place so I am preparing for fireworks in the first quarter of 2012.

If you step back and look at the weekly trend charts of the dollar index and the SP500 index you will see the strength in the dollar along with a possible stop in equities forming. What these charts are telling is that in the next 3 months we should know if stocks and commodities are going to start another multi month rally or roll over and start a bear market selloff.

With the holiday season nearing, hedge fund managers sitting on the sidelines just waiting for their yearend performance bonuses, I cannot see any large selloff start until January. Selloffs in the market require strong volume and the second half of December is not a time of heavy trading volume.

This leaves us with a light volume holiday season, major issues overseas and no big money players willing to cause waves.

So let’s take a quick look at the charts as to where the line in the sand it for the dollar index, gold and silver.

Get your *UPDATED* FREE GOLD Bullion Weekly Report sponsored by NYSE

Dollar Index Daily Chart

This week we have seen a strong shift of money out of risk off assets (Bonds) and into risk off (Stocks). This shift is happening before the dollar has broken down indicating the dollar may be topping and could be an early warning of higher stocks prices going into year end. Also note that light volume market conditions also favour higher prices.

Gold Price Daily Chart

Gold could still head lower but at this point it is holding a key support level. If we see the dollar breakdown below its green support trendline then I expect gold to have a firm bounce to the $1675 – $1700.

Silver Price Daily Chart

Silver continues to hold a key support level. If the dollar breaks down the silver should bounce to the $31.50 – $32 area. But if the dollar continues to rally then silver and gold may drop sharply.

Mid-Week Trend Conclusion:

In short, I think the best thing to do is enjoy the holiday season with family and friends. Trading right now is not that great and with the market giving mixed signals. I am keeping my eyes on the market in case it flashes a low risk setup and I will keep you informed if we get one.

Be aware that Monday is a holiday and once January arrives the market could go crazy again. If you want all my swing trades that I personally do be sure to join my alert servicewww.TheGoldAndOilGuy.com

Happy Holidays to you and your loved ones!

Cheers,
Chris Vermeulen

It’s that time of year again and I’m not talking about the holiday season… What I am talking about is another major market correction which has been starting to unfold over the past couple weeks.

I have a much different outlook on the markets than everyone else and likely you as well. However, before you stop reading what I have to say hear me out. My outlook and opinion is based strictly on price, volume, inter-market analysis, and crowd behavior and you should put some thought as to what I am saying into your current positions.

Two weeks ago I sent my big picture outlook to my subscribers, followers, and financial websites warning of a major pullback. You can take a quick look at what the charts looked like 2 weeks ago:http://www.thegoldandoilguy.com/articles/the-currency-war-big-picture-analysis-for-gold-silver-socks/

Since my warning we have seen the financial markets fall:
SP500  down 2.6%
Crude Oil down 4.4%
Gold down 9.6%
and Silver down 12.2%

If you applied any leverage to these then you could double or triple these returns through the use of leveraged exchange traded funds. The amount of followers cashing in on these pullbacks has been very exciting to hear. The exciting part about trading is the fact that moves like this happen all the time so if you missed this one, don’t worry because there is another opportunity just around the corner.

While my negative view on stocks and precious metals will rub the gold and silver bugs the wrong way, I just want to point out what is unfolding so everyone sees both sides of the trade. I also would like to mention that this analysis can, and likely will change on a weekly basis as the financial markets and global economy evolves over time. The point I am trying to get across is that I am not a “Gloom and Doom” kind of guy and I don’t always favor the down side. Rather, I am a technical trader simply providing my analysis and odds for what to expect next.

Let’s take a look at some charts and dig right in…

Dollar Index Daily Chart:

SP500 Futures Index Daily Chart:

Silver Futures Daily Chart:

Gold Futures Daily Chart:

Crude Oil Futures Daily Chart:

Mid-Week Market Madness Trend Analysis Conclusion:

In short, stocks and commodities are under pressure from the rising dollar. We have already seen a sizable pullback but there may be more to come in the next few trading sessions.

Overall, the charts are starting to look very negative which the majority of traders/investors around the world are starting to notice. With any luck they will fuel the market with more selling pressure pushing positions that my subscribers and I are holding deeper into the money.

Now that the masses are starting to get nervous and are beginning to sell out of their positions, I am on high alert for a panic washout selling day. This occurs when everyone around the world panics at the same time and bails out of their long positions. Prices drop sharply, volume shoots through the roof, and my custom indicators for spotting extreme sentiment levels sends me an alert to start covering my shorts and tightening our stops.

Hold on tight as this could be a crazy few trading sessions….

If you want to get these free weekly reports be sure to join my free newsletter:www.GoldAndOilGuy.com

Chris Vermeulen

By Elliott Wave International

Did European Union leaders make the sovereign debt crisis “go away” last week?

Not even close. What they did agree on is tougher budget rules:

“…17 countries of the euro zone…agreed to run only minimal budget deficits in the future and allowed the European Court of Justice the right to strike down national laws that don’t enforce such discipline properly…”
Wall Street Journal, (12/9)

Will the EU agreement prove bullish or bearish for world stock markets, including the Dow Industrials?

Let’s put it this way: The evidence suggests that government intervention in the economy does not alter the dominant trend of financial markets.

For example: Look at the DJIA chart and try to identify when the U.S. government bailed out Fannie Mae, Freddie Mac, and other financial institutions.

“[The chart below] shows that in fact these actions took place in the early portion of the biggest stock market decline in 76 years. These actions did not push stock prices back up. The market finally bottomed months later, at a time when nothing along these lines happened.

“It is no good to claim that these actions had results eventually. By that reasoning, any future turn in the stock market would prove the contention.”
Elliott Wave Theorist, March 2010

If anything, the face value of this chart argues that economic government intervention makes stocks go down.
There is simply no “cause and effect” relationship between government actions and stock market trends.

The stock market’s price pattern is governed by the Wave Principle:

“Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life.

“….The market’s progression unfolds in waves. Waves are patterns of directional movement.”
Elliott Wave Principle, (p. 21)

If you found this insight into stock market behavior eye-opening, read the2011 Independent Investor eBook, an educational, powerful and FREE 50-page eBook to help you think independently about what really moves the markets.

Thousands of investors have downloaded the Independent Investor eBook, and it has changed the way they think forever. Now YOU can get this important eBook, packed with insightful analysis from 2010 and 2011 Elliott Wave Theorist and Elliott Wave Financial Forecast, free.
Download your free eBook now.