So far 2011 has been an interesting to say the least. Stocks and commodities have been jumping around with high volatility generating mixed trading signals. This choppy price action typically indicates trends are in their late stages. The late stages of a trend is very difficult to trade because volatility rises meaning larger day to day price swings, and at any time the price could either drop like a rock or go parabolic surging higher in value. Generally the largest moves take place during the final 10% of trend, but with a sharp rise in price keep in mind the day to day gyrations are much larger than normal, hence the false buy and sell signals back to back on some investment vehicles.

Taking a look at the charts it’s clear that we are on the edge of some sizable moves in both stocks and commodities. It’s just a matter of time before a correction is confirmed or this current pullback in stocks is just a dip (buying opportunity). I am in favor of the longer term trend at work here (bull market) but it only takes a 1 or 2 bid down days and that could change.

SPY (SP500 Price Action) – 60 Minute Chart

This chart shows intraday price action with my market internals. It is signaling a short term bottom within the overall uptrend on the equities market. The big question is if this is a just an opportunity to buy into this Fed induced bull market or the start of a larger correction?

Currently I am bullish but the next couple trading sessions could confirm my bullish view or a correction could be unfolding. Until then, we must remain cautious.

Price Of Gold – Weekly Chart

Gold has staged a strong recovery in the past four weeks. But it has yet to break to a new high. I do feel as though it will head higher because of the way silver has been performing (new highs). But it is very possible we get a pause for a week or two before continuing higher.

Because of the international concerns in the Middle East both gold and silver should hold up well even if the US dollar bounces off support. But, if the US dollar breaks down below its key support level we could see stocks and commodities go parabolic and surge higher in the coming months. It’s going to be interesting year to say least…

Dollar Weekly Chart

This long term view of the dollar shows a MAJOR level which if penetrated will cause some very large movements across the board (stocks, commodities and currencies).

In short, a breakdown will most likely cause a spike in stocks and commodities across the board which could last up to 12 months in length. On the flip side a bounce from this support zone will trigger a pullback in both stocks and commodities. This weekly chart is something we must keep our eye on each Friday as the weekly candle closes on the chart.

Weekend Trend Report:

In short, 2011 has been interesting but trading wise it’s has yet to provide any real low risk trade setups which I am willing to put much money on. There are times when trading is great and times when it’s not. It all comes down to managing money/risk by trading small during choppy times (late stages of trends), and times when we add to positions as they mature building a sizable portfolio of investments which I think will start to unfold over the next few months.

I continue to analyze the market probing it for small positions as this market flashes short term buy and sell signals.

Last week we say a lot of emotional trading and that typically indicates large daily price swings should continue for some time still so keep trades small and manage you positions.

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Chris Vermeulen

“You can’t lose what you don’t put in the middle.” Mike McDermott, Rounders

While this week was shortened due to the President’s Day holiday, it has been quite a ride for traders and investors. The 24 hour news cycle certainly intensifies current market conditions as any news focusing on oil or the Middle East protests moves markets. Thursday the International Energy Agency came out and indicated that the expected drawdown in crude oil supplies coming from Libya was being exaggerated. Immediately upon the release of this information light sweet crude oil got hammered and stocks rallied from day lows.

By now most market prognosticators and the punditry will be out declaring that oil prices are going to continue lower and equities are on sale and primed for a snapback rally. I’m not sure that it is that easy. Mr. Market makes a habit of confusing investors with mixed signals. One thing is certainly clear from the recent price action, rising oil prices are not positive for equities here in the United States. What is also clear when looking at the Massachusetts Institute of Technology’s (MIT) version of inflation data (http://bpp.mit.edu) for the United States, it becomes rather obvious that inflation continues to ramp higher in the short term and also on monthly and annual time frames.

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If inflation continues to work higher, it would be expected that light sweet crude oil futures prices would work higher as well. The dollar index futures have been selling off while oil and precious metals have rallied until the IEA news came out on Thursday. What should be noted from the recent uncertainty in the marketplace is that the U.S. Dollar Index futures did not rally. This is the “dog that didn’t bark.” During recent periods of market uncertainty such as the European sovereign debt crisis, the U.S. Dollar was considered a safe haven. This most recent market uncertainty caused by political instability in the Middle East has seen the U.S. Dollar Index futures sell off while gold and silver rallied as investors looked to the shiny metals for safety.

So what do all of the mixed signals relating to financial markets really mean? It’s simple, the U.S. economy is not on solid ground, rising oil prices will damage the economy, the world does not necessarily view the U.S. Dollar as a safe haven, and inflation is rising. With all of that being said, what if this is just the beginning of a major rally in energy and the metals? What if prices are going to pull back to key breakout levels, test them successfully, and probe to new highs? As can be seen from the chart above, the U.S. Dollar Index is poised to test recent lows. Should price test the lows and breakdown, oil and the metals could rally in lockstep in a parabolic move.

The daily chart of light sweet crude oil futures illustrates the breakout level that oil prices surged from.

I am expecting a test of that level at some point in the near future. If that level holds, oil prices could be poised to take off to the upside. If prices were to move considerably higher it could place downward pressure on equities and would correspond with the U.S. Dollar cycle lows which are expected by most sophisticated analysts sometime this spring. The intermediate to longer term fundamentals in the oil space are strong and technical analysis could also affirm higher prices very soon. If we see the key breakout level hold and a new rally takes shape on the heels of a lower dollar, the equity market could be vulnerable.

The next few days/weeks are going to prove critical as a lower dollar could change everything. A quick look at the silver futures daily chart illustrates the key breakout level which will likely offer a solid risk / reward type of setup.

As can be seen, silver has had a huge run higher and has broken out to new all-time highs. Gold has moved higher but has yet to breakout and could play catch up while silver consolidates. Longer term I remain bullish on precious metals and oil, but volatility is likely to increase in both asset classes going forward, particularly if inflation continues to increase. Patience and discipline will be critical in order to enter positions where the risk / reward validates an entry.

As for the equity market, it remains to be seen what we will see next week. I am not convinced that the issues in the Middle East are over and that oil is going to come crashing back down to previous price levels. Oil has broken out and if the breakout levels hold I would expect a continuation move higher. If we see price action in oil transpire in that fashion, equities will be for sale and prices could plummet tremendously.

I will be watching to see how much of the recent move lower is retraced. If we see a 50% retracement and prices rollover the S&P 500 will likely be magnetized to the 1275-1285 price range. If that price level is tested and fails, we are likely going to see a 10% correction and potentially more. The daily charts of SPX listed below illustrate the key Fibonacci retracement levels as well as the key longer term price levels that could be tested if prices rollover.


While lower prices are possible, if we see a retracement of the recent move which exceeds the 50% retracement level in short order prices will likely test recent highs and begin working higher yet again. The price action on Friday and next week is going to be critical to evaluate as many traders and market participants are going to be watching the price action closely looking for any clues that might help indicate directionality.

For right now, I am going to be patient and sit in cash and wait for high probability low risk setups to emerge. As I have said many times, sitting on the sidelines can be the best trade of all!

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JW Jones

t’s hard to believe that less than three years ago, silver was $8.80 an ounce. Since then it has nearly quadrupled in value (up 385%) and more than doubled in the last 12 months alone.

That’s great for those who already own the metal – but is it too late for the rest of us to get in?

To answer that question, BIG GOLD Editor Jeff Clark sat down with our friends of The Daily Crux. Read what he had to say about the silver rally, and why you should view any correction as good news.

Crux: Jeff, silver has had an incredible run over the past year or so… Where do you think it’s headed next?

Jeff Clark: Well, that’s probably the most common question we get these days. Silver has definitely been very exciting. The price has basically doubled in a year, and many of the stocks have done much better than that… So you could be forgiven for asking how long that can continue.

I think the bullish case for silver going forward comes down to three main factors.

The first is industrial demand. Everyone knows industrial use is much greater for silver than gold, and that does make it more susceptible to an economic slowdown. But what’s interesting is these industrial uses are growing rapidly.

For example, all of the following uses for silver are increasing: medical, electronics, food processing, water treatment, paper, building materials, wood preservation, textiles, consumer products… the list goes on and on. Every bandage-maker, for example, now offers a silver-based product. You can buy silver-laced toothbrushes, hairbrushes, combs, and make-up applicators. In England, you can buy silver-based soap.

The takeaway is that all these uses are on the rise, so even in an economic slowdown, there is a higher level of base demand. The demand for any individual application could decline, but the total number of applications for silver is increasing. Over time, I think we’ll see increasing levels of demand.

The second major factor is investment demand. Investment demand is soaring and can’t be ignored. The U.S. Mint sold more one-ounce Silver Eagles in January than in any other month since they began creating them in 1986. China’s net imports of silver quadrupled in 2010. Against all this you have the fact that most Americans don’t own any gold or especially silver. So even though there’s already incredible investment demand, the potential for it to increase is still tremendous.

The third factor is supply. Ask yourself what’s wrong with this picture: Total global demand for silver is about 890 million ounces a year. Worldwide mine production is about 720 million ounces a year. Scrap currently makes up the difference, but I think the crucial point to recognize is that producers can’t dig up enough silver to meet current demand.

So what happens if industrial uses continue to rise? What happens if investment demand continues growing? What happens if we do get some type of currency collapse? What happens if Doug Casey is right and we get a true mania in gold and silver?

We had bottleneck issues with physical supply in 2008, where mints across the world couldn’t keep up with orders. A lot of it was due to them being unprepared for the rush, and they’ve since improved some of their operations. That’s great.

But even with all the improvements, even after adding equipment, even after adding staff, even after adding work shifts… they’re still having issues. Over the past three or four months, we’ve been hearing about mints having delays, temporarily running out of stock, etc. So it’s still a problem.

And if all the factors I just mentioned come into play, then I think you could say “Bottleneck, meet desperation.” Regardless of how well prepared a manufacturer might be, demand at some point could legitimately overwhelm the system, and I think that’s a very real possibility. Anything could happen. But the scary thing is, we may not have enough supply to meet demand if we get a mania.

So based on these factors, my view is that silver can continue rising for quite some time. I don’t think it stops until SLV, the silver ETF, is a favorite of the fund managers… until Silver Wheaton is a market darling of the masses… until Pan American Silver is Wall Street’s top pick for the year… That’s when I’ll be looking for the end of this silver bull market.

Crux: Speaking of a mania, just how high do you think silver could go?

Clark: Many people don’t realize this, but silver rose 3,646% in the 1970s, from its November ’71 low to its January 1980 high. If you were to apply the same percentage rise to our current bull market, silver would climb another 500% from here, and the price would hit $160 an ounce.

Those are just numbers, but it shows that we have an established precedent for the price to go much higher.

It’s the fundamentals, of course, that will determine how high the price ultimately goes. Show me a healthy dollar, show me no threat of inflation, show me a responsible government that stops printing money… Show me a repentant Iran and North Korea… Show me that the sovereign debt issues in Europe are resolved… Show me positive real interest rates… Show me that unemployment is plummeting, that bank closures have stopped, that real estate is recovering…

Show me all that and we’ll talk about the gold and silver run being over… But until those things start changing in a big way, I’m buying.

Crux: Silver bears often suggest that a large part of the rally in the last bull market was due to the Hunt brothers, who were accused of trying to corner the market. What do you say to that? How much do you think they attributed to the price rise in the ’70s?

Clark: Well, I’m skeptical that the reason silver went as high as it did was primarily due to the Hunt brothers’ activity in the market. It’s interesting to note that they bought silver primarily because they mistrusted the government, and because they thought silver was going to be confiscated. Remember… gold ownership was illegal when they first started buying silver in the early ’70s.

Yes, they bought a lot of silver… But if you look at the correlation, you’ll notice the price didn’t necessarily move up when they bought. In fact, when the rumors that they were trying to “corner” the silver market really started going mainstream, which was in the spring of 1974, the silver price dropped solidly for the next two years. One would think that the price would’ve risen, not fallen, if silver was being “cornered.”

Secondly, if you look at price charts, silver moved in lockstep with gold back then. They rose and fell pretty much together. They both peaked on the very same day, January 21, 1980. So unless the gold market was equally spooked by what the Hunt brothers were doing with silver, it seems a stretch to assume they were the primary cause of the rise.

Last, as my editor pointed out, you have to consider that it was the mainstream media that largely promoted this idea the Hunts were “cornering” the market. With that in mind, one has to be suspicious that was, in fact, the case.

To be clear, I’m sure they had some effect, but to suggest they were the main impetus behind silver’s tremendous rise doesn’t seem wholly accurate. And look at the price today… It’s outperforming gold in our current bull market, just as it did in the ’70s, and there’s no Nelson Bunker Hunt around.

Besides… who’s to say that we won’t see other “Hunts” come along today and try to buy up large quantities of the metal? I wouldn’t rule it out.

So again, I think it’s more important to look at silver’s fundamentals for any kind of price projection than a one-off event. And those fundamentals are very bullish.

Crux: What are the bearish arguments for silver?

Clark: Well, I touched on it earlier… but if the economy crashes, silver is likely to suffer more than gold due to its large industrial use component. Another factor is that silver is not bought by central banks, so one source of demand for gold is not present with silver. But I think the bigger trend of a currency crisis is going to dwarf those concerns… And I think that silver will do very well in that environment.

Silver is more volatile than gold, but that just means you get better opportunities to buy it cheaper, and probably make more money on it if you sell near the top.

So yes, there are bearish arguments for silver, and one has to be prudent in buying it – you don’t want it to be the only asset you own, for example. But it would be equally a mistake to not own a meaningful amount.

Crux: So… is today a good time to buy?

Clark: Well, how many ounces do you own? And what percentage of your assets do those ounces represent?

There’s your answer. If you have minimal or no exposure, I suggest buying. Don’t rush out and spend all your available cash, because there will always be corrections, but the less you own, the more you want to make a plan to add a meaningful amount to your portfolio.

Remember… silver is a currency replacement just like gold. It’s money… and therefore you want to make sure you own enough for both protection and profit. If you don’t own enough, I suggest going into “accumulation” mode… buying some on a regular basis, like dollar-cost averaging.

Our recommendation in Casey’s BIG GOLD– which is a conservative letter, by the way – is that approximately one-third of your investable assets be devoted to the precious metals market. That includes gold, silver, and precious metal stocks. That may sound extreme to some, but we think the risk to currencies right now is extreme. Therefore, being overweight precious metals is justified. Obviously, each individual investor has to be comfortable with what they do.

Crux: Do you a recommend a certain percentage of ounces in silver versus gold?

Clark: We generally recommend you hold more gold than silver. We suggest approximately 70%-80% in gold versus 20%-30% in silver. Depending on your situation and risk tolerance, you may wish to have more or less in silver, but again the point is to have meaningful exposure.

Crux: For individuals who are new to buying precious metals, what are your preferred ways to purchase silver?

Clark: The options are becoming more and more mainstream, so it’s getting easier to buy both metals. The alternatives are growing, and they’re also improving. You basically have two choices: You can either buy and store it yourself, or you can buy and have someone else store it for you. Ideally, you want to do both… you want to diversify.

There are risks to storing metals yourself, such as theft, loss, or fire. You can put it in a safe deposit box, but then it’s in the financial system and it’s subject to banking hours and could even be susceptible to confiscation, though I’m skeptical that will actually happen. But I do think everyone should have some physical silver handy, at least a couple months worth of expenses.

So the short answer is to diversify what you buy and how you store it. For physical silver, I would stick to buying the popular one-ounce bullion coins – Eagles, Maple Leafs, etc.

You can also buy silver funds and ETFs in your brokerage account or online, and there are definitely some advantages to doing that. They’re easy to buy, sell, and trade. There’s no need to mess with the storage yourself, and it’s especially beneficial for those who have larger holdings. You can put $50,000 worth of gold in the palm of your hand – but $50,000 worth of silver would require a small suitcase, so space is an issue. A lot of online options now have delivery alternatives available, and some even have free storage. Options here include the various ETFs, closed-end funds, online options like GoldMoney or BullionVault, and certificate programs like the Perth Mint Certificate.

So find a couple options you’re comfortable with, diversify your holdings, and just continue to buy on the dips, with the intention to hold until the bull market is over.

Crux: How about silver stocks. Can you give us a favorite?

Clark: Well, it’s pretty clear the go-to stock in the silver industry – in my opinion at least – is Silver Wheaton. It’s definitely been a sweetheart the past two years. It’s given us everything we could want in a silver stock.

The stock suffered badly in the meltdown of ’08, and things did get a little dicey at the time, but I remember thinking that unless the world comes to an end and the silver price never recovers, this company is going to survive and bounce back – in part because of management and in part because of the business model. They have no exposure to mining costs, for example.

Shares back then were around $3… If you bought at the time, they’re now a ten-bagger. So it’s been an incredible run.

The question, of course, is going forward: Since the stock is already at $35, can it be another ten-bagger from here?

Well, the company expects to increase “production” by 70% by 2013. And their costs will basically stay stagnant. Meanwhile, imagine where the silver price could be in the next two to three years, and you can see this company can make enormous amounts of cash. Some of that is probably priced into the stock already, but you can’t deny where this company is headed over the next few years.

In the bigger picture, you have to look at our currency issues – they’re very real. They’re deep. They’re intractable. So when I look at what is likely to happen to the dollar and thus what level of inflation is probable, I think silver will go substantially higher, which means Silver Wheaton is going to go much, much higher. Only if you believe deflation ultimately wins the war and that inflation doesn’t occur do you think silver or Silver Wheaton won’t do well.

Could it have a big correction? Well, it recently dropped as much as 28%, but sure… it could easily fall more than that in a major correction. But if that happened, I’d consider it a big buying opportunity.

In my opinion, the bigger the correction, the bigger the buying opportunity, because I really believe the future is very bright for that company.

Crux: Sounds good. Any parting thoughts?

Clark: If you’re bullish on gold, I think you need to be bullish on silver, unless you think inflation will never come to pass. Regardless of the short-term fluctuations in the market, it’s only a matter of time before the currency issues punch us in the gut and inflation really takes off.

Second, remember that silver will be volatile, but focus on the fundamentals and use selloffs as buying opportunities. Until the fundamentals driving the bull market change, buy.

Bottom line, the bull market is far from over. I think it’s going to go much longer and much stronger… So buying on dips is the best advice I could give anyone.

Crux: Thanks for talking with us, Jeff.

Clark: You’re welcome. Thanks for having me.

Editor’s Note: Readers of Casey’s BIG GOLD can access Jeff’s full list of the world’s best gold and silver stocks, along with Casey Research’s preferred and trusted precious metals dealers. Get your three-month trial with a full money-back guarantee today.

Here’s the introduction to the latest BullBear Weekend Report:

Introduction

US equity markets have continued to make higher weekly closing highs, climbing relentlessly in defiance of calls for a pullback or a resumption of the bear market. Treasuries broke down from a month long consolidation and resumed their downtrend as capital continued to exit the perceived safety of fixed income for risk assets. Gold appears to have completed a correction of its recent decline and may be set to join Treasuries in a downtrend as investors exit safe haven plays. The Japanese Yen may have finally made a significant, long term top (and a bottom for Dollar.Yen) and if it breaks out soon it may signify a resumption of the carry trade, which would mean that another major liquidity stream is coming online to power the stock market rally even higher. The US Dollar Index may have found a bottom and there is some potential that it may climb together with US stocks as investment demand for big cap, developed nation companies appears to be the emerging story. There are some technical considerations which suggest a minor top may be due sometime soon. The worst case of the likely scenarios is a correction akin to the August 2010 decline. The likelihood of a top to this run resulting in a resumption of the bear market is low, but as always we must keep our minds open to the possibilities and keep one eye on the mouth of the bear cave.

Certain world markets–largely in Asia–have been in a downtrend since November and others, such as Korea’s KOSPI, have experienced strong selling very recently. This has placed many traders and analysts on alert for a big decline. Indeed it is worth keeping a sharp lookout to determine whether these divergent markets are leading a topping process. A dramatic divergence between US and other developed market equities (Europe and Japan) and much of the Emerging Markets and BRIC markets has developed since the November bottom. At this moment I actually regard this as a bullish development.

First, from a sentiment perspective, the outflow from these select emerging markets has been developing since November and only now has it garnered recognition in the investment and analysis community. That in itself may be a sign that a bottom is near. Also, that investors are apparently taking profits from their emerging markets trades and moving capital into developed markets is a sign that investor confidence has returned. The considerable differentiation among world markets may be a sign that the phenomenon of a universally rising liquidity pool driving all prices higher may be in the process of being replaced by more long term allocations of capital based on real investment decision making. While that may not reflect the common wisdom at this time, markets are generally forward looking and likely reflect a range of factors that are as yet generally unknown.

Second, there are some technical signs that the markets in question have completed a three wave corrective pattern and are now ready to bottom and rally. Friday saw some strong buying and at the time of this writing Asian markets are generally up 1.5-2.5% with India’s NIFTY leading the way. Investors and traders may want to give the emerging markets and BRIC segments some consideration as a long entry opportunity at this time.

In spite of the ongoing rally, the general sentiment backdrop continues to be significantly pessimistic. A review of any popular investment analysis blog site shows a continued prevalence of negatively biased themes both in the editorial content and in the reader commentary. Even now as I write this CNBC Asia is featuring an analyst who is calling for a major currency and sovereign debt crisis, calling it “Financial Crisis II”. These kinds of views are still common and even prevalent. My point is not that there couldn’t be such a crisis, but rather that the broad public and even many informed investors continue to fear the markets and disbelieve the rally. The sentiment environment conducive to a long term top does not yet appear to exist.

I’m keeping an eye on recent moves higher in LIBOR, LIBOR-OIS spread (LOIS) and Treasury-EuroDollar (TED) spreads. If there is to be a renewed credit crisis it should show up in interbank credit spreads. Barring a major, sudden disruption of credit and liquidity, I generally expect the uptrend in US stocks to continue, with the potential for lesser degree corrections from time to time. Longer term projections indicate a top on the order of the April 2010 peak coming in the vicinity of the 2007 highs or near a 100% retracement of the prior bear market.

The greater threat to our trade at this time is not the risk of a major (April 2010 level) correction but that we exit our position too soon. The best thesis continues to be that we are in a Major Wave 3 advance within the context of a bull market.

READ THE FULL 8 PAGE REPORT, ANALYSIS AND COMMENTARY HERE:

http://www.thebullbear.com/group/bullbeartradingservice/forum/topics/021311-bullbear-market-report

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Tim Iacono

In this item at his Forbes blog, Brian Domitrovic looks at the relationship between William Jennings Bryan’s famous “cross of gold” speech and the creation and practices of the Federal Reserve in a romp through monetary policy history from about a hundred years ago.

In 1896, Bryan opposed the gold standard because it had coincided with the 1-2% per year deflation that the country had been experiencing since the 1870s. Every point of deflation added a point of interest on debts, and farmers were prone to have lots of debt. The cost of their inputs bought with capital was always going up. If there were big dollar production outside the strictures of the gold standard, Bryan and the Populists reasoned, deflation would be erased and the farmers could breathe easy.

Come the creation of the Federal Reserve in 1913, a big new federal institution was ready to throw money around. And that it did. From 1913 to 1919, the Fed doubled the dollar supply as the economy barely grew at all. Whatever Bryan was getting at in 1896, he wasn’t bold enough to say that the dollar float should be suddenly doubled.
…
Dollars were showering the land, the cross of gold was history, and somehow farmers only got killed as never before. The doubling of the money supply increased the price level by a factor of two, halving the real income and assets of farmers, not to mention everyone else. Debt service was cheaper, but the things credit could buy cost twice as much. It is well-known even today in the Midwest that the 1920s were as desperate a decade as went the livelihoods of farmers as any, including the Great Depression years of the 1930s.

Bryan had been completely wrong that the gold standard bore responsibility for the difficulties of farmers. As late as 1915, 65% of Americans were still living in rural areas, even though mechanization and other advances had phenomenally increased agricultural efficiencies. There simply was no longer need for so much farm labor. Farmers chose to stick it out, however, and not move to where the real employment action was – cities.

Like you, perhaps, I’ve never really thought about Bryan, the “cross of gold” speech, and the Fed, though, after learning about his role in the Scopes Monkey Trial, it didn’t seem worthwhile to spend much time to better understand  his views on money. Domitrovic is right, however, in that this speech has given the gold standard an undeserved bad rap.

At the risk of stating the obvious, the recent market action in the commodities has been manic with wild gyrations of price in a wide variety of basic materials, metals, and energy. Given these wild fluctuations in price, I thought we could look at an options trade in USO that gives a high probability of success.

In order to give a bit of a conceptual framework for this sort of trade, let me share the way I look at these. Development of precision high altitude bombing during World War II resulted in a dramatic reduction in casualties while inflicting devastating consequences to enemy forces. I view the sort of option strategy described below as the equivalent of high altitude precision bombing. We will extract substantial profit without putting ourselves at high risk of damaging anti-aircraft fire.

As is shown on the daily price chart below, there is substantial support in the region of 35.60-36 provided by a recent swing low and the 200 period moving average.

In selecting the structure of option trades, I usually like to consider the volatility environment in which we currently operate. This is important because a very strong tendency of implied volatility is reversion to its mean. The knowledgeable trader factors this into his trades in order to put the wind at his back as much as possible. Trades can be selected and constructed to benefit (positive vega trades) or suffer (negative vega trades) from increases in implied volatility. As you can see in the chart below, implied volatility is currently in the lower quartile of its historic value for this specific underlying:

Given the current low volatility, let us look at a strategy that gives us substantial profit from an altitude of 50,000 feet and the ability to roll the trade forward for additional substantial profit. This trade is structured as a “ratio calendar spread”. Now don’t go getting hung up on the name, it is simply a two legged trade in which we buy a longer dated in-the-money call and sell a smaller number of out-of-the-money calls. The trade is diagrammed below:

For those getting used to these sorts of trades and trying to form an organizational framework, the trade can be thought of as a basic calendar spread where an additional contract of the long options is purchased. The addition of this extra contract removes the upside limit on our profitability which would exist in an ordinary calendar spread. As is often the case in option trading, this trade can also be thought of as a “first cousin” to a covered call structure where the long in-the-money contracts serve as a surrogate for long stock. I find it helpful to think of the various option constructions as individual members of several different families. Each family has a number of “family traits” that help make sense of the large number of potential constructions available to the options trader.

One of the characteristics of this family under discussion is the “Sham Wow” factor- “but wait-there’s more”. The “more” in this trade is the ability to “roll” the short calls forward as they expire or, more prudently, as they reach inconsequential value. For example, this trade would have been initiated by selling the February 37 calls at a value of around 57¢. When these calls reach minimal value, let us say 10¢ for discussion, they could be bought back, and the March calls sold to capture substantial additional premium. This process can continue for April, May, June, and July. These additional sales give the opportunity to reap additional profit for the trade.

The risks in the trade are:
1.USO breaks support and continues to sell off
2. Volatility collapses on the long leg of the trade

I have discussed both of these factors in the price chart and volatility chart above when I was developing the logic of the trade. While no guarantees exist for the behavior of either price or volatility, the current trade represents a reasonable balance between risk and probability in my opinion.

As with all our discussions, these considerations are presented for educational purposes and do not represent a recommendation. This is not a solicitation nor should it be considered financial advice. I am simply trying to demonstrate how to use the knowledge of option behavior to construct trades that benefit from high probability events. Bombs away!

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J.W. Jones

While Ben Bernanke says we are not seeing any inflation, I think most of us know that is a load of BS as other countries like Egypt see food prices surging. Over the past couple years everyone has been talking about how inflation will soon start and that has been one of the main driving forces for higher precious metals prices.

As we all know the market does the opposite as to what the majority of investors are doing. And while everyone has been buying metals in anticipation of inflation, I find it amusing how inflation for the first time is clearly presented on TV (Egypt issues) and we see gold and silver trading lower than they were a month ago. Seems like the buy the rumor sell the news lives is playing out. But the question everyone is starting to ask is how far will the metals correct?

Personally, I do not think they will drop much further but I do think it’s going to take 6-8 months before we see new highs in both gold and silver. They have had a nice run but now it looks as though they may cool off for a while. We could see some strength in the dollar for a little while and that should keep some pressure on metals even though inflation is clearly starting to show up around the world. Then the metals should start to climb the wall or worry again.

Below I are my updated charts on gold, silver and the gold miners index. Not much has really changed from last week analysis other than both gold and gold miners are getting deeper into a resistance level forming a bear flag pattern.

Gold Daily Chart
Gold is working its way up into a key resistance level and forming a possible bear flag.

Silver Daily Chart
Silver has been testing its key resistance level for a few days. It is normal to see silver push the limits and make larger moves simply because it is thinly traded and much more volatile. It looks ripe for a pullback at this area.

Gold Miners Daily Chart Index
Gold stocks have put in a nice bounce from the strong selling in January. As it pushes up into a resistance level it’s starting to look more attractive as a short play also. I still think the market has a couple more days to upward/chop before metals see possibly another thrust down, but that also depends on what the dollar does this week. The dollar does look ready to rally this coming week and that will put pressure on metals.

Sunday Night Super Gold Conclusion:
In short, I’m an still neutral to bearish on gold, silver and gold stocks. Last week’s report showed these same patterns and it takes time for patterns to mature. The market always tends to take longer than we think to start a move.

At the moment I am waiting for metals to form a low risk entry point which looks to me like we could take a short position for another downward thrust in the market unfolds as the charts are hinting to before we buy gold for another long term hold as inflation rises.

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Chris Vermeulen

As most sophisticated investors and traders are aware, the U.S. Federal government has run up significant deficits and the long term debt burden is becoming a drain on Gross Domestic Product. That being said, most economists are discussing the possibility of a major decline in the value of the U.S. Dollar going forward as inflationary monetary policy begins to strangle growth. While that view point may prove right over the long haul, in the short run most traders are not likely expecting the U.S. Dollar to rally.

The U.S. Dollar is expected to reach a multi-year cycle low in the near future. From the cyclical low, I expect the U.S. Dollar to regain a strong footing and work higher against the crowd. This is not to say that the U.S. Dollar will not eventually decline, but financial markets do not work that easily. Shorting the U.S. Dollar is a crowded trade and Mr. Market punishes crowded trades quite often by pushing prices the opposite of what the heard is expecting. Should the U.S. Dollar find a strong underlying bid, precious metals and domestic equities would feel the brunt force of such a move. While it remains to be seen if the U.S. Dollar rallies, if it does it will catch many traders and economists by surprise and the unwinding of the short dollar trade could unleash a wave of buying that we have not seen for quite some time.

Let’s take a look inside the market…

Major Index Price Action Over The Past 12 Trading Sessions – Bearish
Below is a table showing the main indexes used for tracking the market. The interesting thing about this data is that the indexes which typically lead the market have been deteriorating for the past 12 days and no one has noticed.

In short, the Nasdaq, Russell and Dow Transport indexes typically lead the market

Every radio station and business channel covers the Dow and SP500 indexes therefor the general public hears the market performance based on the those indexes. The problem here is that the Dow only consists of 30 stocks and the SP500 only holds the top 500 companies which is not a full view of the overall market because there are thousands of stocks listed on the exchanges.

The analysis below can be taken two ways depending which boat you are in… which I will explain in just a minute. The way I see things is a bit of both, I’m not really in or boat or the other… rather I have one foot in each because I have seen the market do things which support both sides (manipulation and measured technical moves) during my 14 years trading.

Ok here are my thoughts/opinions/forecasts…

Idea #1: Dow and SP500 indexes which 99% of the public use to gauge the market are moving higher on light volume. I feel because these indexes hold the stocks which everyone knows and is comfortable buying that this is the reason why they keep going up while the rest of the market silently erodes. It’s the simple thought that big money is moving out of leveraged positions (small cap stocks, transports, technology) in anticipation of a market correction, and the Average Joe continue to buy into brand name stocks boosting the Dow and SP500 thinking things are peachy..

Idea #2: We all know there is market manipulation, the question is how much of the price action is manipulation and how much is real supply and demand? No one will ever really know and that’s just part of the market and trading we have to deal with as traders. But I know there are traders out there blaming the Feds, POMO, and PPT for pushing the market up month after month. So the question is if these invisible forces manipulating the top 30-500 stock prices by buying them up which naturally boosts the Dow and SP500 indexes to keep everyone bullish on the market?

My thinking is that it’s a bit of both and that a correction is just around the corner.

Gold Miner Stocks Underperform Gold – Not a good sign
Gold stocks today (Wednesday) underperformed the price of gold and are also forming a bearish chart pattern. If this plays out then we can expect another sizable pullback in both gold stocks and the price of gold because this index typically leads the gold.

FREE Weekly Gold Updates HERE

US Dollar Multi Year Support Trendline
The US Dollar is trading down at a key support level and if we get a bounce and possibly even a rally then we could see a sizable correction in stocks and commodities across the board. As we all know everyone is shorting the dollar, buying gold and buying food commodities…. So it makes sense that all these crowded plays are about to see a major shift. Now this is just my contrarian point of view and those of you who follow my work know I’m not bias in my trading. I just take the market one day or week at a time and play the setups. But you must step back and look at the larger picture and at least give it some thought…

Concluding Thoughts:
In short, the major indexes are moving higher on light volume which is not a strong sign, and other key indexes are pointing to lower prices. The question everyone wants to know is how low will this correction be? The answer to that is that you must play the trend as you never know if a trend will last 2 days or a year. I take the market one day at a time continually analyzing price action.

If you would like to get my detailed reports and daily videos covering my analysis please join my newsletter at: www.TheGoldAndOilGuy.com

Chris Vermeulen

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Courtesy of Robert Reich

Put your ear to the ground and you can almost hear the bulls stampeding. The Dow closed above 12,000 Tuesday for the first time since June 2008. The Dow is up 4 percent this year after increasing 11 percent in 2010. The Standard & Poor 500 is also up 4 percent this year, and the Nasdaq index, up 3.7 percent.

“The U.S. economy is back!” says a prominent Wall Streeter.

Ummm. Not quite.

Corporate earnings remain strong (better-than-expected reports from UPS and Pfizer fueled Tuesday’s rally). The Fed’s continuing slush pump of money into the financial system is also lifting the animal spirits of Wall Street. Traders like nothing more than speculating with almost-free money. And tumult in the Middle East is pushing more foreign money into the relatively safe and reliable American equities market.

It’s simply wonderful, especially if you’re among the richest 1 percent of Americans who own more than half of all the shares of stock traded on Wall Street. Hey, you might feel chipper even if you’re among the next richest 9 percent, who own 40 percent.

But most Americans own a tiny sliver of the stock market, even including stocks in their 401(k) plans.

What do most Americans own? To the extent they have any significant assets at all, it’s their homes.

And the really big story right now – in terms of the lives of most Americans, and the effects on the US economy — isn’t Wall Street’s bull market. It’s Main Street’s bear housing market.

According to the Wall Street Journal’s latest quarterly survey of housing-market conditions, home prices continue to drop. They’ve dropped in all of the 28 major metropolitan areas, compared to a year earlier. And remember how awful things were in the housing market a year ago! In fact, the size of the year-to-year price declines is larger than the previous quarter’s in all but three of the markets surveyed.

Home prices have dropped most in cities already hard hit by the housing bust – Miami, Orlando, Atlanta, Chicago. But declines increased in other markets that had before escaped most of the downdraft, such as Seattle and Portland.

Things could easily get worse on the housing front because millions of owners are in various stages of foreclosure or seriously delinquent on their mortgages. Millions more owe more than their homes are worth, and, given the downward direction of the housing market, are going to be sorely tempted to just walk away. This means even more foreclosure sales, pushing housing prices down even further.