Recently I have had several members of my service requesting my thoughts on the macroeconomic backdrop which is shaping financial markets. I decided I would proffer an article about why I find such practice to be a total waste of time. Don’t get me wrong, acknowledging what is going on in the world around us as a trader is important because economic data and geopolitical events shape social mood. Social mood is just one catalyst that directly impacts financial markets and it is important for traders to monitor the world around them.

However, building trading plans based on events with outcomes that are unknown and unknowable is foolish. If an event’s outcome is unknown, one would surmise that the market’s reaction to the news is unknown as well. If a trading plan is built on multiple unknowns it can lead to a disastrous outcome for trades built around such premises. I pay attention to the headlines, but I don’t base trading decisions solely on the news cycle. Spending time building detailed thoughts about the future of events and then trading based on those events also cause traders to become biased with regard to price action.

Let me be clear, I do read analysis from experts on global events, but I don’t build trading plans around what I read. I try to look at the news and decipher what impact events will have on social mood. Once I have what I feel to be a grasp of social mood, then I look at fundamentals which could be earnings reports or economic data points searching for more clues about social mood and the strength of specific economies. From there, I use basic tape reading and technical analysis to help identify trades that have sound risk / reward. Trading is not a guessing game, nor is it gambling. The best traders take a variety of forms of data, interpret them, and then build trades that make sense based on probability.

Trading is very similar to playing poker. Everyone sits down with the same amount of money essentially and the money on the table does not really change. All that happens is money moves from one perception of the game to another. Those who understand and accept risk at appropriate times are rewarded more often than those who ignore risk. As time goes on, the players who understand the game and risk the most make the most money as their probability of success is higher than those who play every hand ignoring potential hazards. Trading is identical in thought and practice. Understanding risk and leveraging probability is what separates great traders from speculators.

As is customary, I will provide readers with a little bit of insight about what I believe could play out in the S&P 500 and gold. Before I get into the chart work, I would like to remind readers that this market is treacherous. Risk has not been this high for quite some time and ignoring it is foolhardy. I am trading smaller position sizes, taking profits quickly, and ultimately I’m sitting in cash waiting for price to breakout and offer solid setups where risk is defined. Currently the S&P 500 and gold are stuck between major overhead resistance and underlying support. Breakouts are going to transpire, but the question is which direction price will ultimately go. I’m going to let others do the heavy lifting and wait patiently for a solid setup to trade.

It seems to me that social mood is pretty poor at this point, economic data has not been great, earnings have been solid except for Caterpillar, and headline risks are plentiful. With that said, I am starting to lean slightly in the bullish camp. My reasoning is built around the fact that the majority of retail investors and novice traders are all setting up for a nasty selloff.

The only selloff I see possible is in the Treasury bond market and possibly the U.S. Dollar. In either case, equities could rally and it would be a surprise to most investors and traders. Mr. Market will punish as many traders and investors as possible and the majority are leaning bearish, so my contrarian instinct says to watch for bullish setups, but be patient enough to see them breakout before jumping aboard.

I intend to trade the S&P 500, but I am waiting on a confirmed breakout in either direction. I really don’t care which direction it is, I just want to be patient and let Mr. Market talk. Once I know the expected directional bias, I will have a solid risk / reward entry because I will be able to define risk at the breakout level regardless of which direction price ultimately arrives at. The key levels I’m watching on the S&P 500 Index are shown on the daily chart below:

If the S&P 500 extends to the upside above the S&P 1,350 price level a test of the 2011 highs will take place. I believe that if tested a second time we could see the 2011 highs taken out and a trip to the S&P 1,420 – 1,450 price levels before year end. Consequently, if price breaks down on the S&P 500 below the S&P 1,295 level I expect price to work down to the March pivot lows. If they breakdown, a trip to the S&P 1,150 – 1,180 area is likely.

Thus the conundrum described above is now in focus. The S&P 500 remains range bound and until a confirmed breakout takes place, I will likely remain neutral with a slight bias to the upside for good measure. However, I would point out I am simply going to be patient and let Mr. Market dictate the terms of price. I am just going to wait Mr. Market out instead of having some kind of trading plan built on assumptions about the outcome of multiple independent variables which at this point are unknown.

My most recent article discussed the likelihood for a small correction in gold and silver. We pulled back quite a bit, but news coming out of Europe and the flight to safety has bounced gold prices back near recent highs. I will likely establish new long positions in gold and silver on a breakout over recent highs that has strong momentum and volume. I continue to believe that in the longer term gold and silver will remain in a bull market due to the continuing devaluation of various currencies by deficit laden, overextended federal governments around the world. The daily chart of gold is shown below:

Gold similarly to the S&P 500 is trading in a range between the recent all-time highs and the breakout level which was offering resistance and now stands as support. If price breaks above the recent highs I will expect a move higher that could close in on $1,700 – $1,750/ounce by the end of the year. If price breaks below the recent breakout level (1,580) a thrust as low as $1,410 – $1,480/ounce could play out in a short period of time. I continue to believe higher prices are far more likely, but I will respect the price action. The weekly chart below of gold prices illustrates the key price levels:

In closing, I would remind readers to monitor their risk aggressively, keep position sizes small, and protect capital at all costs. Risk is extremely high currently and price could go either direction in a variety of asset classes.

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

Take a look at www.OptionsTradingSignals.com/specials/index.php today for a 24 hour 66% off coupon.

JW Jones

How many times have you scratched your trading head wondering why gold or silver were either rallying hard or dropping hard on seemingly bearish or bullish news? How about the general stock market represented by the SP500 Index? Has it ever rallied when the headlines were horrible or tanked when the news seemed good? Well, welcome to crowd behavioral dynamics and investing!

At my TMTF service, I use Elliott Wave Theory combined with a few other indicators like sentiment gauges and Fibonacci relationships to forecast the coming bottom and top pivots in Gold, Silver, and the SP 500 indexes in advance. In doing so, I often ignore the day’s headlines completely and rarely if ever use them to forecast the next movements in the precious metals or broad stock markets.

Let me give some examples of why you should learn to ignore economic indicators, headlines, and talking heads on CNBC and elsewhere and focus on crowd behavioral patterns. Learning to scale in long when everyone is getting bearish and taking profits when everyone is universally bullish is much easier if you follow Elliott Wave Theory, and apply that theory correctly. If the matter between your ears is unabashedly biased, it will not work… one must be objective and open minded to change to survive these volatile markets.

Recently with Gold, we had a major drop from $1557 to $1482 over brief window of time. When I last wrote about Gold several weeks ago publicly, I presented a bullish and a bearish case. I had said Gold must close over $1551, otherwise it may have a truncated top and correct hard. Sure enough, a few days later Gold hit $1557 intra-day and could not get over $1551 on that close. Within days it collapsed and dropped below $1500. How did I know this in advance? Crowd Behavioral Patterns are repeated throughout the markets over and over again and again. Here is the original chart I sent out many weeks ago showing the possible drop:

Gold did end up dropping to the 20 week Exponential moving average at $1480 range, and as it did I noticed a clear “ABC” weekly pattern. Now this is an Elliott Wave pattern that can warn you of an imminent bottom in Gold in this case. In late June, after this major correction I wrote up another chart and showed a potential bottom coming in Gold around 1480, and then on July 5th I confirmed the Bull views on Gold were coming back into play, which you can see with the June 29th chart I did below for my TMTF subscribers:

We were able to adjust our views from short term bearish to moving back to bullish and still catch the big swing in Gold. The precious metal rallied from $1480 ranges to $1610 recently, and now is likely to go through a minor correction to $1568 or so. All of this is the crowd’s action together pushing positions into overbought stages of hysteria, and back to oversold stages of pessimism…I simply track those patterns and try to forecast the next move ahead of the crowd running in or out.

Another sample is Silver as it collapsed from $49 down to $32-$33 per ounce not long ago. After the dust settled I sent out a chart and told my TMTF subs we would likely see Silver trade in the $34-$41 range for quite a while, before mounting another attack back towards $50. Right now I see Silver soon running to $45-$47 per ounce once it takes a breath. Below is the original early June silver chart I sent to my TMTF subscribers: We had an ABC strong rally which we forecast at TMTF in late August 2010 ahead of time, and once those rallies are over it takes quite a while to work off the sentiment.

Silver has indeed consolidated as forecast for about 7 weeks now between 34-41, having recently hit $40.80 and backed off. I expect Silver to break out over this range soon and attack $60 by year end as possible, but certainly $46-$50 by the fall. Last Wednesday I finally went bullish again based on crowd patterns and told my subs to go long at $37 as you can see below in the chart sent out then with a target of $46 likely coming. The herd of investors had formed yet another ABC weekly pattern, and it was time to go long.

Finally we look at the SP 500 which I forecast on a regular basis as well using Elliott Wave Theory and other indicators. This past week or so we saw a huge drop in the SP 500 and broader markets supposedly on Italy concerns and Eurozone issues. Although I am well aware of these issues, they are used to explain what just happened in the stock market, but not forecast it. Late last week I sent out the chart below to my subscribers and said as long as 1294/95 pivot holds, I remain very bullish on the markets. The SP 500 hit 1295 and has since rallied 31 points in a few days catching everyone off guard. That is Crowd Behavior 101 if I ever saw it!

The bottom line is understanding that the precious metals and broader markets tend to move based on major swings in sentiment from optimistic to pessimistic. The collective psyche of the herd is the most important because we can have periods of very bad news where the market will continue to rally, and also periods of seemingly great news when the market is dropping. The perception of the news of the day and how the crowd decides to react is more important than the news itself! If you’d like to try the TMTF service and take advantage of a coupon as well, go to www.MarketTrendForecast.com and check us out. You can also sign up for an occasional but somewhat infrequent free reports.

By Elliott Wave International

The European Banking Authority announced Friday that 8 banks had failed their stress tests and 16 more had narrowly passed. But the results drew much criticism from analysts, who said that the stress test is not strict enough.

Indeed, this is something that European Financial Forecast readers have known since the first stress test last summer.

For a unique perspective on Europe’s sovereign debt crisis, we invite you to read a free 6-page report by Elliott Wave International’s European Financial Forecast editor Brian Whitmer, “Credit Crisis in Europe.” Brian has been anticipating and tracking the credit contagion across Greece, Ireland, Spain, Portugal and other EU nations for months.

Below is a quick excerpt from this report, written just after the first stress test. For details on how to read it in full now, look below.
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Credit Crisis in Europe: How the Stability of an Entire Region is Teetering on the Edge of a Major Collapse

By EWI’s European Financial Forecast editor Brian Whitmer (excerpt)

Panic Now and Avoid the Rush — July 30, 2010
The market’s collective sigh of relief is also reflected in authorities’ stress testing of 91 European banks. In case you missed last Friday’s results, their message is clear: relax. The Committee of European Banking Supervisors (CEBS) gave passing grades to nearly every bank on its list. The group, for example, passed both Irish banks and all four UK banks that it evaluated. The CEBS gave clean bills of health to all four Portuguese banks, all five Italian banks, and five out of six Greek banks that it analyzed. Even with share prices that sit 29%-66% beneath their 2009 countertrend highs, the CEBS says that the Bank of Ireland, Piraeus Bank, Banco Popolare, and Banco Santander are all in good shape. In fact, just seven of the 91 banks failed to make the grade. Five were in Spain, one in Greece, and one, Germany’s Hypo Real Estate, is entirely owned by the German government anyway. Everyone else — 84 institutions in all — are supposed to be strong enough to withstand another economic shock.

It’s not so much the stellar results that expose the optimism of a Primary degree rally, but rather the Banking Committee’s stress tests themselves. They are notable primarily because they failed to test for any real stress in the first place. As the chart shows, the Committee’s “adverse scenario” regarding economic performance assumed a mere 3% deviation from the European Commission’s GDP forecast. Another test looked at banks’ resilience to a sovereign risk shock, yet the analysis merely used conditions similar to those of May 2010. In other words, just like the UK budget office, the CEBS is utilizing a woefully diluted version of the economic deterioration that is about to grip the continent.
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FREE REPORT: Discover what Europe’s debt crisis means for the future of the continent and your investments. Get your FREE 6-page report filled with unique analysis on Europe, the PIIGS and the sovereign debt crisis.

EWI’s European Financial Forecast editor Brian Whitmer gives you the context for what’s happening in Europe and gets you up to speed on the reality of the situation. Download your free report now.

By Marin Katusa, Casey Research Energy Team

It turns out that China is not willing to pay whatever it has to for energy and metal resources.

Several resource deals have faltered in recent months, indicating an increasingly choosy Chinese perspective on energy and metal acquisitions. Add to that the growing concern that the global economy is once again stumbling and that commodity prices may be near a top, and you have a Chinese deal-making market that has gone from 60 to zero in no time.

On the metals side, observers are seeing a “buyer’s strike,” where companies are watching commodity prices from the sidelines rather than making deals. China’s Minmetals Resources, for example, stepped back from its bid to acquire copper producer Equinox Minerals after Barrick Gold (NYSE.ABX, T.ABX) topped Minmetals’ $6.3 billion offer with a $6.7 billion bid.

Equinox was lucky to get the higher Barrick offer; other companies, like Lundin Mining (T.LUN), have given up trying to find suitors willing to pay a fair price. In May, the company announced it couldn’t find an acceptable buyer for all or part of its copper, nickel, and zinc mines that are spread across Europe and Africa, citing a gulf between its project valuations and what buyers were willing to pay.

Both stories signal that there is a limit to how much even the deep-pocketed Chinese will pay for resources, even though securing resource assets is a stated national goal.

Pricing may be at the heart of the problem. Prices for oil assets in Alberta – home to the massive oil sands and a raft of light oil and natural gas plays – have soared: The average price per acre has climbed from C$2,185 in mid-2010 to C$3,111 today, according to government statistics. The price increased on the back of a series of international deals: France’s Total S.A. signed a C$1.75 billion deal with Suncor Energy to develop oil sands reserves; Malaysia’s Petronas inked a C$1.07 billion deal for ownership stakes in some Albertan natural gas fields; and China’s Sinopec spent C$4.6 billion for a 9% stake in Syncrude Canada.

But price isn’t the impediment to new deals – the biggest Chinese investment in Canada’s oil patch to date just fell apart because the potential partners couldn’t agree on how to work together. China’s largest oil and gas company, PetroChina International Investment, and Canada’s Encana (T.ECA) announced on June 21 that their C$5.4 billion deal to jointly develop Encana’s Cutbank Ridge gas project had fallen apart. The companies couldn’t agree on how to structure the joint operating agreement, though they did not elaborate on the specific issues.

Encana will now launch a fresh search for a new Cutbank partner… or perhaps partners. The PetroChina deal included stakes in gas production, reserves, acreages, pipelines, and processing facilities, but Encana now says it wants to split things up, offering a variety of joint-venture opportunities for portions of the undeveloped resources and infrastructure requirements while keeping the producing acres for itself.

The PetroChina-Encana deal was a bit of a sweetheart in the industry, often cited to support arguments about China’s growing interest in Canadian oil and gas. Its failure now supports the opposite stance: that China is getting pickier about what projects it supports and how that support plays out.

In the first five and a half months of 2011, Canadian energy companies sold a total of 231 million barrels of oil and gas reserves, less than half the 482 million barrels sold in the same period in 2010. The value of those Canadian oil and gas deals came in at $11 billion, down 35% from a year earlier (excluding the failed PetroChina deal). So there are fewer deals being made.

That may not last for long, especially given that a 34-day market slide has left valuations on the cheap side of average. According to Bloomberg, companies on the S&P 500 Index will earn 18% more this year than in 2010, but the index has fallen 6.8% since the end of April. The combination means valuations are the cheapest they’ve been in 26 years. The index is valued at 8.7 times cash flow, cheaper than in 81% of occasions since 1998; and it is priced at 2.1 times book value, which is lower than it has traded 90% of the time since 1995.

The challenge for a buyer right now is to actually ink a deal at current prices, because most potential targets are still valuing themselves using parameters pulled from the rich deals of 2010.

How will it all pan out? Only time will tell. If commodity prices continue to slide because of U.S. economic uncertainty, Greek default concerns, and slowing Chinese demand, deal-making will remain quiet for a while – until the floor is visible – as no one wants to buy a company today that will be cheaper tomorrow. If commodity prices rebound, deals will be back on the table, as no one wants to chase a rising price.

We expect the M&A world to remain fairly quiet for the next few months, as the global economic situation figures itself out. Greece has enough bailout funding to get through August without defaulting, but there are no guarantees beyond that. The U.S. Federal Reserve just lowered its growth forecast for the next two years but still remains confident that the American economy is simply going through a rough patch. As for China, there are as many analysts predicting continued double-digit growth as there are anticipating a significant, inflation-fueled slowdown.

Regardless, it seems that the age of huge, blind Chinese investments is waning. The Asian giant has become pickier in its choices and more demanding in its deals, and why shouldn’t it? After all, we are all relying on China’s massive population to support global economic growth. It seems reasonable that such growth should be on China’s terms.

[Marin and his energy team supply the most in-depth information on the energy markets – be it oil and gas, nuclear, coal, solar or geothermal. Read on to find out more about oil’s future… and the amazing profit opportunities arising from it. Free report here.]

The phrase “Greater Depression” was coined by Doug Casey a decade or so back as a way of describing the economic crisis he foresaw as inevitable, and which is now materializing.

Because I think it is important for every organization to constantly challenge its own assumptions, I’ve long acted as something of a devil’s advocate here at Casey Research. By constantly pushing our analysts to revisit their assumptions and calculations, it is my firm intention for us to spot the fork in the road that indicates it is time to shift strategies away from investments designed to do well in the face of a currency debasement and to something else.

Being attentive to that fork in the road is hugely important, because even though we urge our subscribers not to overdo their exposure to inflation hedges, we recognize that many do. Many a good person had their clocks cleaned in the early 1980s solely because they had become overly enamored of their precious metals – so much so that they stopped thinking of them as an asset class and began thinking of them more in the terms one might associate with an amorous dinner date. Thus these investors were utterly unprepared when said date stood up and broke a dinner plate over their heads.

With that brief setup, I want to make our views clear: While we correctly anticipated the recent correction in precious metals, this correction is but a blip in a secular bull market that is very much intact.

Doug Casey has often said that the unfolding crisis is going to be even worse than he expects (which is saying something), and the longer the rest of us at Casey Research study the tea leaves, it is hard to disagree that the Greater Depression is still ahead.

Consider:

• The eurozone is growing increasingly desperate. Watching the heads of Europe dither and debate over further bailouts to the unhappy Greeks and other troubled PIIGS – before ultimately reaching back into the pockets of the equally unhappy citizens in Germany and the decreasing number of still-functioning economies in the eurozone – reminds me of a down-on-his-luck blackjack player. He’s mortgaged his home to play the game but is now down to his last chips. He doesn’t want to risk his remaining resources but has no choice, because to walk away now will mean taking up residence in a cardboard box. And so, reluctantly, he shoves across another pile. The problem is that the game is rigged – and not in his favor. As the PIIGS start to default and either leave the eurozone entirely or are shunted off into some sort of sidecar organization, there will be great volatility in the euro and in the European markets.
• The U.S. debt situation is far worse than anyone in Washington is willing to admit. We keep hearing calls for more, not less debt creation. But if people would stop kidding themselves and tally up all the many demands the U.S. government has against it, the actual debt-to-GDP ratio rises to something on the order of 400% – and even that is likely understating things. The fundamental flaws in the U.S. monetary system – flaws that have given license to the bureaucrats to smash the limousine of state straight into a wall – have required a remaking every 20 to 30 years or so. The problem is that there is pretty much nothing else that can be done to save the status quo at this point, and so the monetary system is likely to collapse. That means big changes ahead, including – or perhaps starting with – a poisonous ratcheting up of interest rates.
• China’s miracle mirage. While having aspects of a free market, the hard truth is that China is run as a command economy by a cadre of communist holdovers. This is apparent in the cities that have been built for no purpose other than creating jobs and boosting GDP. It is also apparent in the growing inflation in China – the inevitable knock-on of the government’s decision to yank on the levers of money creation harder than any other nation at the onset of the Greater Depression. Meanwhile, signs of social unrest crop up here and there. Though so far they have been swiftly put down, there is no question that the ruling elite has to walk a very fine line. If the Chinese economy stumbles seriously, all bets are off. That we are talking about the world’s second-largest economy means this is not of small consequence.
• Japan is essentially offline. Reports from friends in Japan – including one who was initially skeptical about the scale of the problems at Fukushima – have now changed in tone by 180 degrees. You can almost feel the growing sense of desperation as the already massively indebted nation begins to slide toward an abyss. There is little standing in the way of the world’s third-largest economy’s slide.
• The Middle East is in flames. This, too, is far from settled. As usual, the U.S. government has been hopping here and there in an attempt to maintain its influence, but at this point pretty much everything is up for grabs. The odds of the U.S. retaining the same level of influence in the region that it has enjoyed over the last century are slim to none, especially now that even the Saudis are shipping more of their oil to China than to the U.S. Again, big changes are ahead.

I’m convinced that nearly everything about today’s world is going to change over the coming decade… much of it for the worse.

But that doesn’t mean that people – you – can’t come through this in more or less good shape, just as our parents and grandparents made it intact through the last Great Depression. Pay attention and take action, and you’ll do far, far better than most.

Some investment ideas…

First and foremost, protect yourself against the collapse of the U.S. monetary system. It is not as simple as ducking into the nearest coin store and loading up, though that should certainly be one part of your strategy. Between now and the endgame that leads into what we can only hope will be a new money based on something tangible, there will periodically be opportunities to make big moves with your portfolio.

I could give you a big pitch for our precious-metals-oriented services here, but won’t. I will say, however, that if you are new to the sector, do yourself a favor and sign up for our three-month no-risk trial to BIG GOLD – and do it today, so you can begin bottom fishing.

As Doug also likes to say, you should do whatever you want in this world, as long as you are willing to accept the consequences. If you are willing to risk going down with the ship, then do nothing.

Some other investible ideas…

* Everyday essentials. Energy is the classic essential. Sure, energy use and prices will ebb and flow with the economy, but ultimately everyone uses energy every day, and the people in emerging markets want to use a lot more of it. Carefully thought-out investments in energy, ideally bought on the dips, belong in everyone’s long-term portfolio.

* Breakthroughs to a brighter future. Throughout modern history, companies that make significant technological advances transcend bad economic times. Do you think that the company that finds a cure for a common variety of cancer will be weighed down, even by a stock market crash? Hardly. In cautious amounts, these sorts of potential breakthrough stocks belong in your portfolio.

* Investing in the inevitable. A ton of charts and data point to just how unusual and unsustainable today’s low, low U.S. interest rates are. When these sorts of baseline trends eventually change direction, they tend to move in the new direction for years, and even decades. No one can pick the bottom, but anyone who is paying even a little attention can and should be getting positioned to profit from a sea change in U.S. interest rates while they still can.

* One foot over the border. History has shown that having even one foot over the border can make the difference between losing everything and coming out just fine. Internationalizing your assets is not always easy or convenient, but that doesn’t make it any less urgent that you do so.

As for crisis investments, no one has been focused on that longer or better than Doug Casey and the team here.

The bottom line is that while the scale of the crisis is beginning to become more widely apparent, and reading and thinking about it can become fatiguing for those of us who have been on this story from the beginning, the base case for a Greater Depression is fully intact. We need to gird our loins and continue to take active measures to prepare – with the caveat that even in this base case, there are prudent measures you can take to ensure that not all your eggs are in one basket.

[Gold and silver are still the best protection for any portfolio… especially now that China and other countries are getting ready to dump the U.S. dollar. Read more on how dangerous the situation is, and how you can come out ahead – free report here.]

A few weeks ago traders and market prognosticators were frantically trying to determine if the S&P 500 would hold the 200 period moving average. As it turns out, the 200 period moving was able to hold sellers in check. After a few days of grinding around, the S&P 500 pushed higher. The price action has been spectacular the past two weeks and the S&P 500 could potentially breakout to new 2011 highs. Only Mr. Market can push prices to the brink of disaster only to have them break to new highs in a matter of weeks.

Last week I was of the opinion that if a major descending trend line did not hold we would see the S&P 500 index push into a major resistance area around the SPX 1,340 – 1,350 area. I posited the following chart in my most recent article:

As it turns out, the descending trend line was taken out and price has jammed right into the major resistance area detailed in the chart above. In fact, yesterday the index was on the verge of pushing through the key resistance area and could likely test the 2011 highs in the near future.

Current price levels offer a multitude of outcomes depending on price action, news items, and economic reports. Predicting the future is a fool’s game, particularly in a marketplace full of government intervention. With that being said, I am going to use this article to point out a few key items that traders should be aware of in coming weeks.

Bullish Camp

For S&P 500 bulls, the price action as of late has been impressive and undeniably bullish. Bulls would point out that the U.S. Dollar Index futures have moved higher and equity indices were able to shrug it off which is generally an unusual set of circumstances considering the greenback’s recent strength.

Additionally the bulls will note the improving economic data points as well as last week’s strong manufacturing report. Another key area that many bulls are pointing out is that earnings forecasts for the 2nd quarter are not expected to be strong according to the analysts. The hidden potential for earnings expectations to be blown away is clearly present.

From a technical standpoint, nearly every major resistance level has been knifed through with ease. In fact, the past two weeks resistance levels have been nonexistent. If we look at the SPX Weekly chart we can clearly see a golden cross represented by the 50 period moving average pushing well above the 200 period moving average. The chart below illustrates the golden cross:

Generally speaking a golden cross on a weekly chart is viewed as bullish momentum. Speaking of momentum, based on recent price action the longer term momentum remains below historical long term levels over the past year. The following chart courtesy of Barcharts.com plots the number of stocks currently trading above the 200 period moving average:

Over the past year the current momentum to the upside in the longer term time frame reveals the potential for stocks to move considerably higher. It would take a huge move for equities to become overbought in this metric of study in the longer term time frames. Overall, conditions for higher prices are clearly present and traders and investors alike may see a major breakout in the near term over 2011 highs. If a breakout plays out readers can expect to see the S&P 500 rally to a resistance area that is shown below on the SPX daily chart:

Bearish Camp

The bears would point out that the present move higher in the S&P 500 has been parabolic. When price action goes parabolic in either direction the pending profit taking / correction is generally just as harsh. The S&P 500 has rallied 7 of the last 8 sessions and has moved over 7% higher since testing the 200 period moving average on the daily chart on June 16th. It is without question that in the short term the S&P 500 is severely overbought. The momentum chart below courtesy of Barcharts.com shows the number of stocks trading above their key 20 period moving averages:

In addition to the short term overbought nature of the S&P 500, the daily and weekly charts clearly illustrate a head and shoulders pattern. The head and shoulders pattern is a typical characteristic of a topping formation that is often found at several major historical tops. The daily chart below illustrates the head and shoulders pattern:

This particular head and shoulders pattern is not getting a lot of recognition in the media which lends it a bit more credence. If we start hearing about this pattern on CNBC or FOX Business I will expect the pattern to fail. Call me a contrarian, but in the past when major television personalities are constantly talking about chart patterns they almost always fail.

Besides just technical data points, continued worries stemming from the European sovereign debt crisis helps the bear’s case further. In the event of a major default in the Eurozone, the implications to the financial sector of the U.S. economy will come into focus. It is widely expected that a banking crisis in Europe could spread to some degree to the large money center banks in the United States. Clearly this would have negative implications on price action in domestic equity markets.

In addition to the European debt crisis, the United States government has a looming credit crisis of its own. With politicians currently arguing over whether to raise the debt ceiling, bears point out that if the United States defaulted on its debt (unlikely) the implications would be severe. However, many traders and economists point out that the end of QE II may have dramatic implications on price action as well. The current uncertainty around the world lends itself in favor of the bears.

As I am writing this the unemployment number just came out and it was far worse than the market expected based on Thursday’s strong ADP employment report. At this point in time we are getting heavy selling in the S&P 500. While this could be the beginning of a larger move, it might make sense that sellers are stepping in taking profits. The real question for traders and investors alike is what the future holds in coming weeks. Do we get a small correction from current prices before breaking out to new 2011 highs or are we putting in a dreadful double top that leads to the return of the bear?
Only time will tell . . .

Take a look at www.OptionsTradingSignals.com/specials/index.php today for a 24 hour 66% off coupon.

JW Jones