U.S. Economy: As I watched the coverage from Jackson Hole, WY this week, I couldn’t help but notice how beautiful it is there. It’s no wonder policy makers and economists gather there while brain storming on how to save the world… I mean economy. I don’t envy them handling the daunting nature of this assignment. Consider the weight Mr. Bernanke bore upon his shoulders this week:
Existing home sales fell to the lowest annual rate in 15 years
Manufacturing in not as strong as hoped for
New Home Sales (a leading indicator) fell to a record low 267,000 unit annual rate
The jobless claims 4-week average is 486,750,
GDP was revised down to 1.6%
Consumer Sentiment lost steam
Yet, the very words Mr. Bernanke spoke gave breadth and renewed hope to the Wall Street optimists. His reassurance that the central bank has the ammunition to prevent the U.S. from back peddling into a recession sent futures in the S&P markedly higher on Friday. That was the saving grace that kept the 20 and 50 WMA from having their official crossover on the weekly chart. The two now rest at 1100.76 and 1100.61 respectively. Doing some quick math and hoping excel doesn’t let me down, my calculations suggest that in order to prevent the bearish crossover from occurring this week, the S&P would have to rally to 1272 by Friday! I highly doubt that will happen.
"Moving Averages and Price Action"
While past performance is not necessarily indicative of future results, the last four major turning points in the market over the last 10 years, both bullish and bearish, were met with whipsaw moves until the 20 and 50 WMAs crossover occurred. Should the bearish crossover occur again, I urge caution to those in the bullish camp. Those that are long stocks and concerned may want to consider any rallies as opportunities to fade equity risk exposure and seek alternatives.
Here are some of the reports to watch for this week: Monday brings Personal Income and Outlays (0.3%); Tuesday, ICSC-Goldman Store Sales, Redbook, S&P Case Shiller HPI, Chicago PMI (56), Consumer Confidence (51), State Street Investor Confidence, FOMC Minutes; Wednesday, Motor Vehicles Sales (8.7M), MBA Purchases Applications, Challenger Job-Cut Report, ADP Employment Report, ISM Mfg Index (53), Construction Spending (-0.6%); Thursday, Chain Store Sales, Monster Employment Index, Jobless Claims (470K), Productivity and Costs (-1.9%), Factory Orders (0.3%), Pending Home Sales Index; Friday, Employment Situation (-80K/9.6%), Dennis Lockhart Speaks, ISM Non-Mfg Index (53).
Currencies: I’ve been watching the correlation study between the Dollar and Gold. I think the present relationship is important to watch as recent price action is atypical for the two. Last week I penned, “What implication will this potentially have on the DX/GC relationship? The 100 and 200 Day Correlation Studies (DCS) may be showing the beginning of a separation. I think the 50 DCS is the key to watch for an early signal. The Dollar chart is presently offering bullish technicals, but I think the Gold chart still seems questionable.” The 50 Day Correlation Study slipped to 60% this week, dragging with it the 100 and 200 DCS. This may be a sign of the two beginning to decouple. I guess the question is will they both serve as “safe-haven” markets or is the status over for one of them? In my opinion, if the dollar index slips back under 82.00, it may then be back in bear mode. If gold falls under $1,200, I’d watch the recent low (See Metals Section). This past week I shared these thoughts and more with Robert Graham on his radio show.
Click Here to Playback the Interview!
Click on the Chart to ENLARGE!
Data for Chart provided by Esignal, Corp. Chart prepared by Options Pro Corp.
Foods and Fibers: Last week I penned, “Demand has been very strong for U.S. grains… Should the export pace continue, I would expect corn prices to fast approach the $5.00 level.” The brisk pace in corn demand continues with last week’s figures ringing in at 1,715,900 metric tons. Export commitments are now running 8% above last year. What I like about corn’s present market environment is the demand factor. This is not a weather scare, but an actual usage issue. Even more interesting to me is that yields on the U.S. crop may be questionable. Pro Farmer has suggested that the slightest sign of a disappointment in U.S yields may force a greater risk premium into the market.
Technically, over the last 4 weeks, the corn chart shows that futures cleared and retested the 100 day moving average. The January ’09 high and ‘10 highs will be the upcoming hurdles for the bulls to surpass. Let’s watch the demand pace and the highs for clearance of a potential move to $5.00.
Energies: I think the oil markets are experiencing a classic example of Déjà vu. We see oil inventories rising again yet oil is moving higher on the hopes that a cure is around the corner. While I have faith in Mr. Bernanke and all his efforts, I think oil’s price is at levels that a recovery would justify. The key word is “recovery”. I’m not sure we are having a recovery. We are hoping for a recovery. I think big money shares my thought on this. Large traders dropped from being long 62,056 to 27,323 over the last week (55.97%). They haven’t been net short since the week of May 8, 2009. Open Interest peaked at 1,470,234 on May 14th when crude topped near $87. It has lost 223,450 contracts and now sits at 1,246,784. Meanwhile, front month futures have zigzagged from $87 to $64 to $83 to $70. I’m going to be watching for Large Traders to get net short. If so, this may indicate that Crude may be headed for the 60’s again, especially as the market trends seem far more bearish now than back in 2009.
Last week I penned, “When I look at the chart I see that the December futures contract is resting on what I believe is an important support level, the uptrend line from the May and July lows. If oil can catch a bid and bounce from here up to the $78 - $80 range, I would begin to look closely at call premium writes. I believe that the slew of resistance that lies within that area will contain the price rally and allow the 20 and 50 week moving averages to have a bearish crossover.” Both events materialized this week and as such call premium collections may be considered for those not believing in the rally. There is specific trade examples in last week’s Options Pro Report.
.GIF)
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Metals: Gold bulls had another promising week with December futures closing at $1,236.60. The yellow metal’s higher price is being accepted as a sign of the times. It is reported that India’s imports will top 2009 despite the record price level. In their most recent report, The World Gold Council announced that bullion demand increased by 36% in the second quarter. The driving force was investor purchases of gold-backed funds like ETFs. While this is a good thing for gold’s price, the flip side is that downward slides may be fierce as well. In my opinion, the popularity of ETFs allows the novice investor to introduce a perceived ‘safe-haven’ into their portfolio through an equity purchase. The concern for me is that if the equity markets get rocky, as I think they will, margin related selling may weigh heavily on the metal.
In the last few Wire’s I have been writing about my concern for the upside direction of gold. I had expressed concerns with resistance and volatility. Specifically, last week I penned, “You know what else makes me very nervous? The volatility on gold. Both statistical and implied volatility are near 3-year lows. Why the jitters over low volatility? As the market nears its all time high, coupled with the expectation of large price swings to come, I think that market participants are becoming too complacent.” That seems to have changed this week with implied volatility jumping approximately 15%.
I’m going to turn my focus this week to a more technical perspective. I believe that gold has completed 5 waves up in June, with the beginning wave (1) being the February ’10 lows. June and July witnessed a 50% correction of the advance with gold futures testing $1,155. Looking forward, the July – August rally is likely coming to an end. In turn it would be marked as wave 1 of a new 5 wave count. If I am correct, wave 2 may pull back to the Fibonacci numbers sitting between $1,211.40 and $1,190.10, before entering wave 3, which targets a move of approximately $150 to $1,346. Should this pull back occur, those with a bullish bias may consider put premium collections below the $1,155 support. Those in pursuit of a potentially greater gain than the net premium collected may consider a more bullish strategy. If or when the events unfold, I will issue an Options Pro Report with trade examples.
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Trading futures and options involves substantial risk of loss and is not suitable for all investors. All known news and events have already been factored into the market's underlying commodities. Past performance is not necessarily indicative of future results.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. All known news and events have already been factored into the market's underlying commodities. Past performance is not necessarily indicative of future results.
