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What Could Lie Ahead for the S&P 500 & Gold

JW Jones & Chris Vermeulen – http://www.optionstradingsignals.com/specials/index.php

Now that Mr. Bernanke’s speech is old news, what was the financial media thinking exactly? A significant number of financial writers have been anticipating discussion of QE III or QE III Lite which clearly were never even on the Fed Chief’s radar this week. The focus of the Jackson Hole Summit was how to achieve long-run growth, not conduct discussion of monetary policy.

QE III will not be discussed openly until the next FOMC meeting in September, which noticeably was extended to two days. Besides the extension and the Fed Chairman’s prediction of growth in the back half of the year, the remainder of Mr. Bernanke’s speech was nothing more than a brief synopsis of what he has already said in the recent past.

While Chairman Bernanke focuses on the U.S. economy, I have been more inclined to monitor the action across the pond. Price action in Europe is having a major impact on financial markets here in the United States. Traders are monitoring credit default swap (CDS) spreads on European sovereign debt as well as on domestic and European banks.

Recently U.S. banks have seen the CDS swaps on their debt rising indicating that the marketplace believes their debt is a greater risk to investors. While the price action is nowhere near the 2008 & 2009 levels, current prices are relatively consistent with what was seen during the correction in the late spring of 2010. While there is no reason to panic at this point, this is a trend that I will be monitoring closely going forward.

For now, I continue to believe that equity markets will rally in coming weeks as conditions are extremely oversold. The price action so far today makes sense as the wild price swings helped flush out weak hands that were long. Consequently, the snap back rally pushed shorts into stop levels as well.

A significant move lower does not seem likely at this point, but a retest of the recent lows is possible, if not probable. I would remind readers that stock market crashes generally happen within the context of an oversold market. While the likelihood of a crash is remote, it is still possible and tight risk definition in this environment is warranted regardless of which side of the tape a trader is playing.

One price chart that I have been watching closely is the German DAX. The German DAX is presently a thermometer for traders to monitor the situation in Europe. The reason the German stock market index is so important is due to the financial strength of Germany within the Eurozone. Without Germany, the Eurozone would crumble in on itself and the Euro currency would be in trouble. Recently Germany’s equity markets have been crushed and the daily chart below illustrates the recent carnage:

Another metric I monitor regularly is market momentum. The chart below illustrates the number of domestic stocks trading above their 200 period moving averages. As can be seen below, the U.S. equity market has not been this “oversold” since back in 2009. Chart courtesy of Barchart.com.

In my previous article posted back on August 18th, I discussed the likelihood for stocks to pullback and put in some form of a basing pattern. I wrote the following statement in that article:

“It is entirely plausible that Mr. Market thrusts lower from here to shake out longs. If that scenario plays out it could potentially carve out a double bottom or another basing pattern which would give active traders another entry point to get long.”

Since August 18th, we have seen the S&P 500 push lower and there is a double bottom on the daily chart which is capturing quite a bit of attention in the trading community. I would also draw your attention to the wedge pattern that is also present. A breakout higher or lower out of this wedge pattern will be the clue that will indicate Mr. Market’s short term price direction. I continue to believe we will see a breakout higher, but a retest of the lows is always a possibility. The daily chart of the S&P 500 Index is shown below:

In the short to intermediate term, I believe we will see higher prices and a test of the key S&P 1,220 area or possibly a re-test of the key S&P 1,250 price level which corresponds with the March 2011 pivot lows. Additional resistance would come in around the 1,260 – 1.270 area which marks the neckline of the recent head and shoulders pattern which triggered the selloff in the S&P 500. The daily chart of the SPX below illustrates the key resistance areas:

Gold Analysis
My most recent article argued that gold prices were going parabolic and that a pullback was likely. We have seen a major pullback in gold prices. Admittedly, I was about $200 an ounce early on my call, but members of my service were able to capitalize on an option trade that captured 32% based on maximum risk through the use of a double calendar spread. While my timing was not precise, the juiced volatility in the GLD options allowed me to roll contracts forward and make additional adjustments to produce a strong gain for the service.

Some traders argue that gold prices are going to rally back sharply in short order, which I find hard to believe. Instead, I am of the opinion that we could see additional downside in the weeks/months ahead in gold prices. There is an ominous pattern starting to form on the gold daily chart which if it is carved out and triggered, it could produce the next leg of this selloff. The daily chart of gold is shown below:

While it is far too early to determine if a head and shoulders pattern will be carved out or if lower prices take place, I am of the opinion that this selloff will offer an attractive entry point for longer term investors. At this point it is a bit too early to get involved, but if my analysis is accurate the next leg of the gold bull market will be potentially extreme.

While I believe stocks will rally in the short to intermediate term, I am of the opinion that we have officially entered the next phase of the bear market. The next wave lower in stocks is going to be just as severe as the likely rally in gold.

The reason I believe gold will rally is primarily due to future weakness in Europe. If European banks have a credit crisis, a sovereign nation unexpectedly defaults, Germany leaves the Eurozone, or a currency crisis transpires gold prices should soar while U.S. equity prices tank.

While it is far too early to make that determination, if the S&P 500 puts in a lower high on this next advance higher and consequently takes out the recent lows on a selloff, the bear will be in full swing and gold prices should take off. The chart below illustrates my expectations for the S&P 500 in the future:

The next few weeks are going to be very telling about the future in domestic markets. Is this just a correction that pushes stocks higher by the end of the year, or is this the beginning of something far worse?

For now I am going with the latter, but price action in coming weeks will offer clues about what lies ahead for U.S. equity markets. Right now this is nothing more than speculation, but the next few months should be very interesting. Risk remains exceedingly high.

Join Now at http://www.optionstradingsignals.com/specials/index.php for a 24 hour 66% off coupon.
JW Jones & Chris Vermeulen

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.

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Gold & SP500’s One Candle Rebound To Riches

March 3th
It’s been a great year for trading!
So far February, last week and this week have being absolutely amazing for both swing traders and intraday traders.

On February 5th we had extreme panic selling with nearly 35 sell orders for every 1 buy order on the NYSE. That extreme panic and dumping of shares was the day we jumped into the market and we nailed the bottom.

As my trading buddy David Banister from ActiveTradingPartners would say “Buy When They Cry!” and that is exactly what subscribers did. Since then our gold, silver and the index funds have been moving up nicely.

I would like to note that there were several more technical reasons why we jumped into the market that day but I won’t get into the nitty-gritty cause this mid-week update would be a trading book…

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Explanation of What happened Last Week & This Week
Ok this may get a little confusing but try to stick with me here…

If you recall last Wednesday’s mid-week report which was called “Gold, Silver & Stock Indices on the Verge of Rolling Over”, I talked about how I was bearish on the overall market. This report has a bunch of detailed charts explaining what was most likely to happen next and some trading.

Well, the market played out just as we had expected. The market dropped 1.35% in over night trading and the following trading session providing intraday traders using ETF’s, Futures or CFD’s a net profit between 1.35% to over 100% return within 17 hours of entering a trade depending on which trading vehicle you used. Check out how this trade was executed by reading my report titled “How To Use Multiple Time Frames For Setups” which I send out the next day. Understanding how to trade using different time frames is a must for all traders and this report shows you how.

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Now here is the part that has thrown a lot of traders off
Just to recap, I posted an extremely bearish report saying the sky is falling on Wednesday. Thursday morning the market moved down as expected, and then late Thursday afternoon I sent out a trade alerts to buy a bunch of precious metal and stock etfs.

I understand why emails flooded my inbox that afternoon…. Everyone wanted to know how I can say the market is falling then turn around and buy the very next day.

It’s actually a really simple answer. “I don’t fall in love with my positions” and “I re-evaluate the market after each new candlestick on the chart”.

Trading is not an easy task, that we all know. The market tests and bends my brain to the limit on a regular basis and if one cannot control their emotions and stick with a set of trading rules, then you will eventually lose all your money.

I have placed thousands of trades in my lifetime and pulling the trigger to get in and out of a position does not phase me anymore. But the problem is most people don’t want to exit a losing trade because then they are proven wrong and most people hate being wrong. If that’s what you are feeling, then you need fix it or get out of trading.

My general rule is “when in doubt, get out”. I would rather watch a trade move without me knowing I had it right, than be stuck in a losing trade, saying to myself, “Why the hell did I get into this trade?”

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Re-Evaluating the Market or Your Investment
After each new candle is formed on a chart it is crucial to re-evaluate the charts. In other words if your main focus is to trade the daily chart then you better re-evaluate the strength of the chart each day and also check the 1 hour intraday chart for possible bullish or bearish patterns.

On the other hand, if you are an intraday trader focusing on trading the 1 hour chart, then you better be evaluating things every hour, and also check the 5 or 10 minute charts for patterns to keep an eye on price and volume action.

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Below are daily charts of some ETF’s I trade showing how we have been trading the market. You can see February 25th the market reversed to the upside and that is when we went long again as prices formed an outside reversal candle and these funds have been moving higher ever since.

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Mid-Week Trading Conclusion:

In short, it’s been a great start to the year with the market performing within its regular trading patterns between fear and greed.

I believe 2010 is going to be very tough for individuals who do not fully understand the market and how to manage risk. I figure the market is about to top in the next week or so then start to head lower. 2010 will most likely trade in a large sideways range for 8-10 months and maybe even longer. Being able to spot market reversals and trade them actively is were the money is this year. No grand slams, just a bunch of single base hits.

I would like to see the market rally and makes new highs but I am ready for what ever the market dishes out in the coming months.

I hope this report helped you to understand that trading is an active sport and being able to change directions one day to another is just part of the game.


If you are interested in my Trading Alert Service for ETFs check out TheGoldAndOilGuy
at www.TheTechnicalTraders.com

On another note, if you would like to trade all the setups I do in real-time I will be launching a service where I provide all my personal trades and analysis for your to follow along in real-time. Members will receive all my intraday and swing trade alerts for indexes and commodities Futures allowing you to trade which ever vehicle you want whether it’s an ETF, Leveraged ETF, Futures Contract or CFD. This way your timing is accurate and you can trade which ever investment you are comfortable trading with.

There will be a 24/7 chatroom allowing us to trade around the clock when setups arise. Also, members can swap ideas, ask me questions, make new trading buddies etc… There is even a squawk box feature! I can talk live with audio to everyone in the chatroom to the site can hear me for important news or trades alerts.

All trade alerts are instantly posted in the members area, chat-room and sent via email making it one of the most powerful trading services I have seen available online.

If you are interested please fill out the form to be notified for this service which will start the last week of March or the first week of April. It will have limited availability to keep it personal:

Chris Vermeulen