Thursday, February 24, 2011

Goldrunner: Fractal Analysis Suggests Silver to Reach $52 – $56 by May – June 2011

Dollar Inflation remains the driver of the pricing environment for almost everything denominated in U.S. Dollars as long as the Fed continues to monetize debt. The debt monetization creates Dollar Inflation that results in Dollar Devaluation. As the Fed ramps up the QE II that they have announced will end in June, I expect Gold, Silver, and the PM stocks to aggressively rise.
In previous articles I have shown that fractal analysis suggests that:
  • Gold could reach $1860 into the May/ June period based on the late 70’s Fractal. I have also shown the potential for Gold to rise even higher if the market psychology is volatile enough – up to $1975, or even up to $ 2250.
  • The HUI at from HUI 940 to 970 by mid-June is a distinct possibility and we will discuss the fractal considerations for the PM stock indices further in the next editorial.
  • Silver could reach $52 – $56 into May – June of 2011 as explained in this article.

Fractal analysis provides us with:

  • decent target estimates in price and in time,
  • decent reference points to keep us on track and, most importantly,
  • decent expectations for the quality of potential price moves.

Let’s look at the potential for the next intermediate-term move in Silver in relation to the 2006 fractal period and then in relation to the 1979 fractal period using ratio analysis.
The Silver Chart From 1977 – 1978
The chart below is a “line chart” of the 1979 portion of the long-term Silver bull and because it does not show the spikes in price inherent in a Silver bull the true upward run in price would be higher than what is actually shown.
The circled area on the Silver chart is analogous, in fractal terms, to where we are today. The chart shows that the run out of the analogy to today’s correction was a bigger run than the price move up into it. The estimated time to the next intermediate top measures to May/ June of 2011 which matches the stated current program of QE II in effect by the Fed.

Today’s Silver Price vs. the 2006 Fractal Move Suggests the Next Top at 52.8

- The black lines in the chart below show the approximate slope for the current intermediate-term move as related to the similar fractal move in 2006.
- The red dotted lines off of the previous tops show a general range of where the next intermediate-term top might lie based on the symmetry of previous old top history series.
- The fib indicator is placed the same in both fractal periods – off of the last intermediate low with the 50% line off the top of the “recent high” (at black arrow) and the .618 fib off of the low that followed. This fib placement fit the next intermediate-term top (at red arrow) in the 2006 Silver Fractal. Today, an equivalent fractal top for Silver would come in around 56 into the May/ June 2011 time period at the RED ARROW. In the 2006 Silver Fractal, the next intermediate-term top came on a rise 65% above the last recent top. A similar target for May/ June would be to 52.8. This difference between fractal periods appears to be logical since we have reached a more aggressive portion of the parabolic rise on the chart, today, versus 2006.
Red arrows and black arrows have been placed at analogous points on the chart. We can see similar formations that have formed on the Technical Indicators in the RSI, ADX, and Slow Stochastics.
In summary, the black line in the current period reaches the red angles lines in an area where the lower red dotted line will be around $48 to $49 into the late May/ June period and the upper red dotted line will be in the $55 to $57 area in that same approximate period. Considering all of the above, I will be looking for a potential top in Silver into May/ June 2011 to around $52 with the potential to see a spike up to as high as $56.
Another Silver 2006 Fractal Chart
The chart below should clarify the work I did annotating the chart above.
To estimate the timing and the eventual price level of the next intermediate top in silver off the 2006 fractal, I have noted in both the current and 2006 periods:

  • The last high before break-out for the last aggressive run
  • The last bottom before that run as POINT A
  • Cluster top equivalent of the recent high as POINT B
  • The recent hammer bottom and 2006 equiv off the cluster tops
  • The double top 2006 equivalent of our next expected intermediate-term top.

I have done a rough count in terms of “time” from Point A to Point B. The current ratio in terms of time for “A to B” versus the 2006 period is around 1.8. Using the ratio times the 2006 time periods yields a range of ~ 18 to 23 weeks to each of the double tops of 2006. That estimate in time would put us into late May to early June.

In terms of price, my confidence in the use of the 2006 fractal comes from how closely the 05/ 06 fractal worked off of the “recent prime 2002 fractal.” The move from point B to Point C in 2006 was almost precisely 2 times the rise from Point A to Point B. Thus, we would expect the coming run up into the next intermediate term high to be about 2 times the rise from the last bottom before break-out up to the recent high. The current period “A to B” is approximately ~ 14. So, 2 times 14 = 28 added to 31 gives us a potential rise, spikes included, up to about $59 for the coming intermediate term top. This is only a comparison off of 2006.

I would be quite happy to see a rise up to $48 to $52 yet the move in Silver in the 1979 parabolic move suggests a spike to a point a bit higher as the psychology of a parabolic move would suggest.

Gold Denominated in South African Rand

If Gold priced in Rand rises out of the ascending triangle to the upside as shown in the chart below, then

SA gold stocks could start to rise in a momentum run analogous to their runs in early 2002 and in 2005/ 2006. The RSI has already broken out while price sits at the top of the huge ascending triangle. It is “3 touches and out for the PM sector” (as per Ciga Eric), and if so, this is the 4th attempt at the top of the triangle. In the 2006 fractal period I showed with Silver, above, Gold in Rand rose sharply higher out of a triangle formation sending the SA Gold Stocks into an upward momentum run which, historically, have very large 3rd wave runs that tend to move in sync with the HUI Index.

The PM sector upside looks like it could be explosive in the coming months just as in the 1979 fractal. I think is time to get positioned to take full advantage of the coming move.

10 Mining Stocks With Strong Buy Ratings

(TheStreet) -- Posco(PKX), MAG Silver(MVG), Sterlite Industries(SLT), Puda Coal(PUDA), Steel Dynamics(STLD), Barrick Gold(ABX), Peabody Energy(BTU), VALE(VALE), Rio Tinto(RIO) and Goldcorp(GG) received analyst buy ratings in the range of 78%-100%. These stocks have an upside potential of up to 67%, based on analysts' consensus estimates of 12-month price targets.

Base metals kicked off to a good start this week due to heavy stocking and strong industrial demand. A descent in HSBC Flash China Manufacturing Purchasing Managers' Index in February to seven-month lows could alleviate inflationary pressures and push demand revival. Demand surge for commodities worldwide ensured upswings in most metal prices. Besides, a recovery in developed economies and a sustained push from emerging markets would augur well for mining companies.

We have identified 10 mining stocks that received average analysts' buy ratings of 90%, while POSCO, Sterlite, Puda and Mag Silver have 100% buy ratings. Analysts foresee further upsides from present levels. The selected stocks have potential to deliver 15%-67% return over the next one year and have been picked from U.K., China, India, Canada, the U.S. and Brazil.

The stocks are stacked in terms of upside, great to greatest.

10. Goldcorp(GG) is among the world's fastest growing senior gold producers with operations throughout the Americas.

During the third quarter, net profit surged 65% year-over-year to $231.5 million on lower cash costs. Revenue surged 28% year-over-year to $886 million during the September quarter on robust gold sales.

For the third quarter, Goldcorp reported higher cash flows before working capital in the order of $471 million on production of 596,200 ounces and lower cash costs.

Exuding optimism about future gold production, Goldcorp's CEO said in a press statement, "We have begun commissioning of the high pressure grinding roll circuit, representing the completion of Peñasquito construction and the final component of designed 130,000 tonne throughput capacity, which we expect to reach early in 2011. The expected completion of the Andean Resources acquisition will add Cerro Negro, another large, high-quality gold asset in Argentina."

Goldcorp has a strong balance sheet. The stock received buy ratings of 78% and as per consensus estimates, the stock is poised to deliver 36% in the next one year. The stock is trading at 21 times its estimated 2011 earnings.

9. Rio Tinto(RIO) is a global metal and mining player dealing in aluminum, copper, coal and iron ore. Rio sources bulk production from Australia and North America and operates in more than 50 countries.

Rio announced record underlying earnings of $14 billion in 2010, up 120% from 2009. Net debt reduced to $4.3 billion in 2010 from $19 billion in 2009.

Rio Tinto recently made an off-market takeover offer to acquire all the outstanding shares of Riversdale Mining at A$16 per share cash offer. The company divested the remaining 48% stake in Cloud Peak Energy(CLD) during December 2010.

On future growth, the company's CEO Tom Albanese said, "We will continue to expand our tier-one assets following the $12 billion of major capital project approvals since the start of 2010. We have embarked on Australia's largest fully integrated mining project through the expansion of our iron ore business in the Pilbara toward 283 million tonnes a year by 2013, and continue to finalize studies into the phase two expansion to 333 million tonnes a year by 2015."

The stock outperformed during 2010, gaining 34% during the last one year, and is currently trading at 7.6 times its 2011 earnings.

8. VALE(VALE) is a metals and mining giant producing iron ore and iron ore pellets.

During February 2011, Vale announced commissioning its first pelletizing plant in its industrial complex in Oman, which also includes a deep-water bulk jetty.

Bulk materials comprising iron ore, pellets, manganese ore and ferro-alloy contributed 77.7% to third-quarter operating revenue, while sales to Asia contributed 56.4% toward total revenue. In recent quarters, bulk material sales and sales to Asia trended higher.

Operating revenue jumped 110% year-over-year to $14.5 billion. Operating income and net income rose by a staggering 200% each on robust revenue. Margins were impressive, with operating margin climbing 56%, up 8% from the second quarter.

The stock gained 22% during the last one year and is trading at 7.1 times its estimated 2011 earnings.

7. Peabody Energy(BTU) is a coal company with business interests in the U.S. and Australia.

Net revenue for 2010 increased to $6.9 billion from $850 million, driven by higher volumes and pricing from mining operations in both the U.S. and Australia. Sales volume for 2010 totaled 246 million tonnes compared with 243.6 million tonnes in 2009.

Higher contributions from mining operations improved gross profit to $1.8 billion, compared with $1.3 billion in the prior year. Operating profit rose 57% year-over-year to $1.33 billion, resulting in significant cash flow generation of $1.1 billion. Overall, net income rose 76% year-over-year to $805 million.

Commenting on the better-than-expected results, Gregory H. Boyce, Peabody Energy CEO, said, "Peabody delivered the second best year in company history, with record safety performance, strong cost containment and margin expansion in every operating region."

The stock is trading at 10.7 times its 2011 earnings. Of the 26 analysts covering the stock, 22 rate it a buy. The stock appreciated 38% during the last one year and is likely to gain 15% over the next one year, based on consensus estimates. The stock is trading at 10.7 times its estimated 2011 earnings.

6. Barrick Gold(ABX) engages in the production of gold and other associated activities like exploration and mine development.

Fourth-quarter adjusted net income rose 57% to $947 million, compared to $600 million during the same quarter last year, riding on buoyant gold sales and higher realized prices for both gold and copper.

Rising gold prices and lower cash costs supported Barrick's cash margins -- fourth-quarter cash margins jumped 35% year-over-year to $882 per ounce and net cash margins rose 29% to $1,042 per ounce.

Barrick's financial position is strong, including a quarter-end cash balance of $4 billion, low net debt of $2.5 billion and robust operating cash flow generation. Besides, commissioning of the Pueblo Viejo and Pascua-Lama projects would improve gold production to 9 million ounces over the next five years.

Of the 28 analysts covering the stock, 24 rated it a buy. The stock gained 30% during the last year and is trading at 11.5 times its estimated 2011 earnings.

5. Steel Dynamics(STLD) is the fifth-largest producer of carbon steel products.

Net profit for 2010 stood at $141 million on net revenue of $6.3 billion, in comparison to a net loss of $8 million on net revenue of $4 billion for 2009.

During the fourth quarter, the company announced net profit of $8 million on net revenue of $1.5 billion. In comparison, fourth-quarter 2009 net profit stood at $27 million on net revenue of $1.2 billion. A non-cash asset impairment charge of $13 million related to the company's fabrication operations lowered fourth-quarter earnings.

Fourth-quarter steel shipments were 1.3 million tonnes, up 13% compared to fourth-quarter 2009.

Looking ahead, Keith Busse, Steel Dynamics CEO, said, "With the expected slow but continual improvement in the U.S. economy, we could see increased volumes compared to 2010 for both our steel and metals recycling operations. Our current expectation is that steel consumption should grow in 2011 in the automotive, transportation, energy, industrial and the agricultural and construction equipment sectors."

The stock is trading at 9.5 times its estimated 2011 earnings.

4. Puda Coal(PUDA) is located in China's Shanxi province and supplies high-grade metallurgical coking coal that is used to produce coke for steel manufacturing in China.

Puda's annual coking coal capacity is 3.5 million metric tons. The company recently moved upstream into coal mining as an acquirer, and the Shanxi provincial government has appointed Puda as a consolidator of 12 coal mines; the company foresees higher margins from these mines.

During the third quarter, Puda reported a 60% year-on-year increase in total revenue, driven by higher sales volume and average selling prices for cleaned coal. Net income rose 86% for the quarter. Gross margin stood at 10.7%, improving 1.1% from the same quarter of last year.

The company's future prospects are secure, as China's burgeoning electricity demand would require massive volumes of coal. The stock is trading at 6.5 times its 2011 earnings, with 100% analyst buy ratings.

3. Sterlite Industries(SLT) is a global player in the metals and mining sector, with a diversified portfolio consisting of non-ferrous metals.

Hampered by regulatory restrictions at its Tuticorin and Orissa projects, the stock has been underperforming the broader market indices, down 12% in the last year.

Sterlite completed the acquisition of 74% interest in Black Mountain Mining from Anglo American Group in South America. The acquisition includes Black Mountain zinc mine and Gamsberg zinc project, the company said in a press statement. Furthermore, the acquisition of Skorpion zinc mine in Namibia from Anglo American for around $700 million has also been concluded.

On the operational front, production ramp up at its new smelters will augment volumes. Strong contributions from its power and zinc segments could improve earnings profile.

Sterlite has a strong balance sheet with cash and cash equivalents of $6 billion, which can be used for organic and inorganic opportunities.

The stock is currently trading at 7.1 times its estimated 2011 earnings, with a dividend yield of 0.4%.

2. MAG Silver(MVG) is a silver mining company operating in the Mexican Silver belt.

MAG announced an independent updated mineral resource estimate for the Juanicipio Property, which is a standalone underground silver mine owned by Minera Juanicipio, a joint venture between Fresnillo and MAG.

The mine has around 5.2 million tonnes containing 110.8 million ounces of silver and 321,300 ounces of gold that can be excavated during its lifetime, as per a company report. Regarding the estimate release, Dan MacInnis, MAG's president and CEO, said in a press statement, "We are pleased, but not surprised, to have added over 2 million tonnes and more than 27 million ounces of silver and 111 thousand ounces of gold to our Indicated Resources."

MAG Silver maintained a strong cash position of $46.5 million at the end of the third quarter. The stock doubled during the last one year and analysts' consensus suggests an upside of 50% over the next year.

1. Posco(PKX) is a Korea-based integrated steel producer.

During 2010, the company achieved its highest steel production volumes to date. Production volumes stood at 33.7 million tonnes, up 14% year-over-year, following capacity expansion. During 2010, Posco launched operations at its newly opened or expanded facilities, such as the Gwangyang steel plate factory and refurbished Pohang Furnace.

For full-year 2010, net revenue increased 20% year-over-year. Through low-cost material use and byproduct recycling, operating profit increased 60% in 2010, compared to the prior year.

Going ahead, Posco plans to maintain maximum production from its new and expanded facilities, starting construction at its Indonesian integrated steelworks, India cold-rolled plant, Turkey stainless cold-rolled plant, and by three overseas processing centers each in China and India, in addition to the 48 centers currently operating in 14 countries. The stock is trading at 7.8 times its estimated 2011 earnings.

6 Charts Which Prove That Central Banks All Over The Globe Are Recklessly Printing Money

devalued so rapidly, then why does it sometimes increase in value against other global currencies? Well, it is because everybody is recklessly printing money now. The 6 charts which you are about to see below prove this. The truth is that it is not just the U.S. Federal Reserve which has been printing money like there is no tomorrow. Out of control money printing has also been happening in the UK, in the EU, in Japan, in China and in India. There are times when one particular global currency will fall faster than the others, but the reality is that they are all being rapidly devalued. Unfortunately, this is a recipe for a global economic nightmare.

Right now you can almost smell the panic as it rises in global financial markets. Investors all over the world are racing to get out of paper and to get into hard assets. Just about anything that is "real" and "tangible" is hot right now. Gold hit a record high last year and it is on the rise again. In fact, it just hit a new five-week high. Demand for silver is becoming absolutely ridiculous right now. Oil is marching up towards $100 a barrel again. Agricultural commodities have exploded in price over the past year. Many investors are even gobbling up art and other collectibles.

Paper money is no longer considered to be safe. All over the globe investors are watching all of the reckless money printing that has been going on and they are becoming alarmed. An increasing number of investors and financial institutions are putting their wealth into hard assets that are real and tangible in an effort to preserve their wealth.

The other day, a reader of this column named James sent me some charts that he had put together. I thought they were so good that I asked him if I could include them in an article. These charts show how central banks all over the globe have been recklessly printing money. Over the last 30 years virtually the entire world has developed a great love affair with fiat currency....

So is everyone printing money?

The U.S. is printing lots of money.....

Source, The St. Louis Fed

The Bank of England is printing lots of money.....

Source: The BoE

The EU is printing lots of money.... (more)

Eric Sprott: The Government Lied... There is No More Silver!

McAlvany Weekly Commentary

Interview with Dr. Marc Faber: Measuring with the Proper Unit of Account…Gold

A Look At This Week’s Show:
- Germans not happy with bailout of P.I.I.G.S.
- “The budget will never again be balanced”
- Even if commodities drop, gold should still rise

Dr Faber publishes a widely read monthly investment newsletter “The Gloom Boom & Doom Report” report which highlights unusual investment opportunities, and is the author of several books including “ TOMORROW’S GOLD – Asia’s Age of Discovery” which was first published in 2002 and highlights future investment opportunities around the world. “ TOMORROW’S GOLD ” was for several weeks on Amazon’s best seller list and is being translated into Japanese, Chinese, Korean, Thai and German. Dr. Faber is also a regular contributor to several leading financial publications around the world.

Investors snap up cheap homes, new buyers miss out

(AP) -- Home sales are starting to tick up after the worst year in more than a decade. But the momentum is coming from cash-rich investors who are scooping up foreclosed properties at bargain prices, not first-time home-buyers who are critical for a housing recovery.

The number of first-time buyers fell last month to the lowest percentage in nearly two years, while all-cash deals have doubled and now account for one-third of sales.

A record number of foreclosures have forced home prices down in most markets. The median sales price for a home fell last month to its lowest level in nearly nine years, according to the National Association of Realtors.

Lower prices would normally be good for first-time home-buyers. But tighter lending standards have kept many from taking advantage of them. With fewer new buyers shopping, potential repeat buyers are hesitant to put their homes on the market and upgrade.

Cash-only investors are most interested in properties at risk of foreclosure. They can get those at bargain-basement prices.

"The cash-rich investors can come in and get foreclosed properties at incredibly favorable prices," said Paul Dales, senior U.S. economist for Capital Economics. "The average Joe can't take advantage because they simply cannot get the credit to buy."

Sales of previously occupied homes rose slightly in January to a seasonally adjusted annual rate of 5.36 million, the Realtors group said Wednesday. That's up 2.7 percent from 5.22 million in December.

Still, the pace remains far below the 6 million homes a year that economists say represents a healthy market. And the number of first-time home-buyers fell to 29 percent of the market -- the lowest percentage of the market in nearly two years. A more healthy level of first-time home-buyers is about 40 percent, according to the trade group.

Foreclosures represented 37 percent of sales in January. All-cash transactions accounted for 32 percent of home sales -- twice the rate from two years ago, when the trade group began tracking these deals on a monthly basis. In places like Las Vegas and Miami, cash deals represent about half of sales.

In the three states where foreclosures are highest, at-risk homes make up at least two-thirds of all sales. In Florida, 63 percent of sales in January involved homes that were at risk of foreclosure, according to a Campbell/Inside Mortgage Finance survey. And in Arizona and Nevada, a combined 72 percent of sales involved those homes at risk of foreclosure.

A major barrier for first-time home-buyers is tighter lending standards adopted since the housing bubble burst. These have made mortgage loans tougher to acquire. Banks are also requiring buyers put down a larger down payment. During the housing boom, buyers could purchase a home with little or no money down.

The median down payment rose to 22 percent last year in at least nine major U.S. cities, according to a survey by, a real estate data firm. That's up from 4 percent in late 2006 -- as the housing bubble began to burst. The cities included some of the nation's hardest hit markets -- Las Vegas, Phoenix and Tampa, Fla. -- as well as areas that are rebounding, including San Diego and San Francisco.

That has prevented many from buying, even when the median price of a home fell in January to $158,800. That's a decline of 3.7 percent from a year ago and the lowest point since April 2002.

"If you can get the financing, it's a great time to buy a home with prices this low," said Patrick Newport, U.S. economist with IHS Global Insight.

Many potential buyers who could qualify for loans are hesitant to enter the market, worried that prices will fall further. High unemployment is also deterring buyers. Job growth, while expected to pick up this year, will not likely raise home sales to healthier levels.

With mortgage rates rising, mortgage applications have been volatile. They're now near their lowest levels in 15 years. Economists say it could take years for home sales to return to healthy levels.

"Home prices continue to languish," said Steven Wood, chief economist for Insight Economics. "Any recovery will be difficult to sustain given the still-large supplies of homes for sale and distressed properties."

Last year, home sales fell to 4.9 million, the lowest level in 13 years. And even that number, some say, was overstated.

CoreLogic, a real-estate data firm in Santa Ana, Calif., said it's found that 3.3 million homes were sold last year, far fewer than the National Association of Realtors' 4.9 million figure. CoreLogic has suggested that the Realtors figure is too high.

Since 1968, the Realtors group has produced the monthly report on the number of previously occupied homes sold. The group serves as chief advocate and lobbying arm for real estate agents. It says it's reviewing its 2010 yearly estimate.

One obstacle to a housing recovery is the glut of unsold homes on the market. Those numbers fell to 3.38 million units in January. It would take 7.6 months to clear them off the market at the January sales pace. Most analysts say a six-month supply represents a healthy supply of homes.

Analysts said the situation is much worse when the "shadow inventory" of homes is taken into account. These are homes that are in the early stages of the foreclosure process but have not been put on the market yet for resale.

For January, sales were up in three of the four regions of the country led by an 7.9 percent rise in the West. Sales rose 3.6 percent in the South, 1.8 percent in the Midwest and down 4.6 percent in the Northeast.

The January increase was driven by a 2.4 percent rise in sales of single-family homes. It pushed activity in this area to an annual rate of 4.69 million units. Sales of condominiums rose 4.7 percent to a rate of 670,000 units.

Wait for the Retrace?

Too many people have been waiting for the stock market to correct. Maybe waiting for a retrace/rebound is in order.

The global stock markets' big dump yesterday has long-frustrated Bears salivating. Everyone knows the market has traded up for months on thin volume and heavy intervention by the Federal Reserve, so it makes a certain sense to expect the markets to cascade downward once the charade ends.

Everybody also knows the tradewinds that have filling the markets' sails--record profits, impressive gains in overseas revenues, the expectation that China alone would fuel a commodities boom for decades to come, to name but a few--have all suddenly ceased, and in the stillness, a storm--oil over $100/barrel--is gathering ominously on the horizon.

But too many hedge fund managers and other traders have been waiting for a big dump to make their year, which means the big dump is suddenly less likely. We might also anticipate that the Powers That Be aren't going to let their pride and joy, a manipulated market, roll over and expire just because Libya imploded and oil is heading over $100/barrel.

One possibility is a quick recovery after a few days of uncertainty and a retrace back up, ideally to a double-top. That's what we're looking at on the 10-year chart of the Nasdaq: a big fat double-top screaming "look out below." This is really a beauty to behold: technically, it doesn't get any better than this.

It would be handy if the U.S. dollar confirmed the change in trend by breaking out of its trading range to the upside. Nobody knows what will transpire, but it's something to look for.

As always, these are just the ramblings of an amateur observer, and do not constitute advice nor are they intended as advice--please read the HUGE GIANT BIG FAT DISCLAIMER below for more.

When this market does break down--and it will--then the fireworks may begin. Alternatively, it could just torture everyone with stutter-steps and false breakdowns for a few more weeks or even months. We'll just have to wait and see.

A Crack in the Commodities Story

Prices of goods ranging from copper to cotton are beginning to break down following strong runs.

There are significant cracks in the commodities story, even as oil, gold and silver generally continue to perform well.

In recent weeks, prices for several commodities from soybeans to sugar have stalled. Cotton scored a massive bearish technical reversal last week. And in the stock market, fertilizer and copper stocks have been acting poorly.

Fertilizer stock CF Industries Holdings (NYSE: CF - News)was a market leader for much of the past eight months, but last week started to act rather poorly (see Chart 1). While the broad market edged higher it started to move lower with a particularly bearish performance February 18.


Although it has not significantly broken its rising trendline from last summer or any major moving averages the price declines seem rather suspicious. Momentum indicators, such as the relative strength index, peaked in January setting up a bearish divergence with prices.

And it is not alone in its sector. Potash Corp. of Saskatchewan (NYSE: POT - News) has been floundering for two weeks before completing a bearish pattern called an "evening star" in candlestick chart parlance. This pattern is essentially a failed burst higher. It was followed by a strong day of selling Friday and a decisive pummeling in Monday's trading.

Chile-based Sociedad Quimica y Minera de Chile (NYSE: SQM - News) is another example of a stock that has engineered a stealth transition from bull to bear with its own Monday thrashing. Technically, it was the second time this year that the stock formed a "gap" on the charts because selling pressures swamped buyers and prices could not trend smoothly lower.

In the copper sector, Freeport-McMoRan Copper & Gold (NYSE: FCX - News) also sports a pair of gaps to the downside (see Chart 2). Given the gold component in the company's mix, that it is down 17% in little more than a month as gold climbed back above $1400 per ounce, tells us something about copper miners. It is not good.


Monday's decline took the stock below a small trading range and confirmed a downside break below its key 50-day moving average. Both are bearish signals.

Finally, Southern Copper (NYSE: SCCO - News) has broken down from the ubiquitous head-and-shoulders (see Chart 3). This pattern is marked by a central peak surrounded by two lower and roughly equal peaks. The lows between the peaks define the pattern's bottom and when penetrated to the downside the change in trend is confirmed.


Given that copper itself remains in a solid rising trend after reaching an all-time high just last week, this adds to the argument that something is quite wrong with copper stocks. At a minimum, it casts real doubt on the power of the rally in the underlying commodity.

I am far from a commodities bear but we cannot ignore the evidence from several markets and sectors. Even emerging markets, which are typically commodities dependent, have been floundering for months.

Investors should carefully weigh all evidence before jumping on the commodities bandwagon, because some of its wheels are looking a little wobbly.

5 Oversold Stocks To Watch : CSCO, F, LCC, MRK, TGT

One of the most popular tools in technical analysis that is used to predict a shift in a stock's momentum is known as the relative strength index (RSI). This indicator's primary purpose is to determine when a given rally is becoming overbought or oversold. Generally speaking, readings below 30 suggest that the stock has been pushed to an unjustifiably low level, causing most bullish traders to start looking for a strategic entry position. On the other hand, readings above 70 are often used to suggest that the rally is getting exhausted and that the bears may be getting ready to send the stock lower.


The Basics
The indicator is plotted between a range of zero to 100 where 100 is the highest overbought condition and zero is the highest oversold condition. The RSI helps to measure the strength of a security's recent up moves compared to the strength of its recent down moves. This helps to indicate whether a security has seen more buying or selling pressure over the trading period.

The standard calculation uses 14 trading periods as the basis for the calculation which can be adjusted to meet the needs of the user. If the trading periods used is lowered then the RSI will be more volatile and is used for shorter term trades. (For more, see Ride The RSI Rollercoaster)

How It Is Used
As mentioned above, the most common method of applying the RSI is to use overbought and sold lines to generate buy-and-sell signals. In the RSI, the overbought line is typically set at 70 and when the RSI is above this level the security is considered to be overbought. The security is seen as oversold when the RSI is below 30. These values can be adjusted to either increase or decrease the amount of signals that are formed by the RSI. Let's take a look at a few stocks that have recently entered oversold territory because these could be candidates for a short-term rally when they get spotted by bargain hunters.

Company Name RSI Value
Target Corp (NYSE:TGT) 23.14
Merck Inc. (NYSE:MRK) 29.20
Ford Motor Co. (NYSE:F) 29.77
Cysco Systems (Nasdaq:CSCO) 28.13
US Airways Group (NYSE:LCC) 29.55

Bottom Line
The RSI is a standard component on any basic technical chart and is a great method of filtering stocks that could be setting up for a short-term rally. In most cases, traders will want to confirm any buy or sell signal by using other technical indicators or chart patterns to increase the probability that a predicted move will actually occur. (For more, see Relative Strength Index Helps Make The Right Decisions)

By Investopedia Staff

Nomura Predicts $220 Oil If Just Libya, Algeria Cut Output

Waiting for a Saudi revolution before buying those $200 oil calls? It may be time to reevaluate: according to Nomura a halt in just Libyan and Algerian oil production (far more likely than the crisis spilling over to Saudi) would send oil to over $220/bbl. Specifically "the closest comparison to the current MENA unrest is the 1990-91 Gulf War. If Libya and Algeria were to halt oil production together, prices could peak above US$220/bbl and OPEC spare capacity will be reduced to 2.1mmbbl/d, similar to levels seen during the Gulf war and when prices hit US$147/bbl in 2008." Wouldn't a doubling in price lead to a major demand plunge as well? Yes it would "This could also result in a temporary demand destruction of some 2.0mmbbl/d globally." Also, since the Fed's free money was not flooding global market last time, $220 is just a lowball estimate: "We could be underestimating this as speculative activities were largely not present in 1990-91."

More observations from Nomura's Michael Lo:

  • In order to estimate the impact the current MENA crisis could have on oil supply and prices, we analysed past crises that rocked the region. There have been a few events that drove oil prices higher (from 30% to 130% per event), most of which were during the period in which OPEC controlled oil prices. However, we believe the closest comparison is the 1990-91 Gulf War as this is the only event outside of that period. During the seven months of Gulf War, prices jumped 130% as OPEC spare capacity was reduced to 1.8mmbbl/d while demand came off briefly by 1.7%. Similarly, today, if Libya and Algeria were to halt operations, OPEC spare capacity will also likely be drawn down to 2.1mmbbl/d, in our view, which could fuel higher oil prices.
  • We have identified three distinct stages of the Gulf war which led to changes in oil prices and we believe we are only at the initial stage of the three stage process for the current MENA unrest. During the initial stage of the Gulf war, prices moved up by 21%. This is comparable to what we have seen recently when oil price went up by 13% since the beginning of the MENA unrest. As we see further evidence of real supply disruption, we will be moving into Stage 2 of the event – during this stage of the Gulf war, prices moved to its peak (up 130%) within a period of two months. On the assumption that prices will move up by the same amount, we could see US$220/bbl should both Libya and Algeria halt their oil production. We could be underestimating this as speculative activities were largely not present in 1990-91.
  • Open interest in WTI futures contracts has risen 2.4% since the beginning of the MENA crisis in January this year. On the other hand, open interest in Brent future contracts has fallen 7.6% during the same period. This was primarily on back of the large WTI-Brent differential during the period, as WTI crude prices are being suppressed by Cushing storage and infrastructure issues while Brent crude price was lifted by supply outages in North Sea fields.

And this is how excess capacity looks like per Nomura. If Wikileaks is right, and Saudi has been massively overestimating its reserves, $220 will be just the beginning.

Full report:

Nomura MENA

Wall St slides as oil jumps, tech shares weigh

(Reuters) - U.S. stocks dropped for a second straight session on Wednesday as Libya's violence sent oil prices up briefly to $100 a barrel and tech shares sank, adding credence to calls for a market correction.

Oil futures jumped to their highest since October 2008 amid worries about supply disruptions in Libya, a top oil producer. Late in the day, oil eased off the day's highs, helping stocks trim losses.

The day's drop follows a 2.1 percent decline in the S&P 500 on Wednesday, and the second straight session of above-average trading volume. However, since a modest correction is expected, investors at this point are taking the declines in stride.

"We've had a solid run-up here in the equity markets for an extended period, really without a correction, so long-term, this will be a good thing for the market to have a little bit of a pullback," said Wayne Schmidt, chief investment officer at Gradient Investments In St. Paul, Minnesota.

The Nasdaq led losses as recent top gainers also lost ground, including Netflix (NasdaqGS:NFLX - News), down 4.7 percent at $211.20, and (NYSE:CRM - News), down 2.5 percent at $133.37.

Hewlett-Packard (NYSE:HPQ - News) late Tuesday cut its 2011 revenue forecast on slipping demand for its personal computers, and at least six brokerages cut their price targets on the stocks. Shares sank 9.6 percent to $43.59.

The S&P 500 has climbed nearly 25 percent since the start of September and many analysts have said a short-term correction is likely. However, the benchmark index recovered from hitting an intraday low of 1,299.55 during the session. Analysts eyed support at 1,296, the mid-January highs on the S&P 500, and also 1,286, the 50-day moving average.

"You saw a lot of shorts this morning, going into this market with anticipation of problems spreading in the Middle East, and now that people have made some money, you might see some short covering in the afternoon," said Doreen Mogavero, CEO of Mogavero, Lee & Co. in New York.

Some saw the drop as a positive as it gives investors the chance to buy stocks on the dip, noting that the longer-term outlook remains bullish for stocks even if equity markets slip further.

"Whether this is it or whether we pull back another 3 or 4 percent, it's healthy and probably warranted, given the run that we've had, and also given the uncertainty in the world -- particularly in the Middle East," Schmidt added.

The Dow Jones industrial average (DJI:^DJI - News) fell 107.01 points, or 0.88 percent, at 12,105.78. The Standard & Poor's 500 Index (^SPX - News) lost 8.04 points, or 0.61 percent, to 1,307.40. The Nasdaq Composite Index (Nasdaq:^IXIC - News) declined 33.43 points, or 1.21 percent, to 2,722.99. (NasdaqGS:PCLN - News) shares jumped 6.8 percent to $455.08 in extended-hours trade after the online travel agency posted a higher quarterly profit as bookings increased 44 percent.

While higher oil prices often boost energy-sector shares, they usually drag on the overall stock market. Higher energy costs tend to reverberate through the economy, pushing up the costs of utilities, manufactured goods and transportation.

The S&P energy index (SNP:^GSPE - News) gained 2 percent, while the Dow Jones Transportation Average (DJI:^DJT - News) shed 2.1 percent.

Thousands of Libyans celebrated the liberation of the eastern city of Benghazi from the rule of Muammar Gaddafi, who was reported to have sent a plane to bomb them on Wednesday as he clung to power.

Volume was active with about 10.32 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above the daily average of 7.99 billion.

Declining stocks outnumbered advancing ones on the NYSE by 1,959 to 1,062, while on the Nasdaq, decliners beat advancers by 1,996 to 629.