Tuesday, August 21, 2012

Copper Prices Signaling a Top in the S&P500

The past 5 – 6 weeks have seen equity prices move considerably higher amid growing concerns regarding the European debt crisis, the instability of the Middle East, and ultimately the potential for a major economic slowdown in the United States.

U.S. equity indexes have continued to climb the proverbial “Wall of Worry” since the first week of June and have put on an incredible run. This past Friday saw the S&P 500 Index (SPX) post the highest weekly close of 2012. The perma-bears have been calling for a top and continue to run scared as light volume and volatility have given the bulls an edge during August.

The next key overhead resistance level for the S&P 500 Index to hurdle is the 1,440 resistance zone lingering slightly overhead. I try to refrain from calling tops or bottoms as I feel its a fool’s game that ultimately humbles most market prognosticators. If calling tops and bottoms was easy, investors and traders alike would be able to produce monster gains all the time with uncanny precision.

Instead of trying to predict where the S&P 500 Index will find resistance or create an intermediate to longer-term top, I will simply posit some technical and macro-economic data that indicates we are likely closing in on a major top.

As stated above, the recent rally we have seen has taken place on relatively light volume and plunging volatility as measured by the Volatility Index (VIX).

Volatility Index (VIX) Weekly Chart

Volatility Index (VIX) Weekly Chart

Volatility Index (VIX) Weekly Chart

As can be seen above, Friday’s weekly close for the VIX was the lowest in 2012 and ultimately one of the lowest closing price levels in several years. While the VIX is trading at a major intermediate low, there remains a lower support level going back to late 2006 and the early part of 2007 around the 10 price level. (more)

Chart of the Day - Apple (AAPL)

The "Chart of the Day" is Apple (AAPL), which showed up on Friday's Barchart "All-Time High" list. Apple gapped higher Friday and posted an all-time high at $648.19 and closed up +1.85%. TrendSpotter has been long Apple since Aug 3 at $615.70. In recent news on the stock, Jefferies & Co. analyst Peter Misek raised his price target on the stock to $900 from $800 on Friday, saying an "iPad Mini" is in production in China. His belief is based on readings of reports from Apple's suppliers, contract manufacturers and contacts in the region. He now believes Apple will build 25 million iPads of all kinds in the current quarter, up from a previous estimate of 16 million, which did not include the "Mini." Analysts now believe the iPhone 5 will go on sale in late September, and it's widely believed that it will be the biggest phone launch ever. Rumored upgrades include the ability to access the latest wireless data networks in the U.S. and a slightly bigger screen. Apple, with a market cap of $589.9 billion, designs, manufactures and markets personal computers and related personal computing and communicating solutions for sale primarily to education, creative, consumer, and business customers.


Warning: The "Dumb Money" Is Buying Oil

The last two times the "dumb money" was this bullish on oil, they got crushed.
The "dumb money" hit maximum bullishness in March 2011. The benchmark U.S. crude price peaked that May at $112 per barrel... and fell 30% over the next five months.
The "dumb money" got bullish again this past February. Oil peaked on February 24 at $109 per barrel... and fell 29% over the next four months.
The oil price has since rallied 20%... and the "dumb money" is excited again.
The "dumb money" is hedge-fund money. These are speculators... not "commercial traders."
Commercial traders are the folks who physically produce and consume a commodity. For example, commercials in the oil market include producers and refiners. These are the folks who actually use oil. They are the experts and are intimately involved in the fundamentals of the industry.
They're the "smart money."
The non-commercial traders are the big speculators, like hedge funds. These participants are in the market simply to make money by betting on commodity price movements. They're the "dumb money." They tend to sell at the bottom and pile in at the top... So when you see them piling in... you know a drop is around the corner.
You can see this "piling in" action in the Commitment of Traders report. This report tracks the volume of trades in commodities and currency futures. And it shows who is buying a given commodity... and who is selling it. It lets us track the flow of money.
Right now, the dumb money is flowing into oil. You can see it in the chart below. The blue line is the net long oil contracts held by non-commercial traders. Right now, the blue line is nearing the peaks it saw in March 2011 and February 2012... just before oil prices crashed.
While we aren't at an extreme yet, we are heading that way. And the last two times the dumb money was this long, things ended badly.
As regular readers know, this is just one more signal the price of oil could collapse in the near future. We covered this story here and here as well.
The fundamental data don't support high oil prices, and now a wave of dumb money is betting oil prices will rise... In the past, that's indicated a top in oil prices... and a coming crash. This time, I expect we'll see the same thing.

Endeavour International Corporation (NYSE: END)

Endeavour International Corporation, an independent oil and gas company, engages in the acquisition, development, exploration, and production of crude oil and natural gas. The company holds interest in the Alba, Bittern, and Enoch producing fields, as well as focuses on developing the Bacchus, Rochelle, and Columbus fields in the United Kingdom. It also has interests in various resource plays, including established areas, such as the Haynesville and Marcellus; and developing areas comprising Heath Shale oil play located in Montana, the United States. As of December 31, 2011, the company had estimated proved reserves of 22.7 million barrels of oil equivalent. Endeavour International Corporation was founded in 2000 and is based in Houston, Texas.

To review Endeavour's stock, please take a look at the 1-year chart of END (Endeavour International Corporation) below with my added notations:

1-year chart of END (Endeavour International Corporation)

Over the last (2) months, END has been consolidating within a small Rectangle pattern. A Rectangle pattern forms when a stock gets stuck bouncing between a horizontal support and resistance. For END, the Rectangle pattern has formed a clear $9 resistance (red) and an $8 support (navy). Once END eventually breaks out of it's Rectangle, either the $10 or $6 level should come back into play.

The Tale of the Tape: END has formed a small Rectangle pattern. The possible long positions on the stock would be either on a pullback to $8, or on a break above $9. The ideal short opportunity would be on a break below $8, but a short could also be placed on a rally up to $9.

The Only Indicator You Need to Beat the Market

Individual traders can succeed in the markets if they know their edge. That edge should include knowing what time frame to trade and which indicator to use. Some simple trading strategies can deliver reliable returns and could help you retire early, if you can avoid emotional responses to market turbulence.

Individuals who succeed in the markets generally apply a disciplined and patient trading strategy. The need for discipline is well-known, but patience is rarely talked about by traders. Patience is required to realize gains in the time frame that traders can do best in, which is usually based on weekly charts. Most traders are too impatient to accept the reality that they can't be day traders, which is one of the reasons most traders fail.

Day trading is no longer possible for individuals. High-frequency trading firms analyze prices within nanoseconds and there is no way an individual can compete in that environment. Trading with daily charts requires a great deal of time, and with full-time jobs and family obligations most people can't maintain the schedule required to succeed in that time frame. (more)

Gold Price and Indian Demand Shifting Trends

Chris Vermeulen – www.TheGoldAndOilGuy.com

One of the top stories in the financial markets in 2012 has to be the stagnation in the price of gold at around $1600 an ounce, which is down approximately 17% from its peak at $1920.30. Those bullish on the yellow metal have been disappointed in gold’s performance while those bearish on the shiny metal have reveled in its stagnation, saying that gold’s status as a safe haven is over.

What is behind gold’s sluggish performance in 2012? There are several reasons, but one of the key fundamental reasons has been the lack of demand from traditionally the largest buyer of gold on the planet – India (although China will surpass it this year). India bought only 181.3 tons in the second quarter of 2012, a 2-year low, according to the London-based World Gold Council.

There are several factors at play as to why Indian demand for gold has fallen. One reason is the sharp drop in the value of its currency, the rupee, which is down by 25% versus the U.S. dollar this year. This decline has kept gold prices high in relative terms while the actual dollar value of gold was falling. Perhaps even more important has been the ‘war’ declared on gold by its central bank which has blamed all of the country’s economic ills on Indian citizens’ traditional buying of gold. In an attempt to slow down gold and silver imports, the Indian government has imposed new taxes on the purchase of these precious metals.

But even though demand for the precious metal is way down in India, the situation still offers hope for gold bulls. Why? Because we’ve been here before – in 2009 to be exact. In early 2009, the Indian economy and rupee tanked. Gold demand almost completely dried up. According to precious metals consultancy GFMS, Indian demand for gold in the first quarter of 2009 collapsed by 77%. For the full year GFMS said Indian consumption dropped by 19%.

Now with the Indian economy slowing to its weakest growth rate in nearly a decade and the rupee falling, we are seeing a replay of 2009. The monsoon season has been poor, hitting farmers – among the biggest buyers of gold – hard. Gold prices have hit a record high in rupee terms, and India is expected to purchase, as forecast by the World Gold Council, only 750 tons of gold, down 25% from 2011 levels. Meanwhile, the WGC forecasts that China will buy 850 tons of gold this year.

Investors should pay heed to the clues that recent history is giving us. The drop in Indian demand is simply a cyclical phenomenon due to the lousy state of the Indian economy. It will recover eventually. And when it does, look out for the fireworks from renewed Indian demand for gold added to the Chinese demand. In 2010, as pent-up demand for gold was unleashed, Indian gold consumption soared 74% to a record high of 1,006 tons according to GFMS.

Gold bulls surely hope we see something similar in 2013 and that is exactly what I talked about last week based around gold miner stocks and also what Dave Banister’s recent gold forecast was about at TheMarketTrendForecast.com sees in 2013.

Gold Chart Showing 2009 Collapse and Outcome and Current Gold Price Analysis:

Gold Forecast - India Gold demand

Gold Forecast - India Gold demand

Gold Trading & Investing Conclusion:

In short, gold and gold stocks have a lot of work to do before they truly breakout into the next major leg higher. I feel we are nearing that point and they may have bottomed already. Starting a small long position to scale in I think is a safe play. But I would only add more once the trend actually turns up and shows strength in terms of price and volume action.

3 Indicators and a Market Wizard Are Saying 'Buy This Sector'

After someone turns a couple hundred million dollars into billions in a few short years, it seems worthwhile to pay attention to what they do in the future. John Paulson is best known for betting against the housing market in 2006. His fund started with about $150 million, and he delivered gains of more than $20 billion to his investors by the end of 2009.

Paulson then moved into gold, allocating 44% of his $21 billion hedge fund to the sector. And his big position in that market delivered big gains.

Gold Chart

Now, Paulson likes gold again. He owns more than $3.3 billion worth of SPDR Gold Shares (NYSE: GLD) and has twice that much invested in mining stocks. (more)