With tomorrow the end of the sixth trading week of 2012 and such an impressive performance in stocks so far (7.39% gain in the S&P 500 Index based on Thursday's close), I decided to analyze the historical market performance over the first 6 calendar weeks of the year to give a unique perspective.

I was looking for correlation between a strong "First 6 weeks" and what the market does on a yearly basis.  The results were strong and surprising, in my view.

Using S&P 500 (SPX) (SPY) weekly data over the past 40 years, going back to 1972, allowed for a fairly large sample size and also a vast variety of bull, bear, and flat markets.

Here is the bulk data below, which shows the gain/loss for the first 6 weeks of the year and for the entire calendar year.  Positive gains are shown with "W", Losses with "L":

SPX Data Since 1972

The bolded "W/L"s indicate the instances where the first 6 weeks did not correlate to the full year performance.  There were only 10 times out of 40 where this occurred — in other words, 75% of the time the performance in the first 6 weeks foretold what the overall market gain/loss would be for the year.

In addition, there were only 2 instances where the market was UP in the first 6 weeks, but ended the year down — (1994 and 2011) — and both of those years had a net yearly loss of less than 1.5% (basically flat).  So this "Up beginning, Down Year" result is only 2% of the overall sample size and 8.6% of the "Up beginning" samples. 

Another way of stating that is that 91.4% of the time over the past 40 years, an Up first 6 weeks resulted in an Up year.  Thus the past data indicates that the strong open to 2012 is very likely to result in a market gain for the year or a "flat" market in the worst case scenario.

Now let's take a look at the 'leverage' that a strong year open means for the full year performance … the average of the 21 "Up 6, Up Year" years was 5.93% gain for the first 6 weeks and 19.20% gain for the year.  This gives us a "leverage factor" of 3.24.  Projecting this to the 7.39% gain the SPX has achieved thus far in 2012 (Friday's trade action notwithstanding), this gives a projected gain for the year of 23.94%.

That would push the SPX to a potential year end target of 1560.19.  This is certainly a higher number than many analysts are forecasting.  But actually, if you take a look at the SPX Weekly Chart below, this would take us right back to the highs of 2007 just before the global economic crisis hit.

SPX Weekly Chart

So you can see that this potential upside target for 2012 would in fact basically retrace all of the losses incurred since 2007.  This is also a logical resistance/pause/reversal area for the markets.

Since we've had such a strong gain in the first 6 weeks, let's also take a look back at the most similar years since 1972 to see how 2012 may shape up (if history is any guide).  There were 7 years where the market gained between 5% and 10% in the first six weeks: 

Note that the similar years (barring 2011) all had market gains of 19% to 31% on the year, which also falls in line with the leverage forecast calculated above.

The 2011 example (5.7% gain in the first 6 weeks, market ended year virtually flat unchanged) is part of the caveat to the overall very bullish tone of this data.  Please note that this "First 6 Weeks" indicator has NOT worked as a harbinger of the overall market performance in the past 3 years.  One could theorize that the "January" or "6 Week" effect may have been too widely known and traded and the market thus bit the "easy money" in the tail.

While in my view think the overall weight of the 40 years of data is strong and we should see a 'reversion to the mean', the fact that this hasn't worked correctly as a market prognostication tool since 2008 is something to keep in mind when you begin drooling over a potential run to SPX 1500+ this year.

The process of creating a system is not easy, that's why I am sharing with you my breakthrough findings on key points to help you create a more effective system.  This is part of the same process that we've used at BigTrends to design the core signals behind our real-time option trading alert programs.  Without focusing too much on the minutia involved in the day to day actions of system design I'll provide you with a template to follow in creating your next system.

* Research – The backbone to any system is quality research, especially in the often zero sum game of options trading — it's crucial to have an advantage on every level you can.  In my view, this is the step where you choose your indicators, normally based on a logical theory or observation of price action.

To create the best system you need primary indicators and supportive indicators.   Similar to your investment team, you need a leader and a support staff, and each contribution should deliver something unique.  For example, using only volume indicators is not recommended — your system would not be diversified and may overlook key signals found from other types of indicators.

* Design – When you choose your indicators you should have an end result in mind.   What is your risk appetite?  Design a system that fits your needs;  trade the right system for your goals.  The design should also consider time frames — similar to your indicators, you should have a primary time frame and a secondary (supportive) time frame for confirmations.  When we design a new system we consider the results goal in relation to the strategies used to reach those benchmarks.

* Results Driven - After researching and designing multiple systems to test, a successful trader will focus on results.  Each system that you test must be scrutinized based on its ability to surpass previously determined benchmarks.  In this step, many traders lose focus and create a false sense of success in their system — they want to believe it is better than it truly is.  A good way to circumvent over-valuing your system is to have a third party evaluate the results.

* Implementation – At this point of the process you should feel comfortable with the logistics of your system.  The system should be a strong performer based on your goals and is now ready to implement.  Most traders treat a new system much like a small child treats a new toy, they are emotionally attached instantly.  You must avoid this. 

Try this:  give the system to another person to trade – this will ensure that you are clear in your rules and trades are managed without emotion.  Finally, your initial implementation should seek to trade smaller position sizes, at least until the system is given the stamp of approval.

* Evaluate & Improve – Set a trial period for live trades, yes that's right, real trades.  Paper trading is important, backtesting is crucial, but live trading will provide proof.  Based on the research and design process you should have expectations for your system… were they met during implementation?  Focus on the best and worse trades during this period and find a common thread to exploit and improve your system.  This process is ongoing, when a system is perfected is usually when it's time to adapt to the market.  That is, the most efficient system is always being evaluated and improved.

There's much more to the science (and art) of building a profitable active investing tool — including utilizing (and creating) technical indicators, optimizing trading inputs, choosing a universe of securities, entry/exit & profit/stop rules, etc.  But incorporating a systematic approach (such as described above) to your trading will benefit your portfolio in many ways.

Trade Well,

Price Headley

With that in mind, let's have a look at the Gold (GLD) price.  The next chart shows Gold in the 1970's.  At the peak, price was trading 118.32% above the 50WEMA, and 170.04% above the 100WEMA.  WOW!

Gold 1970s Chart

Currently, Gold is only trading 7.54% above the 50WEMA and 17.71% above the 100WEMA — so compared to 1980; Gold is NOWHERE near a Bubble.

Gold Current Chart

The same counts for Mining stocks, as measured by the HUI Index (GDX), as it is trading roughly at the 50WEMA and only 5% above the 100WEMA:

HUI Weekly Chart

When we look at the Gold-to-Dow Jones Industrial Average (DJIA) (DIA) ratio, we can spot a nice uptrend, but nowhere near going vertical. 

However, when we look at the last 12 years, we can see that when price was 30%+ above the 200WEMA or 15%+ above the 50WEMA, it was time to be cautious.

On the other hand, when the ratio was 10% below the 50WEMA and 200WEMA, this offered some nice buying opportunities:

Gold/DJIA Ratio Chart

When we look at the following chart, we can see that, as long as the (reversed) Dow Jones-to-Gold ratio was above the purple line (100WEMA), stocks were in a Bull market, while in 2001, they entered a bear market when measured in "real currency" … and will continue to be in a "real" bear market as long as the purple line is not broken to the upside on a sustainable basis:

DJIA/Gold Ratio

I like to make comparisons of assets as I think history often rhymes, so here's another one which I have shown more than once.

It's Gold in 2006 vs. Gold Now, In an overlay study:

Chart 15

If 2006 is any guide, Gold could consolidate throughout the summer, before taking off sharply into 2013.  Of course, that is, as long as the comparison holds. 

Good luck investing.

Courtesy of Willem Weytjens, www.profitimes.com

The chart below shows us the "classic bubble pattern".  [BigTrends Editor's Note:  You may be familar with this chart and our recent discussions of these types of 'burst bubble' patterns.  But remember that bubbles don't occur in every security or index, only occasionally, and that this exact pattern does not necessarily occur at any given time -- but this type of parabolic upside pattern and breakdown has been seen multiple times in a variety of financial instruments since the 1970s].

Classic Bubble Pattern

Most money is made during the latest phases of any bubble, as price goes nearly vertical.  When something goes straight up, I tend to get worried.  All good things come to an end, eventually.  When something goes straight down, I am looking for ways to enter the market, as bad things come to an end as well… Eventually.

Imagine you invest in an asset that has a similar pattern as the one above… When do you sell if you are in a bubble?  How do you even know whether you are in a bubble or not?

The first thing I look at is sentiment. If sentiment is uberbullish, I become fearful.
 If sentiment is uber Bearish, I get greedy.  The second thing I look at is price action.  When I see something is going straight up, I start to worry.

However, sometimes price goes up too hard, too fast.  Below, I will show you a couple of examples:

1) Oil in 2008:
- at some point, Oil was trading 40%+ above the 50 weeks EMA.
- Oil was also trading 63% above the 100 weeks EMA.

Crude Oil Weekly, 2008

2) Nasdaq in 2000:
- at some point, the Nasdaq was trading 50%+ above the 50 weeks EMA.
- it was also trading 80% above the 100 weeks EMA.

NASDAQ Composite Weekly, 2000

3) Chinese Shanghai index in 2007:
- at some point, the index was trading 57%+ above the 50 weeks EMA.
- it was also trading 100% above the 100 weeks EMA.

Shanghai Index Weekly, 2007

4) Cotton in 2011:
- at some point, Cotton was trading 78%+ above the 50 weeks EMA.
- it was also trading 112% above the 100 weeks EMA.

Cotton Weekly, 2011

Every bubble ended the same way: they all came back down sharply.

One bubble that is currently forming in my opinion is the relative price of Natural Gas (UNG) to the price of Oil (USO).

[BigTrends Editor's Note -- the relationship/ratio between Crude Oil & Natural Gas may have fundamental factors affecting it and is also a paired chart when compared to the single index/asset charts shown in this article -- something to keep in mind.]

As we can see in the chart below, the ratio of Oil to Natural Gas fluctuated between roughly 6 and 14 from 1990 to 2009.

However, from then on, the ratio broke out of this range, and is now going vertical.
Recently, the ratio was trading 65% above its 50 weeks EMA and about 90% above its 100 weeks EMA.

Someday, I expect this ratio to come back down.

Crude Oil/Natural Gas Ratio Weekly Chart

However, when we look at the charts below – where I plotted the Silver (SLV) price on the left hand side (another classic burst bubble pattern), and Oil-to-Natural Gas ratio on the right hand side – we can see very similar patterns.

Please notice that this similarity is currently at the point when silver was trading around $31.

Silver had a small pullback and then rallied all the way to almost $50, so if the similarities between the two patterns continue to hold, Natural Gas could still get a LOT cheaper compared to Oil.

That could mean:
- rising Oil Prices
- falling Gas Prices
- a mix of the two above
- rising Oil and Natural Gas prices, whereby Oil rises faster
- falling Oil and Natural Gas Prices, whereby Natural Gas falls faster.

Silver Weekly vs Oil/Gas Ratio Weekly

Courtesy of Willem Weytjens, www.profitimes.com

We'll compare the long-term and the short-term in a second.  First, let's poke and prod last week's exhaustive economic numbers.

Economic Calendar

We got a ton of economic data last week… more than we can discuss in detail.  So, we'll hit the highlights here; all the rest can be found on the calendar below.

First and foremost, unemployment is at least a little less of a problem than it was a month ago.  The unemployment rate fell from 8.5% to 8.3%, and the government says 257K new private (non-government non-farm) jobs were created on net basis in January.  The criticisms of the numbers being touted still exist [accusations that the data we're hearing excludes a big chunk the unemployed pool] — but the fact is, the total number of working Americans is falling, and the total number of unemployed Americans is falling.

But the jobs these people are getting aren't great?  Not so fast – the average hourly wage is higher now than it was two years ago.

None of this is to say things are 'great', because everything is still a struggle.  But, things are at least getting better, even if slowly.

There was other news besides the unemployment snapshot last week, believe it or not.  New as well as continuing unemployment claims both fell.  Personal income was up by 0.5% (versus an expected growth rate of 0.4%), and spending was actually flat (versus an anticipated 0.1% increase).

The dip in spending – despite the rise in incomes – somewhat jives with the dip in consumer confidence;  the Conference Board's consumer confidence score fell from 64.8 to 61.1… a surprising pullback, all things considered.

All the rest is below.

Economic Calendar

Clearly the coming week is going to be less eventful.  In fact, it may be downright boring from an economic report standpoint.  The only item of real interest that we don't really know what to expect with is Tuesday's consumer credit.  It's unlikely we'll see another $20.4 billion increase in fixed loans, but even the anticipated $8.5 billion increase is a big deal.  [Note that almost all of December's $20.4 billion improvement stemmed from student loans. January's may not be much different.]

S&P 500

When it was all said and done, the S&P 500 (SPX) (SPY) rallied 2.17% last week, most of it on Friday following some encouraging unemployment data.  The S&P 500 as well as the Dow (DIA) (DJIA) are teetering on the brink of new 52-week highs, and the Dow actually closed at a new 52-week high close, and the NASDAQ (COMP) (QQQ) is well into new 52-week high territory.

But can the market – and the S&P 500 in particular – continue to march at its current pace?  Trend-followers have to like the direction of things, and are likely inclined to stick with the trend that's in motion.  But, at some point common sense and reality have to kick in, and suggest to the majority of investors that the indices are stretched thin at their current levels.

Just for reference, the S&P 500 has gained 11.5% since the last major low (December 19th).  And, with Friday's surge, the index is once again brushing the upper 20-day Bollinger band (dark green)… which has been containing rallies pretty reliably for a couple of years now.  Note that we didn't say 'ending rallies', but rather, 'capping rallies', meaning the S&P 500 isn't likely to accelerate from here.

That being said, a lack of a bullish parabolic move may be the least of our worries at this point.

Take a look at the CBOE Volatility Index (VIX) (VXX) (VXZ).  Though in a downtrend, it's struggling to push under its lower 20-day Bollinger band (orange) itself.  In fact, the shape of Friday's bar is another hint that – via the VIX – traders are quietly and subconsciously hedging their bullish bets.  Why do we think that?  Although the VIX closed lower, it also closed at the upper end of the daily range, telling us the bearish positions were trickling in late in the day, when push came to shove.  In fact, the VIX has been closing at the upper side of its daily range for most of the last few days; the bulls are getting a little hesitant here, despite the market's ongoing gains.

SPX & VIX – Daily

So what's the prognosis? As we've mentioned a couple of times recently, your timeframe is everything.

In the short run, even the die-hard bulls have to be getting nervous here.  The S&P 500 is not only bumping into the upper Bollinger band – which is where most of the major pullbacks have been starting lately – at the same time the VIX is straining to move any lower.  The kicker is how the S&P 500 is now 6.3% above the 50-day moving average line (purple)… an extreme distance that rarely doesn't result in a sizable contraction.  It's not started yet though.  The triggering event will be a pullback under the 20-day moving average line (blue) currently at 1308.53.  Notice how the 20-day average line acted as a floor and springboard last Monday.

In the long run though, the bulls have done some solid work in getting the market out of the funk of Q3-2011.  We got a key so-called 'Golden Cross last week, which is a cross of the 50-day moving average line above the 200-day moving average line.  With all of the last eight Golden Crosses, the market has higher six months later.  So, if you're not thinking like a long-term bull here, know that you're betting against the odds.

Earnings Scoreboard

Just a quick update on how Q4-2011 earnings season is going… in a nutshell, earnings have been as mediocre as expected.

With 273 of the S&P 500's companies having reported, bottom lines are up a mere 3.5% on a year-over-year basis.  When removing the finance sector from the equation though, the improvement ramps up to 8.2%.  Only 60% of the surprises have been positive (less than the typical 67% to 71%), while 30% of the surprises have been negative (more than the 19% to 21%).  The 'mets' rate is pretty much inline with the norm of just under 10.0%.

Trade Well,

Price Headley

Here was the original chart in 2009:

Jobless Claims & SPX

Let's revisit this indicator to see how it has held up since that time:

Jobless Claims & SPX, Current

You can see above that right at the beginning of 2010 the rate of decline in jobless claims slowed, and this also coincides with the end of the very sharp upward slope on the market trend.  However, the general trend in claims has been consistently lower since 2010 — and this is line with a generally higher market trend since that time.  Certainly the SPX has had more ups and downs but the overall trend has been higher.

From here the major concern on the jobless claims chart is what will happen when/if we reach the 2007/2008 claims levels — assuming the downward trend continues.  This coincides with the SPX approaching the 2007/2008 highs around the 1500 level, which is the clear major overhead long-term resistance on the chart.  Of course, that's still about 13% higher from here, so there is some more upside potential before we reach the crucial levels.

Just a reminder that the normally the jobs report comes out every Thursday at 8:30 am EST.  It is released by the Dept. of Labor and is available here.
 

The Elliott Wave Principle focuses on the behavior of humans and how that behavior impacts the stock market.  Rather than acting in an unpredictable manner, Ralph Nelson Elliott (in the late 1920s) noticed that the market actually ran in repetitive cycles – which were a result of investors' reactionary behavior to outside influences. 

The principle was published in Elliott's books The Wave Principle and Nature's Laws – The Secret of the Universe.  Elliott believed that humans are rhythmical beings, so all human decisions and actions could be predicted in rhythms.  So basically, we have a stock principle based on human behavior.

While Elliott's Wave Principle is based partially on the Dow Theory and incorporates Fibonacci, it expands on the belief thanks to individual wave aspects that Elliott uncovered.  According to Elliott, an impulsive wave follows the main trend – and it is comprised of five other waves, a pattern that runs infinitely (these are wave degrees).  Each impulse wave is followed by a corrective wave, which occurs in threes – creating a five/three pattern.

Robert Prechter et al are among the biggest proponents of Elliott Wave theory.  The long-term record of such analysis is a bit spotty though — they have called some big market moves very well, yet also been on the wrong side of some gigantic long-term moves.

For those who utilize these techniques, they break down waves into degrees of the pattern, each with its own name.  These degrees are not classified by their form; not by their size or duration.  Therefore, waves of the same degree may have different sizes or durations.  The waves are named:

Grand Supercycle (the longest)
Supercycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Subminuette (the shortest)

The Grand Supercycle can take years to complete while the subminuette can take mere minutes to run its course.

Bottom Line:  Elliott Wave (and Wave Theory in general) can be fairly hard to quantify and utilize as a practical trading technique.  Certainly there is a logical basis to the fact that "waves" occur both in nature and the stock market — and the psychological implications of various waves/trends from investor behavior are important, as well.  Wave Theory technical analysis practitioners tend to be "true believers", but testing and measuring indicators for short-term active investing based on these theories/methods can be difficult.

Trade Well,

Price Headley

“I believe that banking institutions are more dangerous to our liberties than standing armies.  If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.  The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
~ Thomas Jefferson ~

Well here we are, caught between resistance in the S&P 500 around the 1,330 area and support around the 1,300 price level.  I’ve been expecting a top in the coming days and weeks ahead, but prices just continued to work higher.

One of the things that I pride myself in as a person who trades and writes about financial markets in public is that I am always honest.  If I blow a call I fess up and admit it.  When I have made mistakes in the past, I always try to learn something new from them and I discuss losing trades publicly with readers.

This time is different.  I honestly do not know if I am going to be right or wrong. The price action in the S&P 500 has been showing some bearish indicatinos short term, but a back test of 1,300 or possibly even 1,280 could give rise to a Phoenix.  Granted, the Phoenix is nothing more than Ben Bernanke’s pet, but that is a topic for a different time.

I have scanned through my list of indicators which discuss sentiment based on momentum, put/call ratio, the advance/decline line, Bullish Percent Indicators, and several ratio based indicators and they are all SCREAMING that a top is near.  The interesting thing about the previous statement is that it would have been true a week ago and mostly true two weeks ago, yet prices have continued to climb.

The daily chart of the S&P 500 Index demonstrates the recent price action that has continued to climb the “Wall of Worry” for several weeks:

S&P 500 Daily Chart

The culmination of the massive run higher for the S&P 500 was the dovish comments coming from Ben Bernanke during last Wednesday’s press release and press conference.

The U.S. & European Central Banks are seemingly in a perpetual race to debase their underlying fiat currencies.  The race will not end well.  In fact, this type of situation smells like a Ponzi scheme where Ben Bernanke and Mario Draghi (ECB President) are the wizards behind the curtains.  Their loose monetary policies and forced reflation are synthetic drugs that juice risk assets higher and ultimately Mr. Market will have his vengeance in due time.

At this point, it seems like Ben Bernanke will do anything to juice equity prices higher.  I think his hope is that they will be able to artificially keep the game going until the recovery is on a more sound footing.  However, when the entire recovery is predicated on cheap money and liquidity and is not supported by organic economic growth it just prolongs the inevitable disaster.

As an example, the daily chart of the Dow Jones Industrial Average is shown below.   I would point out that that Dow came within 35 points (0.27%) from testing the 2011 highs.  Furthermore, last week’s high for the Dow was only 1,356 points (10.55%) from reaching the all-time 2007 October high.

Dow Jones Industrial Average Daily Chart

I have argued for quite some time that the economy and the stock market are two different things.  If Bernanke and his cronies succeed in reflating the financial markets and the Dow reaches its October 2007 high in the near term, more retail investors will regard equity markets as being rigged.

Who could blame them for viewing financial markets as a giant rigged casino that stands to win while they continue to lose their hard earned capital?  We all recognize that the current economy is nowhere near as strong as it was in 2007.  But alas, the regular retail investor does not recognize that the stock market and the economy do not portray the same meaning.

One specific underlying catalyst that has gone largely unnoticed by most of the financial media during this sharp run higher in stocks is the total lack of volume associated with the march higher.  The NYSE volume over the past 2 months has been putrid when compared to historical norms.

As a trader, I am forced to take risk through a variety of trade structures.  However, the idea that a crash could be coming seems hard pressed as long as Big Bad Ben is at the wheel.

If the Russell 2000 drops 10%, I am convinced that Ben will be out making announcements that the Fed stands ready to intervene with all of the supposed tools they have at their disposal.  Let’s be honest here, they really have one tool comprised of 3 separate functions which are all a mechanism to increase liquidity in the overall system.  To express this liquidity, the following chart from the Federal Reserve shows the M2 money supply levels:

Current M2 Money Supply

The 3 functions are the printing of currency, the monetization of U.S. Treasury debt (QE, QE2, QE2.5, Operation Twist), and exceptionally low interest rates (ZIRP) near 0 for an “extended period of time (2014).”  Since monetary easing is all that the Federal Reserve has done since the financial crisis began, it begs to reason that the Federal Reserve has no other solutions or tools available.  If they did, they seemingly would have used them by now.

The first bubble they created due to loose monetary policy was the massive bubble in oil in 2008.  Fast forward to the present, and they are currently supporting another bubble in U.S. Treasury obligations.  The bubble that they will create in the future when the game finally ends will be in precious metals. T he precious metals bubble will be building while the Federal Reserve and the U.S. Treasury attempt to keep the Treasury Bond bubble from bursting.

At this point in time, if we continue down this path stocks will not protect investors adequately from inflation should the Treasury bubble burst.  I would argue that the central planning and monetary policy we have seen the past few years continues in the United States and Europe that gold, silver, and other precious metals are likely to begin their own bubble of potentially epic proportions.

As the weekly chart of gold futures illustrates below, gold has recently pulled back sharply and has broken out.  I will likely be looking for any pullbacks in gold as buying opportunities as long as support holds.

Gold Weekly Chart

In closing, for longer term investors the stock market might have some serious short term juice as cheap money and artificially low interest rates should juice returns.  However, eventually equities will start to underperform.  At that point, gold will be in the final stages of its bubble and the term parabolic could likely be applied.

If central banks around the world continue to print money there are only a few places to hide.  Precious metals and other commodities like oil will vastly outperform stocks in the long run if the Dollar continues to slide.  The real question we should be asking is who will win the race to debase, Draghi or Bernanke?

Couresty of Chris Vermeulen, www.GoldAndOilGuy.com

Using data from finviz.com, (be sure to check the financial numbers on these companies on your own before any investing or trading in them) we ran a screen with numerous factors to narrow down the list of stocks:

-Optionable & Shortable
-Market Capitalization Over $300 Million
-Average Daily Volume Over 500k
-Price/Earnings (PE) Ratio Under 30
-Sales Growth Quarter-Over-Quarter (Q/Q) Over 25%
-Return On Assets (ROA) Over 20%
-Return On Equity (ROE) Over 20%
-Return On Investment (ROI) Over 20%
-Gross Profit Margin Over 20%
-Operating Margin Over 20%
-Net Profit Margin Over 20%

This narrowed down the universe to 16 stocks, some of which are very widely known and traded, and others less so.  Take a look at the table below:

You can see that 14 of these 16 names are up year-to-date (YTD), with 11 of the 16 up over 10%.  These are the types of names that will likely outperform during market upmoves.  The current P/E ratios range from 4 to 28 according to this data (this number is something that may require further research due to the idiosyncrasies of an individual quarter).  Remember that these are companies showing over 25% growth in quarterly sales, with strong profit margins to turn those revenues into profits — yet the current P/E ratios are in the "reasonable" range below 30.

Big name tech stocks like Apple (AAPL), Priceline (PCLN) and NetEase (NTES) are among the list, as well as other techs and biotechs including BroadSoft (BSFT), IPG Photonics (IPGP), Jazz Pharmaceuticals (JAZZ), Spectrum Pharmaceuticals (SPPI) and Spreadtrum Communications (SPRD)– but also (and perhaps more surprisingly), there are many categorized under the "Basic Materials" sector. 

Nearly half of the list is among this materials group, with Industrial Metals, Gold, Silver, Oil/Gas, and Copper among those represented.  ETFs that represent those materials sectors include (XLB) (GLD) (SLV) (XME) (XLE) (USO) and (JJN) among others.

Let's do a quick thumbnail on the materials stocks that turned up in the screen, leaving out Leucadia National (LUK) which does have oil/gas operations but is in many diversified businesses:

BHP Billiton (BHP) - Australian diversified mining giant, next interim earnings report due February 8.  Very strong reported profit and return margins.  Dividend over 2%.  Very big float of 2.66 billion shares.

Compania Mina Buenaventura (BVN) – Peruvian mining firm, next earnings release on February 28.  Also has strong reported profit and return margins.  Dividend close to 1%.

Great Panther Silver (GPL) - Canadian based miner, this is a fairly small cap name and low priced stock that barely made it through our screen — always be a bit more cautious and thorough when dealing with stocks below $5/share and also those with smaller market caps.  Next reporting due mid-February. 

Gulfport Energy (GPOR) - US based oil & gas exploration.  Strong profit and return margins, no dividend.  Next reporting due early-February.

Pioneer Southwest Energy (PSE) – US based oil & gas assets.  Limited Partnership founded in 2007, subsidiary of Pioneer Natural Resources (PXD).  Dividend over 7%, but very high dividend yield indicates research needed on the safety of the stream.  Very high profit and return margins.  Next earnings due February 6.

Southern Copper Corp (SCCO) – US based miner.  Very strong profit and return margins.  Dividend yield was over 6%, but the company just announced its latest dividend will be around 0.19 per share (plus a small stock dividend) vs 0.70 per share in previous quarter.  This lowered the yield greatly and caused a selloff in the stock.  This is an example of the risk of playing a stock purely for a dividend stream that may or may not be a safe consistent one.  Earnings due this week.

Silvercorp Metals (SVM) - Canada based miner.  A bit smaller cap and lower priced stock below $10/share.  Good profit and return margins, dividend around 1%.  Next earnings report due February 9. 

All of these names bar PSE are outperforming the market in 2012, as we've seen a rebound in the prices of Gold, Silver, Copper, etc.  However, over 12 months only GPOR & GPL are outperforming the S&P 500 (SPY) – SVM & SCCO being the biggest losers.  See the performance tables below:

GPL – Yellow
SVM – Purple
SCCO – Aqua
GPOR – Red
BHP – Gray
BVN – Green
SPY – White
PSE – Orange

Bottom line, our screen came up with some interesting names.  We were looking for companies with growing revenues & strong profit margins here, but also reasonably priced.  The number of basic materials names on the list certainly stands out — it shows the strong profit margins among many names in that sector, but also incorporates the decline in metals prices.  These companies should be well positioned to benefit and outperform if the 2012 rally in metals has some legs.  The technology and biotech/pharma names on the list may well include some very big standouts as well, but that would be in a different article…

We'll look at what it's going to take to push stocks over the edge in a second.  First we want take a top-down look at things, beginning with the economy.

Economic Calendar

A pretty busy week last week, particularly on the real estate front – pending home sales fell 3.5% in December, while new home sales fell from an annualized rate of 314K to 307K.  Part of that can be chalked up to seasonality effects, but part of it can't.

As for unemployment, new claims rose to 377K (from 356), and continuing claims moved up from 3.466 million to 3.554 million.  Though both were higher, both trends are still broadly pointed lower.

The big news was Q4's GDP growth rate; the economy grew by an annualized rate of 2.8% last quarter.  For the year the overall growth rate was only 1.6%, which is weak by all standards, yet better than most were expecting around the middle of the year.  Perhaps more important though, is the current trend.  Fourth quarter was the third straight quarter the GDP rate improved, making it tough to argue that the economy is slowing down.  The data says it is accelerating.

Economic Calendar

The coming week is going to be nothing less than crazy – we've got 26 major economic data items in the lineup, with most of it being important.  We'll limit our look to the most important of them.

The big ones begin on Monday, with personal income and personal spending.  Both were up 0.1% in November, but incomes are expected to be 0.4% better for December, while spending is forecasted to have only grown another 0.1%.

Tuesday's Consumer Confidence should be noted too.  The pros say it's on pace to rise from 64.5 to 67, mirroring last week's increase in the Michigan Sentiment Index score.  It will be the fourth straight increase if it rolls in as expected, and close to the multi-year high levels we saw in the earliest part of 2011.  Again, it is completely at odds with recent pessimistic assumptions.

The fireworks really begin late in the week though, when we get the next batch of employment numbers.  Payroll (jobs) numbers are expected to be positive again, but not as strong as December's growth.  The government says private payroll numbers will increase by 145K (versus a 212K increase in December), while ADP is looking for 175K new jobs to be created last month (versus 325K in December).  Still, the unemployment rate isn't expected to budge from 8.5%. 

S&P 500

The good news is, the S&P 500 Index (SPX) (SPY) is still moving up within the confines of that bullish channel we plotted a couple of weeks ago [see the orange lines on our chart below].  As long as the support side of that channel holds up, the bulls are ok.  Simultaneously, the bulls are getting a boost from the fact that the VIX (VXX) (VXZ) is still pressing downward, into its lower Bollinger band.

Yet, there's still something not quite right about the rally effort in its current state.

We've mentioned the SPX's upper Bollinger band before as a ceiling.  And it was still ceiling this past week as well, as the index bumped into it on Thursday and peeled back without much hesitation.  However, given that the upper band was still rising and the market's broad trend remained a bullish one, it wasn't a problem – the upper Bollinger band was simply a guidepost.

Now, however, things have changed in that regard.  As of last week, the upper Bollinger band is no longer sloped upward. Instead, it's flattened out – a precursor starting to point lower.  It's still too soon to say it's insurmountable, but it's not a step in the right direction.

Nevertheless, the line in the sand we really want to keep an eye on is that lower edge of the rising channel.  It was at 1311 as of Friday, and inches a little higher each day.  If and when it snaps, that'll be the first real sign of trouble in a long time.

SPX & VIX- Daily

Just for a little more perspective, take a look at the weekly chart – same parameters, same settings . The bullish channel is still clear, and the upper Bollinger band is still starting to flatten out.  That's not any different than the view of the daily chart.  It's with the weekly chart, however, that we can see something alarming that we haven't seen in a long, long time…. indecision.

Last week's bar is called a doji, where the open and close are essentially at the same level (1316), and that close is pretty much in the middle the week's high-to-low range.  Generally speaking, it's a sign of indecision, and frequently a sign of a reversal.  To see one materialize after a six week, 8.0% runup only bolsters the likelihood of a reversal. 

Again, it's not unraveling yet.  And the weekly chart itself looks a little less vulnerable than the daily chart does, as there's a little more room for the market to keep rising while the VIX keeps falling.  So, from a trend-watching perspective we have to remain on the bullish side of the fence.  But, this rally is getting stretched very thin here.

SPX & VIX - Weekly

Sector Performance

It's been a while since we looked at relative sector performance, largely because there was no reason to – they were all equally hot and cold between August and December.  Now though, we're starting to see some real (and persistent) leadership emerge.  That leadership, however, is coming from unexpected places.

Ok, the strength of the basic materials (XLB) sector isn't a total surprise.  The economy is still clearly chugging along (see the economic update above), and even the recent lowering of the inflation rate still leaves it at 'inflationary' levels.  So, we can count on more of the same from the materials group.  The other two emerging leaders, however – gold (GLD) and real estate (XHB) (VNQ) - may be surprises.

For gold, the surprise comes in the form of a complete turnaround from a December implosion.  The buyers have been too persistent since January to just chalk it up to volatility though.

As for real estate (REITS), it's not a turnaround of anything.  Rather, real estate has just cranking out progress for weeks now, and the fruits of that consistent labor are finally starting to be recognized.

Sector Performance since November 25th, 2011

Just as a reminder, the relative sector performance analysis is an ongoing thing – not a one-time snapshot to embrace and cling to until further notice.  There was just a little point in looking at it until recently.  Now that leaders and laggards are emerging though, we'll start taking this look on a regular basis.

Trade Well,

Price Headley

I've long been a proponent of the benefit of having a strong currency, in whatever country you live in.  In our case, it is the US Dollar.  While some say that a weaker Dollar allows for our manufacturers to produce cheaper exports (thus boosting our economy and job situation) — in general the benefits of a strong currency far outweigh the alternative, in my view.

A strong currency allows consumers to have a higher standard of living on a relative basis than citizens of other countries … imported products are relatively cheaper.  It also certainly makes traveling overseas cheaper as well.  And as an indication of the general fiscal state and from a psychological perspective, a strong currency is a good thing. 

And don't forget that strong currencies are where "flight to quality" money goes to park itself.  Imagine if the Dollar & US Treasuries completely lost their place as a world pre-eminent safety zone … because currently the money that is parked there often goes right into the US stock markets when the times comes to re-allocate.  That's not likely to happen soon, however.
 
That aside, there really is no definitive long-term correlation between the Dollar and other risk assets like Stocks, Gold, Bonds & Oil.  Despite what some 'experts' would like you to think.  There have been shorter-term correlations throughout history, but they have varied both in strength and duration.

As an example, during periods of a strong Dollar in the 1980s and 1990s both our economy and stock markets were very strong – Bonds also rallied during those times (interest rates dropped).  Meanwhile during those periods Oil & Gold were relatively weak.  Some of those correlations have reversed or slowed since that time period.

Nonetheless, let's take a look at the current scenario vis-a-vis the Dollar and other assets.  Recently the Dollar has shown some strength, mostly due to weakness and uncertainty about the Euro currency (FXE).  On an interesting side note, despite the recent Euro weakness, it still is about $1.30/1 Euro — while when the Euro was founded in the late 1990s  it was anticipated (and traded in) that it would largely be in the range of $0.80 to $1.20 — somewhat 'pinned' around $1.00/1 Euro

We'll be using UUP ETF (green) for the Dollar, SPY (red) for US Stocks, TLT (blue) for US Treasuries, USO (gray) for Crude Oil, and GLD (yellow) for Gold.

The first chart below is SPY vs UUP performance since UUP basically topped in late 2008 — this also was one of the key market bottoms, although it  famously reached a lower panic low in March 2009.  Note that the rebound in stocks we've seen since that time has been accompanied by a generally lower trending Dollar.  This has provided a backdrop for higher stock prices it appears, so keep an eye if the rising UUP breaks above its long-term trendline.

SPY vs UUP Long-Term Chart

SPY vs UUP Short-Term Chart

The shorter-term UUP vs SPY daily chart above shows the strength in the Dollar since late-August.  Note that there really hasn't been a correlation here with the SPYders … as we mentioned, these inter-relationships between different assets aren't set in stone rules.

Next below is the Crude Oil vs Dollar chart — again here we see that UUP has been rallying, but in general there hasn't been a strong correlation or affect from that move on USO prices.  Some say that a rising Dollar makes Crude Oil prices rise, but once again this is not a "permanent" relationship.

USO vs UUP Short-Term Chart

We do see much more of a correlation when we look at the long-term Treasury Bond ETF (TLT) and the Dollar ETF (UUP), see the chart below.  Both of these have rallied very closely in tandem during the time frame examined.  This is somewhat logical as these are often "safety assets" where cash is parked on the sidelines.  Also take note that TLT has outperformed UUP along the way.

TLT vs UUP Short-Term Chart

Finally we examine Gold ETF(GLD) versus Dollar ETF (UUP), below.  Here we do see what looks like an inverse correlation.  The strength in UUP does look to be hindering the performance of GLD.  This relationship does have some historical backing, as some believe that money shifts between hard money assets like gold into soft paper money assets like currency.

GLD vs UUP Short-Term Chart

Bottom line is the Dollar in the form of ETF UUP has been showing some strength recently, mostly at the expense of the Euro (FXE ETF).  But long-term, the Dollar is still relatively weak and is approaching a long-term trendline that could possibly provide resistance.  Certainly news events out of Europe, Asia and economic developments here will have a big impact on 2012 Dollar performance.

Secondly, keep an eye on the correlations between the Dollar and major assets like Stocks, Bonds, Oil & Gold – but remember that none of these relationships are permanent in and of themselves.  Currently we do see a short-term positive correlation between Bonds & Dollar and a short-term inverse one between Dollar & Gold.  Longer-term, there may be an inverse relationship between Dollar & Stocks that bears watching, but that's not certain.

We'll see exactly how much luck the market's pushing in a second, right after we slice and dice the key economic numbers.

Economic Calendar

A pretty busy week last week, and overall, a better than expected one.

As we mentioned in the last Weekly Market Outlook, we were getting two big (and underestimated) numbers for the long-term market on Wednesday…. capacity utilization, and industrial production.  Whichever direction they're pointed, so too is the market [the correlation is amazingly high].

Well, as it turns out, there's more going on economically than the short-term bears care to admit.  Productivity reversed a 0.3% contraction on November with a 0.4% expansion in December, and capacity utilization ramped up from 77.8% to 78.1% last month.  Though not completely back on track yet, this is an important rebound effort.

S&P 500 vs. Capacity Utilization and Industrial Production Index

We also got some good news in the inflation front – there isn't any, or at least not much.  For consumers, on a core basis (excluding food and energy) prices were higher by only 0.1%, or not at all on an overall basis.  Producer price inflation actually fell 0.1% in December, and on a core basis was only up 0.3%.  The annualized inflation 'rate' now stands at 2.96% – very tolerable.

On the real estate front, we're seeing things perk up as well.  Housing starts fell from 685K to 657K for December, while building permits held steady around 680K (at 679K for December).  That's fairly solid anyway, but quite strong given the time of year.

The rest is below.

Economic Calendar

This week's going to be fairly busy too, though things don't get hopping until late in the week.

Thursday's initial and continuing unemployment claims are going to be key.  The trend is decidedly downward, but has been falling even faster than expected of late.  The pros are looking for initial claims to rise from 352K two weeks ago to 375K last week, but that's very much an above trend number.  Ongoing claims are expected to move from 3.432M to 3.55 million two weeks ago, but again, these numbers have been rolling in better than anticipated.

Like it or not (and not just with these numbers), the jobs picture is getting better and better.

Also this week we'll get the preliminary calculation for Q4's GDP.  All indications so far point to an annualized growth rate of 3.1%… a real upgrade from the prior quarter's 1.8% growth.  The improved GDP figure jives with most of the other improving economic data we're seeing though.

S&P 500 Outlook

We were worried about it a week ago, though so far it's been an unnecessary worry.  The concern was that the S&P 500 (SPX) (SPY) was getting overbought/overextended as it inches its way into the upper 40-day Bollinger band, currently at 1328.  We also noted how the index was moving upward within a rising triangle/wedge shape.  Well, that's still going on – the market's just 2.0% further into bullish channel.  And, the upper Bollinger band still hasn't actually been brushed….

….But boy are things getting tight – there's not a lot of room left inside that wedge.

That being said, the wedge itself is becoming more and more of a liability.  As you can somewhat tell, the ceiling and floor of the wedge are not just rising, but they/re also converging.  These 'ascending wedges are nice while they last, but they tend to result in some fairly sizeable [though that's all relative] pullbacks.  Just think of it as a "the higher they fly, the farther they fall" premise.

The situation is aggravated by the harsh reality that there are no other floors in immediate sight other than the floor of the triangle pattern (orange).  If things go sour – as they're apt to – a small misstep could turn into a big misstep pretty quickly, and we could be revisiting the 1270 area or so soon.  Take a look.

S&P 500 – Daily

Oh wait – it gets worse than that.  Did you notice the VIX?  It's made a strong downward thrust over the past three trading days.  The direction is bullish for stocks, but the move is a little bit too intense… it's knocking on the door of its lower Bollinger band at 17.6.

There's a possibility the VIX could simply bump into that lower band and just gently guide it lower (as we saw for a bit back in mid-December).  At this velocity though, paired with the way the S&P 500 is already staining to add the recent gains, a bounce from the VIX seems a little more likely.

Bottom line?  The momentum is still carrying stocks upward, and the volume on the way up of late – contrary to popular belief – has been getting stronger rather than weaker.  That's bullish.  Nevertheless, there's just a little too much pressure at these levels, and we need to bleed some of it off sooner than later.  A blowoff top (a major gain on high volume) would do the trick, though a move under the lower edge of the wedge around 1300 would also flag the beginning of that correction.  Just be ready.

Also, since we showed it to you last week, here's another look at the weekly chart… just for a little more perspective.  Same story though – the direction looks right, but it looks like we're reaching the near-term limits.

S&P 500 – Weekly

Earnings Results, Q4-2011

Though we're just getting started, it's not too soon to start keeping tabs on last quarter's earnings results, just to see if any trends develop.  So far only 77 (15%) of those 500 companies have reported.  Of them, 48 posted an earnings increase, and 26 posted lower numbers; three said there was no change.  The average earnings improvement is 11.5%, while the average earnings decline has been 48%.  The surprise beat/miss ratio is 47 to 22 (with 8 of these companies meeting estimates).  So far, that's actually sub-par.

As it stands right now, the SPX is on pace to earn $23.31 per share (operating), or $22.36 on a GAAP basis.  That's well under the $24.39 forecasted as of the end of calendar 2011.  That forecast was only for an 8.2% improvement as it was, and so far we're not even going to reach that mark.  Then again, only 15% of companies have reported – the number still has some time to increase before the end of earnings season.

We'll keep you updated as things develop, particularly on the sector front.  FYI though, Q4's big winner is supposed to be the energy sector… with an average 21% improvement in earnings.

Trade Well,

Price Headley

So let's look at the charts and see what they tell us about Gold & Silver.  We'll be using SPDR Gold Trust (GLD) for Gold  and iShares Silver Trust (SLV) for Silver.

Note below the long-term GLD trend on the weekly chart, where Percent R remained above mid-levels throughout this entire trend.  This uptrend was broken in the late part of 2011, and we subsequently saw Weekly Percent R move down to areas not seen since 2008.

The question here is whether the GLD uptrend is over for the foreseeable future or will it have a consolidation and possible rebound in 2012 … at this point the jury is out on this, but I would lean towards the second scenario at this time. 

The GLD uptrend never got quite as parabolic as SLV did, although there was some acceleration in Summer 2011.  If GLD had taken off parabolically to the upside to 200/250/300 for example, then a breakdown would have been inevitable, sharp and long-lasting.

This pullback, while certainly the most severe in several years, could result in a consolidation and rally in 2012.  This isn't guaranteed and more downside could be ahead,, but we have seen a nice bounce in recent weeks after the ETF tested it's Bottom Weekly Acceleration Band.  Holding that suport (currently around 150) and also holding above its 40 Week Moving Average (simple and/or exponential), which is around 160, will be important to whether GLD will suffer more downside in 2012 or not.

Gold Weekly Chart

So has Silver been a better choice since Gold broke down?  The simple answer is no.  Even though SLV broke down several months before GLD peaked, it's actually lost twice as much since the GLD top.  See the chart below GLD is yellow & SLV is white.

GLD & SLV Performance Chart

While there is the possibility that Silver may rebound more if/when Gold stages a rebound, at this time we would say to separate these two metals in terms of trading.  GLD looks more attractive for potential rebound players and has also shown less downside volatility.

The Gold story looks far from over and we may yet see another big upside move in 2012 … the parabolic rally that many anticipated has to occur sooner or later, doesn't it?   Maybe it begins this year … but also remember that parabolic upmoves always end badly.   In general terms, it's fine to ride those higher while they last,  you don't want to fight a strong uptrend — but limit position size and take profits quickly along the way so you don't get caught holding the bag when they inevitably correct sharply.
 

Let's take a look at some of the major Asian & Pacific markets using the most liquid & popular ETF vehicles.

For China, we'll use iShares China 25 (FXI) (green in the charts below).
For Japan, iShares Japan (EWJ) (red in the charts below).
For Pacific Region, iShares Pacific Ex-Japan (EPP) (yellow) (this holds Australia, Hong Kong, New Zealand & Singapore shares).
For India, PowerShares India (PIN) (purple).

Despite great differences in the makeup of these various countries and their individual markets & stocks, you can see in the performance chart below that FXI, EWJ and EPP have been very correlated since 2011.  On a net basis, they are all down between 9% and 13% in this time frame.  And while the performance trendlines have shown some periods of one or another diverging, they have tended to revert to a similar mean.

India has been a different story.  Whether looking at PIN or another major India ETF, WisdomTree India (EPI), it has been a clear laggard versus these other regional ETFs.  As you can see below, basically its performance has been twice as bad.

FXI EWJ EPP PIN Performance Since 2011

While we're still early in 2012, there has been somewhat of a de-coupling of these ETFs that I find interesting.  Take a look at the 2012 performance chart below:

FXI EWJ EPP PIN Performance In 2012

Thus far this year the loser has become the winner, with EPI outpacing the other Asian ETFs.  Additionally, while all the ETFs are higher, the correlation between them hasn't been as strong — considering the wider range of 3% to 14% net gains.  Japan has been the laggard thus far in 2012.

Bottom line at this point is that the extremely close performance correlation between FXI, EPP and EWJ may be in the process of breaking down.  This still isn't confirmed over a longer-term period, however.  Less correlation is generally a healthier sign, in my view, as it shows less overall group think and mass accumulation/distribution by large firms.

The other thing to keep an eye on is the possible re-emergence of India stocks in 2012.  PIN has been downtrending since late-2010 and we may see a significant retracement of some of the losses in 2012.

Generally when investors are concerned about the markets they buy Puts for downside protection — and with the forces of supply/demand, the increased buying pressure for Puts makes option premium prices (and the VIX rise).

The VIX was often viewed as a good contrarian indicator for the markets, especially during the steady uptrends of the 1990s and parts of the 2000s.  It would reliably spike on a market pullback and provide a good low-risk entry point for bullish stock positions.

However, in recent years the VIX seems to have become more of a 'smart money' type early warning signal in my analysis.  An elevated VIX has generally meant that risk is also elevated and traders should proceed with caution in bullish trades.

We just saw a significant decline in the VIX below a key level, the first such weekly close below the round 20 level since July 2011 – but a better comparison may be the VIX close below in 20 in October 2010.

Take a look at the VIX Weekly Chart below with the SPX at the bottom:

VIX Weekly Chart with SPX

Note the similarity to late-2010, when the VIX breached 20 after an extended run of high volatility.  This was in the midst of a stock rally, and the rally continued for many months.  The VIX remained below 20 but also the key 24/25 area throughout virtually all of this run.

Round numbers on the VIX are often significant, you can see that 15, 20, 30 & 40 have all been important from a technical basis in recent years.  The 25 area (or actually closer to 24) is also important.  This is an area that contained the VIX on market pullbacks/VIX pops during the previous market rally.  It's also contained upside in recent weeks.

Watch the VIX — keeping steadily below 20 is important, but also if it remains below the 24/25 area without consecutive closes above that number, the bull trend remains intact for the broad stock market in my analysis.

Let's begin this discussion with a basic definition of Volume, specifically stock volume — option volume is another interesting indicator and topic for another time.

Simply put, volume is the number of trades made on a stock in a specific period of time.  To complicate matters just a bit, the NYSE and the Nasdaq historically measure volume differently.  For every buyer there is a seller, so for every purchased share there is a sold share.  The NYSE would take this equation and count it as one trade with one share of volume.  The Nasdaq would count it as two shares of volume, counting both the bought and the sold shares.

For those who have looked at charts and wondered what the histogram below a chart was, wonder no more.  This is most often a representation of the stock's volume.

Average volume is exactly what it sounds like.  It is the number of shares traded per day averaged over a time period.  Often the time period is a year (52 week).  For liquidity purposes you may look at stocks with over 1 million daily average volume, for example.

There are many volume-related indicators, one of the longest-lasting is On Balance Volume (OBV), which was introduced in 1963 by Joe Granville in his book, Granville's New Key to Stock Market Profits.  Granville's indicator was one of the first to measure positive and negative volume.  Granville stated that volume precedes price, and OBV adds the volume from the sessions where a stock finishes lower.  This sum is then subtracted from the sum of sessions when a stock finished higher.  If a stock closed higher today than yesterday, the new OBV is (Yesterday's OBV + Today's volume).  If the stock closes lower, the OBV is (Yesterday's OBV – Today's volume).  Finally, a close at the same price means yesterday's OBV is today's OBV.

It is believed that changes in the OBV will occur before price changes.  Some believe that rising volume indicates the presence of "smart money" flowing into a security.  Once the general investing public follows the example, the stock's price should rise.

NFLX Daily Chart with Volume and OBV

The chart above certainly shows a big turnover in Netflix (NFLX) shares during its steep decline and in the subsequent rebound.  OBV has also turned higher during the recent rally.  Comparing volume to the actual float (# of shares outstanding for trading) can also be useful as an indicator of share ownership changeover.

A Volume Breakout takes place when a stock performs an immediate about face in volume thanks to a news event.  More often than not, volume breakouts will follow earnings surprises, revised forecasts, contracts, or potential takeovers.  Of course, the news itself doesn't really matter to us; it is what the news means for the company's future and for sentiment & technical analysis. 

Should a volume breakout accompany the breach of a major resistance (or support) level, it could be an indication that the stock is readying for a continued run higher (or lower).  On the chart of Johnson Controls (JCI) below, we have overlaid the volume and you can see a massive spike just occurred on news.  The volume breakout was accompanied by a gap lower — this one will be an interesting one to follow in terms of how the subsequent price performance will be affected by the big volume spike.

JCI Daily Chart

New indicators based on various volume readings have been created by Pascal Willain in his book Value In Time:  Better Trading Through Effective Volume.  Willain has created a variety of techniques based on what he calls "Effective Volume" that appear fairly novel and innovative — worth checking into and researching more in order to find more practical trading applications from them.

In sum, volume can be a very valuable tool for an investor, with a myriad of techniques and methods that can implemented into your trading arsenal.  Bottom line is that the amount of shares trading hands in a day can be an important part of figuring out which direction a stock is headed.  Some think a move higher on low volume is not usually sustainable, while heavy volume on a down move is significant — there are a variety of strategies that can be implemented, tested, and incorporated by active traders.

Trade Well.
 

With a level above 99, Percent R would seem obviously likely to head back lower — but does the market pull back or continue to accelerate?  Well, I looked back at SPX data from the present going back to the year 2000 — because there have been multiple types of markets in this time frame and also it's a good round number to judge things from. 

Interestingly, the SPX itself is actually down since 2000 (not including dividends),  It opened the new millennium at 1469.25 and closed at 1308.04 yesterday (around a 11% loss) — this is one of the reasons why we constantly mention that 'buy and hold' hasn't worked in this environment, you must be more active in asset allocation and trading.

So, what has the SPX done after %R closes above 99?  I optimized a simple "Buy the SPX after >99 Percent R" test in TradeStation for a holding period of 1 to 20 trading days, and the top result came up as 16 days (a bit over 3 weeks) — the results were somewhat shockingly bullish to me, as I didn't expect them to be so strong. 

There are no concurrent signals or any other filters or exits built into the test — but a new signal can start as soon as a previous one expires, assuming the last holding day had a Percent R reading over 99.

With 42 signals over the 2000 to 2012 time frame, there have been a bit under 4 per year.  In 30 of these cases (71.4%), the market was higher 16 trading days later (actually 17 days total because this is a 'buy the open, sell the close' signal). 

The significant thing to me is the consistency of the returns over this time frame — throughout bull, bear and flat markets this indicator has worked well.  There was only 1 losing year (2002, with only 1 signal that was a loss) and 1 50/50 year (2000) — the rest all had more winning than losing signals.

Take a look at the results grouped by calendar year:

In addition to the 71% winning rate, the Average Winning Trade was also 1.5x the Average Losing Trade … giving this a very healthy 'profit factor'.  Certainly, 42 isn't a huge amount of sample size, but as we mentioned this covers a long time frame with many types of markets.

There were 15 winning trades where the market rallied over 2% after such a reading and only 1 losing trade where the market lost over 2% (a 5.1% loss in 2007).  So only 1 of 42 occurrences proved to be a big market loss … that's the kind of edge you want in your pocket.  And take a look at the equity curve of these signals, below … consistently higher since 2000, and think of that in comparison the SPX trendline since 2000 of down 11%:

Let's take a look at the current market and most recent signal, see the chart below.  The reading in October 2011 was the first since Feb 2011 and was certainly a nice one — the SPX rallied from 1224.47 to 1275.92, a gain of 51.45 SPX points or 4.2%.  Thursday morning will be a new 'buy' signal from this indicator — a 2% rally from here would take the SPX to 1334 and a 4% push would reach SPX 1360 (by the way, SPX 1361 is also a key long-term Weekly Fibonacci level).

SPX Daily Chart

Bottom line to me is that based on past data, we're looking at over a 70% chance of a higher market 17 trading days from now (into the second week of February).  At the least, a market plunge over 2% in that cumulative time frame seems very unlikely from the data.  So don't be scared of very strong Percent R and other 'overbought' readings … as we often say 'the trend is your friend'. 

Over the past five months gold (GLD) has fallen sharply and is no longer headline news;  which it once dominated back in 2011 when it was making new highs every day.  The shiny metal has been under pressure because traders and investors started to pull some money off the table to lock in gains.  Gold prices had surged so fast most advanced traders knew that final high volume surge was not sustainable.

But the main reason gold topped out in my opinion was because the US Dollar (UUP) index had put in a bottom and started to build a base.  As we all know a rising dollar typically means lower stocks and commodity prices [but not always].

I have posted some charts below covering gold in detail using multiple time frames.  The weekly which is long term, daily which is the intermediate trend, and the 4 hour chart which shows gold momentum and intraday action.  At the very bottom I talk about the US Dollar and what is happening with that.

Gold Weekly Long Term Trend Analysis

The weekly chart is not the most exciting time frame to follow, as you will grow old watching it.  That being said, it is crucial for understanding the long term trend, price and volume analysis.

Below you can see that gold's recent pullback has been a 3 wave correction, which is a normal pullback for any investment.  But taking into account the rally from 2008 – 2011, I feel this pullback will have one more low put in before bottoming out.  This would make for a 5 wave correction much like what happened in 2008.

Gold Weekly Chart

Daily Chart of Gold Showing the Intermediate Trend

The daily chart allows us to see gold intra-week price action and use the 150 moving average, which is my preferred daily moving average.  As you can see, we are getting a similar pullback as 2008 with gold now trading under the 150 MA.

I would like to see gold make another lower low in the next 2-3 months.  If that happens I feel it completes the correction and can trigger a strong multi month or multiyear rally in gold.

Gold Daily Chart

4 Hour Intraday Chart of Gold

The 4 hour chart of gold allows us to see all the intraday price action which would normally not be seen with a daily chart.  It also gives us enough data to build our analysis upon.

My preferred setup for gold which I feel if happens will trigger major buying in the yellow metal.  If/when we get a rally in gold would also likely mean some more economic uncertainty has entered the market either from within the USA, Europe or China…

Gold 4 Hour Chart

Weekly Dollar Index Long Term Analysis

The dollar has the potential to rally to the 87 – 88 level before putting in a major top.  For this to happen we will need to see the Euro (FXE) crumble (both currency and countries divide) in my opinion.

If you look at the weekly chart of gold and this chart of the dollar index you will notice that gold topped when the dollar bottomed.  Over the past couple years gold and the dollar have had an inverse relationship to each other.

With all kinds of crap about to hit the fan overseas I think it's very possible gold will rally with the dollar.  Reason being there is way more people overseas who want to unload their Euros and with all the negative talk and doubt with the US Dollar, individuals will naturally want to buy more gold.

Dollar Weekly Chart

Trend Trading Conclusion:

In short, I expect a bumpy ride for both stocks and commodities in the first quarter of 2012.  With any luck gold will pull back into my price zone shaking the majority of short term traders out just before it bottoms.  And we will be positioning ourselves for a strong rally buying into their panic selling.

To just touch base on the general stock market quickly.  I have a very bearish outlook for stocks.  If the dollar continues to rise it is very likely the stock market will fall into a bear market.  So I am VERY cautious with stock at this time.

Courtesy of Chris Vermeulen, www.GoldAndOilGuy.com

We'll dissect the near-term situation in a moment, right after a look at last week's and this week's economic data.

Economic Calendar

Last week got off with a bang thanks to Monday's announcements than consumer credit levels had swelled by $20.4 billion in November;  the experts were only looking for a $7.0 billion improvement.  It was only the 13th increase in 14 months, and the biggest single-month increase in more than a decade.  And what's interesting is a bigger-than-normal chunk of the increase was the result of revolving credit (like credit cards) rather than non-revolving credits (like student loans)…. not coincidentally increasing right before holiday shopping began.  Fixed loans were still the biggest piece of the growth, however, and the overall ongoing expansion of credit levels continues to underscore a broad (even if tepid) economic recovery.

Initial claims ramped up to 399K, from 375K.  It was a lot more than the anticipated 375K for last week, but one week doesn't make a trend.  The overall trend here is still a declining one.  The same goes for continuing claims, which held fairly steady at 3.628 million versus 3.609 million from a week earlier.

Retail sales were a bit of a disappointment for December, especially considering the season.  They grew at 0.1% including auto sales… under the expected 0.4% growth rate.  Take auto sales out of the equation though, and retail spending actually fell 0.2% last month.  That was well under the expected 0.3% rise. [It forces one to question why consumer revolving credit ramped up so firmly in November.]  Nevertheless, retail sales are at record levels, close to record levels when factoring in inflation, and still on the rise.

Retail Sales, with and without autos

Economic Calendar

The coming week is going to be even busier, as you can see on the calendar above.  It's all pretty important stuff too, beginning with Tuesday's Producer Price Inflation Index.  It should be good/mixed news though.  On a core as well as a non-core basis, PPI is only forecasted to increase by 0.1% for December.

We'll also get some major – though often overlooked – data about industrial activity on Tuesday…. industrial production and capacity utilization.  As we've noted before, the correlation between the LONG-term market trend and the direction of these productivity and utilization data sets is uncanny.  Both have been stagnant of late, waving a red flag.  But, the upcoming December data is expected to show a real revival for both.  Production is expected to have grown by 0.5% after November's 0.2% decline, and capacity utilization is forecasted to grow from 77.8% in November to 78.1% for December.

Later on in the week (Thursday) we'll round out the inflation picture with the consumer price inflation index.  On a core and a non-core basis the professionals are looking for a 0.1% rise.  The current annualized inflation rate now stands at 3.39% (as of November).  That's palatable.

The week ends with a heavy dose of real estate and construction data.  Annualized starts are expected to have fallen from 685K to 670K, and permits are expected to have fallen from 681K to 680K last month.  Both are still fairly strong(ish) numbers though, compared to levels from a year or more ago.  Existing home sales are expected to be on the mend as well, reaching an annualized rate of 4.57 million last month, up from 4.42 million.

The National Board of Realtors nay have botched the last several years worth of existing home sales data, and is still working out the kinks.  But, the trend's direction is still a key clue in itself, and that trend still shows modest improvement.

S&P 500

Just to lay some groundwork, let's start with the bigger picture first… a look at the weekly S&P 500 (SPX) (SPY) chart.  What it's going to show us is a combination of a rising market and a falling CBOE Volatility Index (VIX) (VXX) (VXZ), both of which are clearly bullish for stocks, in the grand scheme of things.  Take a look:

SPX & VIX Weekly Chart

The momentum is encouraging.  However, the momentum is also waning as the bullish effort gets stretched thin.

Yes, the market is giving us higher highs and higher lows.  Problem is, the higher lows are rising at a faster pace than the higher highs, forming an ascending wedge pattern (orange) that's coming to a close within a couple of weeks.  More often than not, an ascending wedge ends with a relatively pronounced breakdown… after the wedge pattern's confines drop it from a higher height.

The VIX is also in a clear downtrend, being forced lower within a framework established by its falling moving averages and the lower Bollinger band.  That's bullish overall, but within that falling trading range there's still room for the VIX to move higher – up and into those key moving averages at 25.8 – which in turn gives the market that room it needs to move lower.

Again (and as we've been saying for a while), that pullback doesn't have to be catastrophic.  It just has to be big enough to humble the bulls.

On the flipside, the S&P 500 isn't yet testing its upper Bollinger band at 1321, and the VIX isn't yet testing its lower Bollinger band at 17.0.  Given how important both boundaries have been in the recent past, we have to at least acknowledge the market may want/need to test both extreme boundaries before finally deciding to ease back a bit.

Now, with that in the back of your head, a look at the near-term daily chart…

SPX & VIX Daily Chart

The good/bullish news is, the VIX just bumped into its 20-day moving average line (at 22.2) and started to roll lower after the encounter.  Simultaneously, the SPX pushed off one of its recent rising support lines on Friday, closing well off the low and itching to revive the recent uptrend.  Until the VIX hits the lower band line ay 17.0 (and falling) and/or the S&P 500 hits its upper Bollinger band around 1311.6 (and rising), there might – and we stress might – be room for bulls to keep rolling.

On the other hand, there's just something a little un-nerving about the 7.0% rally since the December 19th low.  The S&P 500 isn't anywhere near support at any key moving averages, and the support at the lower edge of the wedge pattern is tenuous at best.

In the long run, we'd rather go ahead and take our lumps now rather than suffer a bigger pullback later.  As it stands right now, however, the vulnerable uptrend is still above and kicking.  Just keep an eye on the battle lines
.
Trade Well,

Price Headley

Despite mediocre global economic conditions and lower stock volume at some brokers, the leading options exchange (CBOE) reported some impressive numbers for 2011.  We'll examine their numbers as a proxy for the entire option industry.

With the vast diversity of options in terms of hedging, speculation and leverage, it's not surprising to me to see this continued growth and increased popularity.

Overall, CBOE.com reported combined options trading volume of 1.20 billion contracts in 2011 vs 1.12 in 2010 (up 7%).  Average daily volume was up 8% to 4.78 million contracts.

The real growth is in trading of Index, ETF, & VIX options — we've previously discussed the growing popularity of ETFs.   2 CBOE flagship products, options on the S&P 500 Index (SPX) and CBOE Volatility Index (VIX), both bosted all-time annual volume records.

CBOE ETF options volume in 2011 was up a whopping 22% over 2010. And VIX options trading (which actually is on the CBOE-owned Chicago Futures Exchange) grew an explosive 174% over 2010.

The many advantages of using options in a portion of your portfolio for any type of investor or trader continues to become more apparent year-after-year, which is seen in the increasing volume and popularity.

Trade Well,

Price Headley

We screened for optionable stocks with over 2 million average daily volume and $2 billion market cap, then sorted by year-to-date performance.

Take a look at the Top 20 names in the table below:

2012 Performance Leaders

The first thing that jumps out is how many big losers on a 52 week basis are having rebounds — only 4 of the 20 names rallying the most in 2012 are up over 52 weeks.  Netflix (NFLX) leads the list with a gain of 38% this year while still down 49% over a year.

Other big well-known names popping up include Bank of America (BAC), Pulte (PHM), Micron Tech (MU), First Solar (FSLR), General Motors (GM), Citigroup (C), Monsanto (MON) and Seagate (STX).

There is significant sector representation on the list by the Financial (including several banks), Technology (semiconductors showing up prominently), and Basic Material sectors.  Let's examine those sectors through the most appropriate ETFs representing those groups and see what the charts show.

All of these ETFs are somewhat forming the "wedge" (sideways triangle) formations that we've discussed previously has formed in many major indices and sectors — these kinds of narrowing formations tend to precede a major move and in the current scenario it looks like this will be to the upside.

We'll use SPDR Financials (XLF) for that group, although there are also banking and other sub-group ETFs that are worth looking at for comparison such as (RKH) (KRE) (KBE) (KIE).

XLF Daily Chart

You can see in the chart above the sharp downtrend in Financials during most of 2011, with Percent R remaining below mid-levels from basially February to October 2011.  It looks like an important bottom was made in October (as many sectors/stocks/indices did).  The uptrending higher lows trendline should now provide support on pullbacks.  There is an uptrending overhead trendline that could provde resistance a bit above current levels.

Also with such a clear top and bottom in 2011 it's prudent to look at Fibonacci Retracement of the move — and this points to the 14.13 level as a 50% retracement of the highs.  Note that the ETF failed right around this level in late-October.  The next retracement level above 50% is just below the 15 level (this particular ETF is low priced and doesn't move a great amount sometimes).
 
Next for technology we will look at MarketVectors Semiconductors (SMH), the SPDR Technology (XLK) and  Nasdaq 100 'Qs' (QQQ) might also be good proxies for the stocks listed above.

SMH Daily Chart

SMH had a sideways consolidation in August/September 2011 where it halted the downtrend.  Since then it's making a nice pattern of higher lows which should provide support on pullbacks.  Here also there is a potential overhead resistance line right around current levels — a break above that makes a run to 35 looks likely.

For materials let's take a look at iShares Basic Materials (IYM), with SPDR Materials (XLB) also representing these types of names.

IYM Daily Chart

IYM also had a clear October bottom, which was a 3rd datapoint in a sharp downtrending line from June 2011.  There also was a sideways downtrending range from August to December.  However, we may have seen what I would call a key pivot point in November — since that time Percent R has mad a bullish pattern and there have been several gaps higher.  Breaking the top of the previous resistance range will allow IYM to run to 80/85.

So looking at the winning stocks of the very early part of 2012 provides some sector ideas to analyze (in addition to individual stock names), due to the prominence of certain groups on the overall list.  These sectors are all staging rebounds in different formats from 2011 downtrends and bottoms and are forming narrowing wedges and/or pushing up against previous resistance trendlines.  It looks like breakouts to the upside are likely (and/or continued strength) — if I had to rate these charts in terms of most attractive over the next few months, I would put IYM first, followed closely by SMH, then XLF. 

No current open positions in any of these in ETFTRADR currently, which is BigTrends real-time ETF option trading program that targets strong moves over a short-term time frame — but that can change at any time.

Gold bugs argue that Gold (SLV) is far from being a Bubble. Especially not when you look at the following comparison, which plots Gold’s rise versus the Nasdaq’s (COMP) (QQQ) rise in the 1990′s.

Gold vs. Nasdaq

The Bear Camp (including Nouriel Roubini for example), argue that Gold is (or was) a hyperbolic bubble that is about to (or already has?) burst:

Gold vs. Nasdaq Chart 2

I like comparisons because – although history doesn’t repeat exactly – I think it rhymes, and when I look at both charts separately, I think both are very nice.

However, what if the Bulls are comparing the wrong asset to the Nasdaq Bubble?  What if they should rather look at Silver (SLV) prices?

Back in April, I felt silver was a Bubble, as price was going VERTICAL, which (as all good things) never lasts forever.  The parabola burst in April, and usually, it takes a LONG time before the next move up will start (if it ever will).

Silver Chart

Now how is that related to the Nasdaq Bubble?

Let’s first look at how most (if not ALL) bubbles evolve:|

* First, the Smart money comes in. They buy it because it’s undervalued, and they see a lot of potential. The markets are not aware of this.

* Second comes the institutional money. The institutional investors are now also aware that the asset has a lot of potential.

After the nice run up, price corrects. Everybody says: this is the end of the bull market, but actually it’s a bear trap.

* When price resumes its uptrend, then comes the public: “look at what this asset has done over the last couple of years, it can definitely go higher”.

It starts with enthusiasm, then comes greed and eventually, we get a “New Paradigm”:  ‘Look at fundamentals; this is a 10 bagger from this point’ (forgetting that it already rose 10-fold).

Then the markets drop.  The bulls say that it’s just a temporary correction after the huge run up over the last couple of years.

Then the markets rise again. The bulls will say: You see, the bull market has resumed.  This is the Bull Trap.

When suddenly price falls below the previous low, the chartists get scared, and stop losses are being hit.  More selling follows.  Now everybody panics.  Then they capitulate: “I’ve had enough of this. I’m sick of it, I’m out”.  Usually, price drops too much, too fast.  Eventually, price returns back to the mean.

Bubble Chart

We can clearly see this pattern in the Nasdaq “Bubble” of the 1990′s:

Nasdaq Bubble Chart

In fact, the Nasdaq is not the only “Bubble” of recent times that has burst. Think about the Chinese stock markets for example, hereby represented by iShares China 25 ETF (FXI).  Do you see how similar FXI behaved to the NASDAQ (even AFTER the bubble had burst)?

FXI vs. Nasdaq Chart

Now let’s have a look at the “Silver Bubble”. It’s following nearly EXACTLY the “Bubble Pattern” discussed above:

Silver Bubble Chart

In fact, when we compare Silver to the Nasdaq, we get a much better comparison than when we compare Gold to the Nasdaq Bubble:

Siver vs. Nasdaq Chart

We might now get the “Bull Trap”, which means Silver might rise back towards $37-$39.

This would also be the target of the red channel in the following chart:

Chart 9

When price hits that level, and then turns down, the last phase of this Bubble can start: Capitulation.

Courtesy of Willem Weytjens, www.profitimes.com

Recent reports are promoting the conception that the unemployment rate in the United States is improving markedly.  In addition, sentiment numbers were released that confirmed my previous speculation that market participants were becoming more and more bullish, as prices in the S&P 500 (SPX) (SPY) edged higher.  The exact numbers that came in demonstrated that bullish sentiment had not reached current lofty levels since February 11, 2011.  The table below illustrates the most recent sentiment survey:

Sentiment Table

(Chart Courtesy of the American Association of Individual Investors)

Clearly investors are growing considerably more bullish at the present time.  The bullishness being exhibited by market participants is rather interesting considering the notable headwinds that exist in the European sovereign debt markets, the geopolitical risk seen in light sweet crude oil futures, and the potential for a recession to play out in Europe.

To further illustrate the complacency in the S&P 500, the daily chart of the CBOE Volatility Index (VIX) (VXX) (VXZ) is shown below:

VIX Daily Chart

The VIX has been falling for several weeks and is on the verge of making new lows this week.  If prices work down into the 16 – 18 price range a low risk entry to get long volatility may present itself.  For option traders, when the VIX is at present levels or lower there are potentially significant risks associated with increases in volatility.

My expectations have not changed considerably over the past week.  I continue to believe that the bulls will push prices higher, in what I believe could be the mother of all bull traps.  Let me explain.  As shown above, we have strong bullish sentiment among market participants paired with general complacency regarding risk assets.

My expectation remains for the S&P 500 to top somewhere between 1,292 and 1,325. A lot of capital is sitting on the sidelines presently and if prices continue to work higher I suspect that a move above the 1,292 price level will trigger a lot of long entries back into stocks or other risk assets.

We could see prices extend higher while the "smart" money sells into the rally.  Retail investors and traders will point to the inverse head and shoulders pattern on the daily chart of the S&P 500 and the breakout above the key 1,292 price level.  The pervasive fear of missing a strong move higher will help fuel long entries from retail investors.

At the same time retail investors begin buying, a lot of committed shorts will be stopped out if prices push significantly above the 1,292 area or higher toward the more the obvious 1,300 price level.  Thus, there will be few shorts to help support prices should a failed breakout transpire.  A perfect storm could essentially be born from the lack of shorts to hold prices higher paired with the trapping of late coming bulls.

The daily chart of the S&P 500 Index below illustrates what I expect to take place in the next few weeks:

SPX Daily Chart

I want to reiterate to readers that it is not totally out of the question that the 1,292 price level could hold as resistance or that we could roll over early this coming week.  Additionally a breakout over 1,330 will certainly lead to a test of the 2011 highs around the 1,370 area.

If the S&P 500 pushes above the 1,370 area we could witness a strong bull market play out.  Ask yourself this question, what reasons could produce such a rally and what are the probabilities of that outcome transpiring in the next few weeks?

Obviously earnings season is going to be upon us shortly and if earnings come in below expectations a potential sell off could intensify.  Furthermore, economic data in Europe continues to weaken, and slower growth appears to be manifesting within the core Eurozone countries like Germany and France.  If most of Europe plunges into a recession, deficits will widen beyond economic forecasts and the strain in the sovereign debt market of the Eurozone will increase dramatically.

One key element that many analysts are not even discussing is the potential for higher oil prices to present additional economic headwinds for developed western economies.

Clearly the situation in the Middle East is unstable, specifically what we are seeing taking place in the Strait of Hormuz involving Iran.  If a "black swan" event occurs such as a military conflict between the United States and Iran or Israel and Iran the prices of oil will surge.

In a recent research piece put out by SocGen, nearly every scenario that is referenced involves significantly higher oil prices.  According to the report, the Eurozone is considering the banning of imported Iranian oil which could cause Brent crude oil prices to surge to a range of $120 – $150 / barrel according to SocGen.

The other scenario involves the complete shutdown of the Strait of Hormuz by Iran.  If this shutdown were to persist for several days the expectation at SocGen for Brent crude oil prices is in the $150 – $200 / barrel price range.

Clearly if either of these two scenarios plays out in real time, the impact that higher oil prices will have on European and U.S. economies could be catastrophic.

The daily chart of light sweet crude oil futures is shown below:

Oil Daily Chart

I want readers to note that I am not suggesting that oil prices are going to rise or fall, just outlining the report from SocGen about where they expect oil prices to go should either of the two scenarios presented above play out.  If oil prices were to work to the $125 / barrel level and remain there for a period of time, I would anticipate a very sharp decline in the S&P 500.

Currently there are a lot of headwinds for bulls, some of which could persist for quite some time.  I intend to remain objective and focus on collecting time premium.

Once I see a confirmed move in either direction I will get involved. For now, I intend to let others do the heavy lifting until a low risk, high probability trade setup presents itself.  Risk is increasingly high.

Courtesy of JW Jones, www.OptionsTradingSignals.com

We'll poke and prod how it all panned out on a second, and take a look at why we're generally bullish in the bigger picture even though we're getting a little concerned in the near-term.  First though, let's run down some of the key economic numbers.

Economic Calendar

Pretty big week last week, especially when it comes to jobs, or lack thereof.

The best news was the unemployment rate fell from 8.7% to 8.5%.  Simultaneously, nonfarm private payrolls jumped from a 120K in November to a 212K increase in December.  The number jives with the 325K new jobs that ADP said were created last month.  Say what you want about the U4, U5, and U6 numbers – this is legitimate progress.  We still need to see closer to 400K new jobs added each month to consider it 'strong' growth, but this is something to build on.

By the way, new and ongoing unemployment claims fell again last week as well.  Everything else is on the grid below.

Economic Calendar

As for the coming week, it's not quite as earth-shattering, but there's some stuff worth noting.

For instance, Monday morning the Consumer Credit levels for November will be out.  The pros are looking for a $7.0 billion increase, extending a pretty impressive swelling of the total amount of money borrowed in the U.S.

We'll get new and continuing unemployment claims on Thursday as usual; both are expected to be basically flat with the prior week's numbers.  However, we'll also get some monster news on Thursday…. December's retail sales.  Was holiday shopping as potent as it needed to be to rekindle the economic revival?  The forecasters are looking for a 0.4% increase, with or without automobiles.  Anything above or below that will likely mean fireworks of some sort.  Be ready.

Finally, on Friday we'll get the first (of three) January readings of the Michigan Sentiment Index. It looks like we're in for a modest improvement from 69.9 to 71.0, extending the modest uptrend for a fifth straight month.

S&P 500

In the introductory comments we noted the market was sending us something of a mixed message…. the outlook varied with the timeframe.  It wasn't an effort to be coy; stocks really are at a short-term crossroads, but have already dropped a major longer-term hint.  Let's start with the latter idea first.

For the long-term bulls, you'll be glad to know the S&P 500 has set up shop above the 200-day moving average line (green) after a string of higher lows. T hough still a little wobbly, the SPX is also managed to make higher highs.

There's still something of a short-term vulnerability though – the ceiling around 1287 (dashed), and the upper Bollinger band at 1297.  Both could halt the uptrend, if not for the long haul, at least in the short run.  In fact, it would be odd if the S&P 500 didn't at least pause somewhere around there.

At the same time, while the VIX's downtrend is broadly bullish for stocks, i t's also getting uncomfortably close to its own lower Bollinger band at 18.4.  As we've seen lately, the VIX hasn't been able to touch its lower band line without pushing up and off of it… which is hurting stocks.  Overall the VIX is still in a long-term downtrend, but it's getting to an extreme in the short run – at a point in time when the S&P 500 is poised to encounter known ceilings.  It doesn't bode all that well for anyway needing some immediate bullishness.

Like we said above though, the bullish crosses of all the key moving averages say the long-term undertow is better.  In other words, we're in a "buy on the dips" environment as long as any of the key support levels hold up.  Take a look, but keep reading.

S&P 500 – Daily

While we're seeing the S&P 500 firm up, even more compelling is the reality that all the indices are making bullish progress.  In fact, all the indices are making the same important bullish progress.

This is an update of the same chart we showed you a week ago, of the Dow, NASDAQ, and the S&P 500.  As we said then, all the major market indices have been getting squeezed into a wedge (framed in orange), which was setting up the potential for big fireworks.  It wasn't until this past week, however, that the triangle shapes were broken in a bullish manner.  The implications are more than encouraging. 

More than that, in all three cases the index in question cleared key horizontal resistance lines.

Dow Jones Industrials, S&P 500, and NASDAQ – Daily

This still doesn't completely pull the fat out of the fire, because none of the indices have really been tested outside of their wedges; will these buyers hold their ground?  It may take a few days to know for sure.  This much is for sure though… this is the best shot the market's had at a true recovery in a long time.

Trade Well,

Price Headley

One of the easiest mistakes any trader can make is not a 'trading' mistake at all.  Rather, the mistake is complacency with his or her trading skills and knowledge.

Unfortunately, trading is not like riding a bike – you can (and will) forget how.  Obviously you'll always know how to enter orders, but the efficiency and accuracy of your trading will diminish without constant renewal of your trading mindset.

The reason that most traders don't undergo psychological self-development is a lack of time, and that's understandable.  However, a good book or trading educational course is actually an investment in yourself, and ultimately an investment in your bottom line.

Today as a primer, and a challenge, I'd like to review some self-development concepts that Ari Kiev explores in his book 'Trading to Win'.  This in no way is a substitute for his excellent book, but they are still useful ideas even in this abbreviated form.  None of them are going to be new to you, but all of them will be valuable to you.

1.  Plan the entire trade before you enter the trade.  Have an entry strategy, and an exit point (both a winning exit point and a non-winning exit point).  This will inherently force you to look at your risk/reward ratio.  Write these entries and exits down in a journal.

2.  Eliminate distractions.  It's difficult enough to find trading time at all if it's not your regular job.  If you're a part-time trader who trades at work between meetings and phone calls, think about this:  there are full-time professional traders who are concentrating on nothing other than taking your money.  It's not that they're better or smarter than you – they just have the time to focus.  If you must trade, set aside blocks of time to study or trade (or develop systems & indicators) without distraction. Or it may be more feasible to do your trading on an end-of day basis, meaning you place your orders and do your 'homework' the night before when you can focus on it.

3.  Choose a method or a small group of methods, and stick to them.  Far too often we see a trader adopt a new indicator or signal only to see it backfire.  Become a master of your favorite signals, rather than a slave to any and every signal.  Understand that an indicator will fail sometimes.  That's ok.  The sizable winning trades should more than offset the small losing trades initiated by an errant signal.  This trading method is designed to eliminate the emotional bias of trading…

4.  Choosing not to trade can also be a prudent choice.  You'll frequently hear 'don't fight the tape'.  The same idea also applies to a flat market – you can't make stocks do something they're just not going to do.  Wait for good entries into a developing trend rather than force a bad entry into an unclear trend.

5.  Take responsibility for your trades – all of them. Examine why the losing trades failed, and why the winners were successful.  The reality is that you chose to enter each and every trade.  This can be painful, at least initially, since the ego is built to deflect blame yet accept praise.  That's a trap.  If you find yourself saying "that was a good trade entry but…" then stop yourself immediately.  Either everything before 'but' or after 'but' is inaccurate.  If you rationalize or justify poor trades, then you'll never learn from them.  This may be the most important idea of the five – the ego can prevent real learning.  If you can learn to accept some failure without being emotionally devastated, then you'll be a good trader.

The only advice I would add to this list is simply to keep a daily trading journal.  This can be a journal of trades, signals, ideas, and emotions about your trading. T he more you put in the journal, the more you'll get out of it.  It will also help you in applying and tracking these five concepts above.

Trade Smarter!

Price Headley, CFA, CMT – Founder & Chief Analyst