Gold, Copper, and Oil Forecasted the Recent Selloff in the S&P 500

For the past several weeks, everywhere I looked all I could find was bullish articles. After the fiscal cliff was patched at the last second, prices surged into the 2013 and have since climbed higher all the way into late February.

I warned members of my service that this runaway move to the upside which was characterized by a slow grinding move higher on excessively low volume and low volatility would eventually end violently. I do not have a crystal ball, this is just based on my experience as a trader over the years.

Unfortunately when markets run higher for a long period of time and just keep grinding shorts what typically follows is a violent selloff. I warned members that when the selloff showed up, it was likely that weeks of positive returns would be destroyed in a matter of days.

The price action in the S&P 500 Index since February 20th has erased most of the gains that were created in the entire month of February already and lower prices are possible, if not likely. However, there are opportunities to learn from this recent price action.

There were several warning signs over the past few weeks that were indicating that a risk-off type of environment was around the corner. As a trader, I am constantly monitoring the price action in a variety of futures contracts in equities, currencies, metals, energy, and agriculture to name a few.

Besides looking for trading opportunities, it is important to monitor the price action in commodities even if you only trade equities. In many cases, commodity volatility will occur immediately prior to equity volatility. Ultimately the recent rally was no different.

As an example, metals were showing major weakness overall with both gold and silver selling off violently. However, what caught my eye even further was the dramatic selloff in copper futures which is shown below.

Copper Futures Daily Chart


As can be seen above, copper futures had rallied along with equities since the lows back in November. However, prices peaked in copper at the beginning of February and a move lower from 3.7845 on 02/04 down to recent lows around 3.5195 on 02/25 resulted in roughly a 7% decline in copper prices over a 3 week period.

As stated above, commodity volatility often precedes equity volatility. As can be seen above, copper futures appear to be reversing during the action today and many times commodities will bottom ahead of equities.

I want to be clear in stating that equities will not necessarily mirror the action in commodities or copper specifically, but some major volatility was seen in several commodity contracts besides just metals. Oil futures were also coming under selling pressure as well.

Oil Futures Daily Chart


As can be seen above, oil futures topped right at the end of January and then sold off briefly only to selloff sharply lower a few weeks later. Oil futures gave back roughly 6% – 7% as well which is quite similar to copper’s recent correction. I have simply highlighted some key support / resistance levels on the oil futures chart for future reference and for possible price targets.

In equity terms, since February 20th the S&P 500 futures have sold off from a high of around 1,529 to Monday’s low of 1481.75. Thus far we are seeing a move lower of about 3.10% since 02/20 in the S&P 500 E-Mini futures contract. While I am not calling for perfect correlation with commodities, I do believe that a 5% correction here not only makes sense, but actually would be healthy for equities.

S&P 500 E-Mini Futures Daily Chart


If we assume the S&P 500 E-Mini contracts were to lose 5% from their recent highs, the price that would correspond with that type of move would be around 1,453.

As shown above, while 1,453 does represent a consolidation zone in the S&P 500 which occurred in the beginning of January of 2013, there is a major support level that corresponds with the 1,460 – 1,470 price range.

I am expecting to see the S&P 500 test the 1,460 – 1,470 price range in the futures contract, however the outcome at that support level will be important for future price action. If that level holds, I think we likely reverse and move higher and we could even take out recent highs potentially. In contrast, if we see a major breakdown below 1,460 I believe things could get interesting quickly for the bears.

I am watching the price action today closely as I am interested in what kind of retracement we will get based on yesterday’s large bullish engulfing candlestick on the daily chart of the S&P 500 futures.

Ultimately if the retracement remains below the .500 Fibonacci Retracement area into the bell we could see some stronger selling pressure setting in later this week. The Fibonacci retracement of the 02/25 candlestick can be seen below.

S&P 500 E-Mini Futures Hourly Chart


So far today we have not been able to crack the 0.382 Fibonacci retracement area. This is generally considered a relatively weak retracement and can precede a strong reversal which in this case would be to the downside in coming days.

It is always possible to see strength on Wednesday and a move up to the .500 retracement level. As long as price stays under the .500 Fibonacci retracement level, I think the bears will remain in control in the short-term. However, should we see the highs from 02/25 taken out in the near term the bulls will be in complete control again.

Right now I think it is early to be getting long unless a trader is looking to scale in on the way down. I think the more logical price level to watch carefully is down around 1,460 – 1,470 on the S&P 500. If that level is tested, the resulting price action will be critical in shaping the intermediate and long-term price action in the broad equity indexes.

If you have to trade, keep position sizes small and define your risk. Risk is elevated at this time.

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This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

Signs that a Correction Maybe Near in the SPX, RUT & DJIA

The great market prognosticators have by now came out with their 2013 predictions about financial markets. It seems to me to be a fool’s game to try to predict what financial markets are going to do in the future.

I want to be clear in stating that I do not know what is going to happen in the future. I do not know where the S&P 500 Index is going to trade tomorrow let alone 6 months from now. Most market pundits simply will not admit to this fact.

These same market pundits seemingly are unable to be honest about their own fallibility. In their own mind they believe it undermines their credibility or will hurt their forward sales for some book or strategy they are going to unveil. I for one do not prescribe to that notion, I believe in telling the truth.

The truth is that these so-called market experts do not know anymore than you or I about price action in the distant future. However, what I do know is that forward price action remains a mystery until its unveiled in the present.

Instead of wasting time discussing potential price action in the future, why not focus on a few pieces of information that have occurred that are known facts right now. I think the chart below points out that in the intermediate time frame, equity indexes are reaching extreme overbought conditions.

As can be seen above, the number of stocks trading above their 50 period moving averages is reaching close to the highest levels in the past 5 years. Many times when these price levels have been reached we witness a correction at the very least and any short-term gains are usually given back in short order. This is not to say that prices are going to sell-off tomorrow or in the next few weeks, however it is a warning that a correction is likely lurking in the not-so-distant future.

To help confirm this notion, a quick look at the Volatility Index (VIX) demonstrates just how much complacency there is in the short-term spot VIX price which is currently trading below 5 year lows. For novice readers when the VIX moves lower the outcome is typically bullish for the S&P 500 Index and when the VIX moves higher the reaction is typically bearish in terms of the S&P 500 Index.


As can be seen above, the VIX is trading near the bottom of its recent range. This helps confirm the strength we have seen the past few weeks, however a reversal seems likely in the near future. Should the VIX pick up considerably it would have a negative impact on the S&P 500 Index. Furthermore, if we go out several months in time the Volatility Index Term Structure steepens wildly.

What this means is that traders and money managers have bid up forward VIX contracts in an attempt to hedge against a variety of perceived risk. I would also point out that at the moment February monthly options contracts are cheap relative to their historical volatility levels. However, the VIX could rally violently higher should the appropriate chain of events take place in the months ahead.

There are several catalysts in the short-term which will have a major impact on price action for the broader indexes. This coming week we will have earnings from major companies such as IBM, AAPL, and GOOG which all have the potential to move the tape significantly in either direction.

The other more obvious short-term inflection point is the dreaded U.S. debt ceiling debacle which is likely to begin permeating the financial media as the deadline for action draws near. In recent history both houses of Congress and the Executive Branch have struggled to achieve compromise until the 11th hour. The fiscal cliff was one issue, but the debt ceiling issue has the potential to have a major impact on financial markets.

Just to put into context what happened back in 2011 when Congress could not reach a compromise regarding a debt ceiling increase, the S&P 500 Index had the following reaction as shown below.


Obviously there are significant unknowns regarding how the debt ceiling process will unfold in 2013. However, what is known is that should the politicians wait until the 11th hour equity indexes could force their hands yet again.

Additionally the threat of credit rating agencies downgrading U.S. government debt is a major concern. The outcome of this decision alone has the potential to devastate investment portfolios should the government have a partial shutdown as a result of a failure to reach an agreement regarding the debt ceiling.

What is important to understand is that the longer-term price action in the future is impossible to know at this point. We have major earnings reports which are about to be released over the next few weeks which presents significant risks to the broader indexes in both directions. Furthermore we have a major macro event that is facing us and will have to be addressed in the next 5 – 8 weeks.

The outcome of these events as this point is entirely unknown. I would also point out that in 2011 prior to the debt ceiling debacle we saw equity prices rally higher in late June of 2011 while the VIX traded down near recent lows at that time. After a period of consolidation equity indexes remained patient and gave the politicians time.

Eventually the price action in risk assets forced both political parties and the President to come together. As shown in the chart above, the S&P 500 lost nearly 19% in less than 4 weeks of trading sessions. Even the most skeptical politician was forced into submission by Wall Street and the financial media.

Will history rhyme with the recent past? Will we see a compromise in advance of the dreaded shutdown date? Will the debt ceiling outcome create a major paradigm shift in U.S. financial markets and U.S. politics?

Unfortunately, there is no one that can tell us with any certainty what is about to happen in the next 5 – 8 weeks, let alone later this year. After all of the forthcoming analysis and discussion in the weeks ahead, price action will continue to remain a mystery until the debt ceiling situation is behind us. Until then, caution is warranted in both price directions. Trade safe.

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This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

What the VIX Term Structure is Saying About the Fiscal Cliff

The past few weeks have been full of a constant barrage of press conferences and public statements from the charlatans in Washington D.C. Politicians cannot pass up a chance to get in front of the cameras and the media has used the “fiscal cliff” as a mechanism to scare average Americans further about their future.

Interestingly enough, amid all of the nonsense that has been going on stocks have remained resilient. I think sometimes its important to just step back away from the media’s noise and just look at some price charts for more clarity. The S&P 500 Index has been trading in a relatively tight range now for over 6 trading sessions as shown below.

As can be seen above, the S&P 500 is struggling to breakout of the 1,400 – 1,420 price range. It is not mere coincidence that the Volume by Price indicator is illustrating the most trading volume having occurred in and around that price range. So what does the recent action mean in light of the supposedly pending fiscal calamity?

Everyone that is looking for this monster move when the announcement is finally made may be waiting for a while. It is without question that the broader marketplace is clearly aware of the fiscal cliff. It would make sense that Mr. Market may have priced in some of the uncertainty. Furthermore, if there was significant concern we would be seeing prices starting to sell off by now.

Markets do not like uncertainty. However, what is certain is that during the end of the year the bulls usually have the upper hand. The reasons are fairly simple, but they usually hold sway most years. Due to the holiday season, many traders take vacations and leave their trading desks. Because traders are largely absent, volume levels start to decline as the holiday season approaches. Typically volume levels do not normalize until January of the new year.

Low volume levels typically synch up with low volatility levels. When those two forces align together the bulls will almost always have the upper hand. Is it any wonder that this time of year the financial media begins discussing a “Santa Claus rally”? Of course not, but Santa Claus is really just light volume levels and low volatility levels in this case.

Recently volatility has been pretty choppy, but the Volatility Index is not showing considerable fear regarding the fiscal cliff in the near term. In fact, the VIX is trading in the middle of its recent range as shown below.

At first glance, this chart does not appear to be warning us about fear at the moment. However, certain aspects of the Volatility Index (VIX) are largely unknown to the retail investor. The VIX is a guide for volatility in the present, but it does a poor job of projecting future volatility. Simply looking at the VIX’s current price is not the appropriate way to gauge market volatility expectations in the future..

The Volatility Term Structure is a better way of understanding what the Volatility Index is saying about the future. Wikipedia lists the following definition for volatility term structure:

“Volatility term structures list the relationship between implied volatilities and time to       expiration. The term structures provide another method for traders to gauge cheap or expensive     options.”

The current Volatility Term Structure chart is shown below courtesy of

As can be seen above, the forward Volatility Term Structure indicates that volatility is expected to go higher in the future. This is not all that uncommon, but I think what is more important is the rate of change in the near term.

When we look at this chart, the term structure indicates that Volatility levels roughly 4 months  out (March 2013) are nearly 13% higher than they are today. By June of 2013, volatility’s rate of change is well over 20% higher than it is today.

It is important to understand that volatility does not necessarily mean risk. Volatility typically increases when equity prices are falling, however volatility levels can rise for a variety of reasons. Uncertainty about the outcome of an event like hitting the debt ceiling could push volatility levels higher without sending equity prices sharply lower. The point is the term structure just provides clues as it is not the holy grail about looking in the future.

What the Volatility term structure does tell us is that the marketplace expects a significant increase in overall volatility in the next 3 – 6 months. What I think the Volatility Term Structure is conveying presently is that decisions regarding the fiscal cliff and the debt ceiling will impact market prices, However the real impact may not be felt until later in the 1st or 2nd Quarters of 2013.

Most economists believe that if we do go over the fiscal cliff and taxes go up for everyone that the U.S. economy will be in recession within 6 – 9 months. Clearly as shown above, the Volatility Term Structure likely agrees with the economists assessments and the economic conditions in the next 6 to 7 months could possibly turn for the worse.

All we can hope for is that the politicians can compromise on a plan that will remove uncertainty from the marketplace without compromising the economy. Something tells me that is not likely to happen, but here is to hoping that I’m wrong!

Happy Trading!

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This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

Why the S&P 500 & Gold Rallied in the Face of Negative News

The amount of negative news that we have seen recently has been mind-blowing. Europe is going into recession, Greece and several other countries are on the verge of bankruptcy, the Middle East is a powder-keg, and the U.S. is facing a fiscal cliff. Shockingly for most retail traders, the past week has produced a very strong return for U.S. equity indexes as well as risk assets in general.

Retail investors often times consistently lose money because they focus on the financial media and all of the negative news that is out there. Trust me, as a longer term trader and investor, there is never an absence of negative news or potentially poor economic possibilities. This is not to say that markets cannot decline, investors just need to understand that markets are cyclical in nature and do not ever move in a straight line.

Based on what I was reading from most of the financial blogosphere recently, you would think that the entire world was about to end. A few blogs were calling for an all out collapse late last week or a possible crash this past Monday, November 19th. As is typically the case, the market prognosticators were wrong with the calls for a crash or an absolute collapse in financial markets.

Unlike those blogs, members of my service at were getting information indicating that we were expecting higher prices. At our service, we lay out regular videos covering a variety of underlying assets from the S&P 500 Index and oil futures, to gold and treasury futures. The focus is purely on analysis of various underlying assets across multiple time frames. We cover intraday time frames as well as daily and weekly swing time frames throughout the week with videos and written updates.

To put into perspective what we were seeing in the marketplace on Monday November 19th, the following chart was sent out to our members during intraday trading that day.

ES Mini - emini SPX Trading Chart


As can be seen above, the target we were expecting was at the top of the recent channel. As shown directly on the chart above was my comments that if the 1,410 level on the S&P 500 Index could be taken out to the upside, the bulls would have an opportunity to move prices higher into the end of the year. The daily chart of the S&P 500 Index after the close on Friday November 23.

SP500 Index Trading


As can be seen above, the S&P 500 Index moved right into the expected target price range and closed literally at the very top end of the range shown above. If prices move considerably higher, the bulls will have broken the descending channel and higher prices will likely await.

Next week’s price action is going to have a dramatic impact on the price direction of the broader market indexes. One important aspect that I would point out to readers is that the large move higher shown above came on exceptionally light volume due to the holiday week. In light of that, a strong reversal cannot be ruled out. Caution is warranted regardless of a trader or investor’s directional bias.

One of the most important charts to monitor over the past few weeks has been the U.S. Dollar Index futures. Typically a stronger Dollar has been bearish for equities and risk assets in general. However, on Friday we saw a very strong selloff in the U.S. Dollar Index futures as shown below.

Dollar Index Trading

As can be seen above, the U.S. Dollar Index futures closed on Friday right at a key support level having given back much of the recent gains. If the Dollar continues to move lower it should put a floor under stock indexes and push risk assets higher overall.

Two major moves higher occurred in light of this weakening Dollar on Friday in both gold and silver futures. The precious metals had a very strong move higher after the U.S. Presidential election and have been consolidating now for a few weeks. Prices in both gold and silver had strong moves higher on Friday which were accompanied by very strong volume. The daily chart of gold futures is shown below.

Gold Futures Trading

Gold futures had a huge move higher today supported by strong volume. Based on today’s action, I believe that we will see the $1,800 / ounce resistance level tested in the near term. Seasonally speaking, this time of the year is bullish for gold and silver and should the strong seasonality correspond with a weak U.S. Dollar much higher prices likely await in the precious metals sector.

Members of TradersVideoPlaybook were made aware that I was expecting very strong action in both gold and silver when they broke higher after nearly testing their 200 period moving averages. At the time, I told members that as long as the breakout from the consolidation zone from the July – August time frame held as support, higher prices were likely and that is just what we have seen.

Overall, I believe that the quarters ahead should be strong for both gold and silver. Time will tell whether oil futures and the broader equity markets will also move higher. I continue to believe that monitoring the Dollar Index futures closely is an important part of assessing the directional bias to expect in the months ahead.

We have a lot of negative news in the headlines, but Mr. Market has fooled most investors and traders alike the past week. If you were one of those investors that were fooled, consider taking advantage of our weekend special by clicking the link below: Take care and Happy Trading!

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This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.


The Weekly Technical Take

Good afternoon members! So far in this session we are not seeing anything real exciting taking place in the equity space, but we do have some action going on in commodity futures today. In the equity indices we are seeing relative weakness in the Nasdaq 100 futures due to the large pullback in AAPL today. The pullback is directly related to the weekend sales numbers of the new Iphone 5 as well as riot issues taking place at FoxConn in China which is the plant where Iphones are produced.

So far the S&P 500 E-Mini futures are showing relative strength but at the moment they are also trading to the downside as the September options expiration hangover continues to linger over the marketplace in general. The Russell 2000 Index futures are also showing downside in line with the S&P 500 futures. The S&P 500 appears to be closing in on some short-term support while carving out what appears to be a bull flag on the daily chart as shown below.

S&P 500 Index (SPX) Daily Chart

If the upper range of the bull flag is taken out I would anticipate an extension higher towards the recent highs. However, we cannot totally rule out selling pressure that could push down toward the 20 period moving average. For now, my bias is to the upside in equities but as always I am not willing to get too carried away with that viewpoint.

The Volatility Index (VIX) is pushing higher today by roughly 2.90% as I write this. Price is starting to move higher after testing down near the lows for the past few weeks. It appears that the VIX could be carving out a major double bottom on the daily chart, but it is way too early to declare a large move in the VIX. However, at the very least the current price action in the VIX will keep the bulls concerned at this time.

We have been monitoring the action in the Dow Jones Transports (IYT) closely as they have been under extreme selling pressure as FedEx and Norfolk Southern have announced poor earnings and horrific guidance which drug the entire transportation index lower. Today we are getting a nice bounce right at support which is a positive sign for the bulls. The daily chart of IYT is shown below.

Dow Jones Transportation Index Daily Chart (IYT)

If we get some consolidation in IYT that resolves to the upside we could see a very strong move out of this support area. If the support level breaks to the downside, we could see a major move lower from here.

The Dollar Index futures are moving higher today which is helping to put some pressure on risk assets. Overall I still do not believe the Dollar is going to move above the longer-term descending trendline. I suspect that area will hold and as we speak the Dollar appears to be carving out a bear flag which solidifies the potential of the bull flag we are seeing in the S&P 500 Index.

Dollar Index Futures Daily Chart

If the Dollar rolls over later this week or next week I would anticipate seeing gold and silver moving higher into the October expiration. For now the Dollar remains short-term bullish, but my expectation is that the price action will eventually resolve to the downside.

Gold and silver future sold off this morning but buyers stepped in and both underlyings are well off of session lows. The fact is there is strong buying pressure under the precious metals here. I think we could continue to see some consolidation and even lower prices, but ultimately I don’t think the marketplace is going to give us any great entries. I really like our GLD Call Diagonal as our opportunity to adjust it with a long bias is what really makes it look attractive at this time.

Oil futures are really getting hit hard today as I expected late last week. The selling pressure in oil is closing in on recent lows and should prices break below the recent support zone a move down towards the $87.50 / barrel price level is likely. I am going to watching oil prices closely in coming days as I continue to stalk a possible long entry in the days / weeks ahead.

The 10 & 30 year treasury futures are showing major strength today. Treasuries are an underlying that I am tracking closely looking for an entry point to get short treasuries. I do not anticipate seeing Treasury’s move much above their 50 period moving averages which in both cases have turned down. The 30 year treasury futures daily chart is shown below.

30 Year Treasury Futures Daily Chart

I will continue to monitor the price action, but for now we appear to be in a bullish cycle. When this cycle ends, I anticipate strong selling pressure coming into treasury’s. For now, I am not going to fight the higher prices, but once we get up into the moving averages I will get involved from the short side more than likely.

Today appears likely to be pretty quiet overall, but I am interested to see if we get any action going into the final hour of trade.

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This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

Copper Prices Signaling a Top in the S&P500

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

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

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

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

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


Volatility Index (VIX) Weekly Chart

Volatility Index (VIX) Weekly Chart

Volatility Index (VIX) Weekly Chart


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

The perma-bulls would argue that we could see those 2006 – 2007 lows tested, but based on September monthly VIX options the option market seemingly is arguing that we are approaching an intermediate low in the Volatility Index. The chart below illustrates the September VIX option chain based on Friday’s closing prices.


Volatility Index (VIX) September Monthly Option Chain

Volatility Index (VIX) September Monthly Option Chain

Volatility Index (VIX) September Monthly Option Chain


Price action is never wrong, but many times a great deal of information can be acquired by simply reviewing option prices. As can be seen above, the VIX closed on Friday at 13.45, a new 2012 low. However, when we consider the prices in the VIX September option chain shown above I would point out that the VIX September 13 Puts are 0 bid.

What this essentially means is that the VIX options market is saying that the Volatility Index is unlikely to move below 13 in September. For readers unfamiliar with options, selling a naked put or using a put credit spread are two trading structures that are bullish regarding the underlying asset which in this case is the VIX.

The VIX September 13 puts are offered at 0.05 on the ask, but are at 0 on the bid. This means that the VIX market makers are not expecting to see the VIX move below 13. Clearly this is not a guarantee as there is never a sure thing in financial markets. However, this pricing situation for the September 13 VIX Puts is favorable for the equity bears in September.

In layman’s terms, the VIX needs to move higher in the next 3 weeks based on the fact that the September VIX 13 Puts are 0 bid. This is one of several clues that we could be nearing a major top in the S&P 500 Index in the very near future.

When we look at a weekly chart of the S&P 500 Index (SPX) it is obvious that we have a major longer term breakout which occurred this past week. However, there remains additional resistance overhead in the 1,440 – 1,450 price range.


S&P 500 Index (SPX) Weekly Chart

S&P 500 Index (SPX) Weekly Chart

S&P 500 Index (SPX) Weekly Chart

While 1,440 might be a major area where a significant top could form, a rally above this level cannot be ruled out entirely. However, the chart above gives traders and investors a context for where possible tops could form.

A reversal could play out almost immediately at the current levels or we could move considerably higher before finding major resistance that holds. For now, we do not have enough evidence based on the S&P 500 Index price chart to proclaim that a top has formed or will form in the near future.

Another underlying asset that I monitor closely is copper futures. Generally speaking, if copper futures are rallying economic conditions tend to be strong. The opposite can be said when copper futures are under selling pressure. Recently copper futures prices have been trading in a relatively tight trading range, but the longer-term weekly chart shown below demonstrates that should prices start to selloff, a major selloff could transpire.


Copper Futures Weekly Chart

Copper Futures Weekly Chart

Copper Futures Weekly Chart

As shown above, there is a monstrously large head and shoulders pattern (bearish) that goes back to early 2010 that has formed on the weekly chart. Should the neckline of this pattern get taken out on a weekly close the selling pressure that could transpire could be devastating regarding the price of copper.

However, a major selloff in copper would also indicate that economic conditions were weakening globally. If copper triggers this bearish pattern, it would likely not be long before other risk assets followed suit.

In addition to the possibility that major selling pressure could await copper should that pattern trigger, another macroeconomic data point would argue that economic conditions are already starting to contract. The chart shown below, courtesy of Bloomberg, illustrates the amount of waste hauled by railroad cars and the implicit correlation to U.S. gross domestic product (GDP).


Waste Railcar Loads Versus GDP Chart

Waste Railcar Loads Versus GDP Chart

Waste Railcar Loads Versus GDP Chart


Recently posited an article that featured this chart and a link to that article is found HERE. The article and the accompanying chart demonstrate that as more products are produced, additional waste can be expected. As shown above, the amount of waste being produced and hauled by railcar has fallen off a cliff and should longer-term correlations remain intact a contraction in U.S. GDP is likely not far away.

There are a multitude of other topping triggers that I follow that are all screaming that a major intermediate and possibly even a longer-term top is nearby. However, at the moment the price action in the S&P 500 Index (SPX) is arguing otherwise.

Picking tops and bottoms in advance is extremely difficult and generally foolhardy, however when multiple triggers are going off regarding a possible type I pay close attention to price action. While I will not go as far as to say where specifically a top in the S&P 500 Index will form, I believe that a top is forthcoming and could even occur in the next 2 – 3 weeks.

Price is never wrong, and eventually I suspect that price will tell us what we wish to know. For now, I am going into the next few weeks with caution regarding the upside in risk assets. However, it is important to point out that I am not looking to get short risk assets either.

My research indicates that a major inflection point is coming and it could coincide with the Federal Reserve’s Jackson Hole summit. It could coincide with an event that we are unaware of as well. At the moment risk in either direction seems high and caution regardless of directional bias should be exercised. The next few weeks should tell the ultimate tale.

Happy Trading!

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Chris Vermeulen & JW Jones

The Federal Reserve, Gold, Oil, & the Dollar’s Demise

“We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it”.

~ Congressman Louis T. McFadden in 1932 (Rep. Pa) ~

The above quote coming from the Honorable Louis T. McFadden is a quite prescient statement as it relates to arguably the most evil enterprise in American history.

The Federal Reserve through its various monetary mechanisms has a major impact on the value of the U.S. Dollar and over time has destroyed the purchasing power of the fiat base currency used in the United States.

Interestingly enough, the following quote comes directly from the Federal Reserve’s website regarding one of its primary mandates, “In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessment of its maximum level.”

The chart below illustrates the horrific job the Federal Reserve has done of protecting the purchasing power of the U.S. Dollar since its creation.

Dollar Creation By The Federal Reserve

In light of the longer-term malaise seen above, the Dollar Index futures have recently rallied sharply higher as Europe continues to flail in a slow and agonizing decline which will ultimately lead to a complete fiscal disaster.

Sovereign debt concerns continue to mount regardless of what the European technocrats spew publicly and the U.S. Dollar has been the primary beneficiary of these seemingly growing concerns.

This brings me to the purpose of this article. Most of the articles I write are focused on option based trades, but I decided it was time to put forth a more comprehensive scenario that could unfold over the next few years as a result of excessive monetary stimulus through various quantitative easing mechanisms developed by the Federal Reserve Bank.  “A mild change” to say the least . . .

As discussed above, the U.S. Dollar Index futures have moved higher throughout most of 2012. Any significant increase in the U.S. Dollar is a growing concern among central bankers as it correlates toward deflation. Deflation is the Fed’s biggest enemy, besides themselves of course.

Next week the Federal Reserve will release statements relating to the economic condition of the United States. Furthermore, the Fed also will discuss if it will initiate another dose of monetary crack for a capital market place that is addicted to cheap money and zero interest rates. At this point, the so-called marketplace is the antithesis of free by all standard measures.

Consider the long-term monthly chart of the U.S. Dollar Index futures illustrated below:

Dollar Index Value Chart

The U.S. Dollar Index futures are in an uptrend that dates back to mid 2011. The orange line illustrates the uptrend and represents a key price level for the U.S. Dollar Index. For those unfamiliar with basic technical analysis, the rising orange trendline will act as buying support until the Dollar eventually breaks down through it signaling the bullish move higher has ended.

This brings us to a rather interesting potential observation. Today Mario Draghi, Chairman of the European Central Bank (ECB), made public comments regarding the readiness of the ECB to act if need be to safeguard the European Union. The Dollar Index Futures plummeted on the statement and remained under selling pressure most of the trading session on Thursday.

If a mere comment from the ECB can have such a damaging impact on the valuation of the Dollar, what would happen to the Dollar if the Fed initiated a new easing mechanism?

The answer is simple, the U.S. Dollar would immediately be under selling pressure. Selling pressure in the U.S. Dollar Index generally leads to a rally in risk assets such as equities and oil futures. Over the longer-term, a weak Dollar is also positive for precious metals and other hard assets.

As an example to illustrate the power of Quantitative Easing as it relates to the price of both gold and oil, consider the following chart:

Spot Gold Price Chart

Obviously the price action is pretty clear that Quantitative Easing has a positively correlated impact on the price performance of hard assets, specifically gold and oil. Now consider a price chart of the Dollar Index shown below courtesy of the Federal Reserve Bank, the annotations are mine.

Quantitative Easing Effects

The chart above tells an interesting story about the impact that Quantitative Easing has on the Dollar. How can the Federal Reserve claim to be protecting the purchasing power of the U.S. Dollar when its actions have a direct negative correlation to the greenback’s price?

Furthermore, based on the chart above I am of the opinion that Quantitative Easing III is a foregone conclusion. The current price of the Dollar Index is clearly above the previous high where QE2 was launched.

So far, the rally in the Dollar Index has not pushed equity prices considerably lower. However, should the Federal Reserve refrain from initiating additional easing measures it is likely based on the chart above that the U.S. Dollar Index will rally.

Upon the conclusion of both QE and QE2, the Dollar Index rallied sharply higher. With the Fed announcement coming closer by the hour, financial pundits will attempt to predict the future action of the Fed.

I have no interest in making predictions about what the Fed will do. It is a certainty that QE3 will take place at some point in the future whether it be sooner or later.

The Federal Reserve simply has no choice, otherwise the Dollar would continue to rally and we would begin to go through a deflationary period which the Federal Reserve simply cannot tolerate.

The scenario that I would urge inquiring minds to consider would be as follows. If the Fed does nothing we can likely assume that the U.S. Dollar Index will continue to rally to the upside.

Based on the price chart of the U.S. Dollar Index shown above, we can expect that sellers would certainly step in around the 86 – 88 price range based on previous resistance.

If the U.S. Dollar makes it anywhere near the 86 – 88 price range without the Federal Reserve initiating QE3 it would be expected that risk assets would be under considerable selling pressure somewhere along the way.

Should the Fed act to break the Dollar’s rally either through more easing or “other” mechanisms, the result would be a potentially monster rally for risk assets, at least initially.

Equities, oil, and precious metals would rally on a falling Dollar as shown above. The question then becomes what if this is the last gasp rally before a monster selloff ensues in the Dollar Index?

If the Fed breaks the rally early or initiates a monster-sized easing program, the initial reaction will be quite positive, especially for equities. As the selloff in the Dollar Index worsens, equities would eventually begin to underperform as oil prices would surge putting pressure on the economy.

In addition to oil rallying on the weaker Dollar, we could also see sellers start to show up in droves dumping U.S. Treasury’s to any buyer left standing. International debt holders would especially have incentive to sell Treasury’s as the real purchasing power of the bonds’ interest payments would decline as the Dollar fell in value.

The way I see it, whether the Fed launches QE3 now or later, the outcome will not change. An extremely weak Dollar could wreak havoc across a variety of assets and the broader economy. Imagine where gasoline prices would be if oil prices hit $125 / barrel. The average price in the U.S. would be well above $5 / gallon based on current prices and possibly higher.

What happens to the economy if interest rates start to react violently to the price action in the Dollar? What if Treasury’s start to sell off viciously and interest rates start to rise wildly and volatility among bond holdings runs rampant?

Are we to believe that the very entity that has created boom and bust cycles through easy monetary policies and has been oblivious to the bubbles that it has created is capable of solving the issues that would potentially arise from a currency crash in the U.S. Dollar?

The track record of the Federal Reserve is quite clear. They are generally late to the party and rarely are able to forecast events in the future with any clarity. Do you really think they will know what to do? The free market wants to destroy debt through deflationary pressure and price discovery and the Federal Reserve continues to get in the way.

The free market will win as it always does, but the American people will lose. This process may take months, years, or even decades to play out. Eventually the game will end.

There is only one certainty should any portion of the scenario discussed above come to fruition, when the Dollar is inevitably broken the only safe place to hide during the potential currency crash will be in physical gold and silver. Paper money and paper assets will come under extreme selling pressure and in some cases will simply . . . disappear.

Here’s to hoping I am totally wrong!

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Chris Vermeulen & JW Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the or websites be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

Today’s Closing Price In Gold Is Key

Today is Friday and that means today’s closing price on the weekly charts are very important for investors and big money traders. The Key thing to watch today on the close will be Gold as it tests its first major resistance level and a strong close above this price and will be the first sign that the bulls are starting to take control of gold.

Pre-Market Analysis Points:
–    Dollar index is trading lower and may have another minor dip before putting in a bottom.
–    SP500 is set to open 0.4% higher as the buying momentum still has some strength behind it likely for another day or two. Gap higher on Monday could result is a Pop-N-Drop which is bearish and could be a great shorting opportunity. Cycles will be topping in the next few days.
–    Gold and silver continue move up this morning but the video shows that they are both still in a down trend.
–    Gold miners have been on fire this week but are nearing resistance and are still within a strong down trend.
–    Bonds have pulled back to support on light volume. If bonds bounce/rally here then stocks will likely sell off shortly after.
–    Oil is looking bearing in terms of candle sticks on the daily chart pattern. $85 level looks like it may be reached any day and we may take a short position in it.
–    Natural gas is still working off its recent rally and is doing so on light volume which is bullish.

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Stocks dropping to key support and 5th wave bounce signal – Video

Good Morning,
The SDS trade is the gift that keeps giving… while our position size is not big, the key is that we are involved and riding this move down in the stock market with a runner. I really hoped we would have had another opportunity to add to our short but we have not really had a bounce with a setup yet. But that may come next week which a multi-day pause or oversold bounce which may kick into play very soon.

Take look at where the SP500 futures are trading this morning. This is the same chart I posted yesterday with the next key support level which is now being tested.

Pre-Market Analysis Points:
–    Dollar breaking out of resistance and moving up sharply. We need to see if it can hold up above this level today. I have a feeling it will reverse back down but let’s focus on the technical as it’s best to trade what you see, not what you think.
–    Crude oil is still trying to form a base and is starting to look more bullish today with a multi-day bull flag pattern.
–    Nat gas is doing the same thing…
–    Precious metals have mini 5 wave corrections and near support. A bounce is looking like it will happen in the next 24-48 hours.
–    Bonds are holding up and half way to our upside price projection. If they reach the previous high from a few months ago then I feel stocks will bottom and bonds will pullback.
–    SP500 is trading sharply lower and has reached our next price target as shown in the chart above. We have a small running with our stop set as yesterday’s high if a knee jerk short covering rally happens.

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