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I was starting to put on my bullish hat
on Friday morning when out of the blue an ugly close has forced me to rethink
my position. After viewing a few hundred charts, I have determined that while
I am still leaning into higher prices at this point in time, I will not
totally rule out a rollover on the S&P 500. In coming days the news flow will be extreme and headline risk will be everywhere we look. The
S&P 500 has been able to deflect worry for quite some time now and in every
case the resiliency is unquestionable.
However, we are nearing the beginning of another earnings season
which will start in just a few weeks' time. First quarter earnings for 2011
are going to be quite interesting and most analysts' estimates are relatively
challenging. Will the rubber hit the road into earnings? Are we about to see
a double top play out into earnings, or is there going to be a breakout which
will take us to the SPX 1,400 - 1,415 price level?
I know, I ask a lot of questions but quite frankly that is what is
running through my head. The SPX is not out of the woods yet, and the price
action on Friday indicated that there is some serious supply overhead and two
key resistance levels to break through before the SPX gets back to clear blue
skies overhead.
SPX illustrates the two key price levels
 
In addition to the uncertainty that earnings season can bring, the
primary reason why I am still leaning into a bullish move in the S&P 500
is the recent price action in the U.S. Dollar Index futures. The U.S. Dollar
is scheduled to make its 3 year cycle low sometime this spring and the recent
price action is indicative that the recent lows may not be the cycle lows. If
the U.S. Dollar Index breaks down below recent lows, I would expect to see a
nasty sell off.
The U.S. Dollar Index futures daily chart is shown
below:
Whether readers believe that we are going to be in an inflationary
environment or a deflationary environment is a topic for a different time,
but the chart above is undeniable that recently the U.S. Dollar has declined
in value and is exhibiting weak price action. Friday morning it looked as
though the U.S. Dollar was going to rip higher, but by the end of the day
sellers had stepped in and forced the U.S. Dollar into the red for the
session. The price action on Friday highlighted the weakness in the U.S.
Dollar and the high levels of overhead supply.
If the U.S. Dollar continues to weaken, in the short run I would
view this as a positive for the S&P 500, crude oil, and precious metals.
If the dollar breaks down to new lows, it should help buoy the S&P 500
and gold prices. Gold has been consolidating for nearly 6 months and a
breakout higher from current price levels would make a trip to $1,500 an
ounce very likely. I would not be surprised to see gold work even higher than
$1,500 an ounce depending on how violent the selloff in the U.S. Dollar might
be.
The weekly chart of gold futures is
listed below:
I would think that most investors are aware that crude oil futures
have been trading higher recently. On Friday oil prices climbed above recent
resistance around the $107/barrel price level and reached new recent highs.
Members that belong to my paid service enjoyed a relatively low risk options
trade that we put on several weeks ago which involved selling cash secured
naked puts on $USO. The trade was closed on Friday for a total gain of 85% of
the premium that was sold. For long time readers, my stance on energy has
been pretty obvious. In the longer term, energy prices almost have to go up
as the world's demand for energy increases while supplies remain flat.
I will likely get involved in another oil trade at some point in the
future, but for right now I'm going to wait for a more prudent entry. Based
on current price action, it would not surprise me to see crude oil futures
test the $110 - $112 per barrel price range in the near future. If the
$112/barrel price level is breached to the upside, a test of the $120/barrel
price level will be likely.
The weekly chart of oil futures is listed
below:
Weekend Trend Conclusion:
The S&P 500 is in an interesting place as far as the price action
is concerned. With earnings season rapidly approaching and a possible break
down in the U.S. Dollar Index likely, future price action is uncertain. I am
leaning into the bullish camp at this point, but that could change rather
quickly based on the price action later this week in both the S&P 500 and
the U.S. Dollar Index. One thing worth mentioning is that if the U.S. Dollar
Index were to bottom around these levels and a bounce higher transpired, it
would put negative price pressure on most asset classes. The fact that price
action in the U.S. Dollar Index has been weak lately makes me believe a break
down is likely, but as most readers know Mr. Market offers few guarantees.
Assuming the U.S. Dollar breaks down, we should see the S&P 500,
precious metals, and oil continue to work higher. My eyes are going to be
watching the U.S. Dollar Index closely in coming days/weeks. If a breakdown
transpires, the potential upside in precious metals and oil could be intense.
Ultimately, I remain slightly bullish on stocks and extremely bullish on oil
and precious metals. However, my entire thesis could change if the U.S.
Dollar Index starts to firm up and begins to work higher. There are simply
too many question marks surrounding price action to take on significant amounts
of risk at this point in time.
Chris Vermeulen
Editor, the Gold and Oil Guy
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