Year end closings

As we approach the monthly closings for year-end I will share the charts and my views.

Firstly on the S&P500:

Despite the weakness of the S&P500 this week (likely year-end profit-taking) the monthly chart is setup for further gains. It's likely we will see gains in January through new position building. Greek elections on January 25th may take the wind out of the market but we may be setting up for a bubble move in stocks. Retail involvement is still low but may be limited after previous losses. The market looks set to go through 2100 though, after which a bull move may take us higher. With Japan pushing QE and the ECB looking likely to join them, we are certain to keep pushing higher until we have another structural break (think Tech bubble pop/sub-prime pop).

Euro:

A very weak monthly and yearly close in the EUR/USD assumes a certain test of the 1.20 level. This will probably happen in January as a result of the Greek elections. The results of this election and possible QE from the ECB could see further losses through 1.20.

Oil:

Crude prices are also electing a very bearish monthly/yearly closing, as WTI breaks through $53. Price should test the $40 level in 2015. We may see a counter-trend rally soon but the outlook for oil is bearish.

On the U.S. Dollar:

The U.S. dollar may put a top in soon for a pull-back, however the bullish trend will continue. The BOJ and ECB are going all out to devalue their currencies, whilst the oil price decline is threatening sovereign debt in oil-producing nations. Talk of the dollar's demise is still premature and there is too much risk out there that could see a run to the dollar.

The smart investor's guide to gold

I have just finished writing a new ebook: "The Smart Investor's Guide To Gold".

The book is available in the Amazon Kindle store here: http://www.amazon.com/Smart-Investors-Guide-Gold-ebook/dp/B00RHULU00/ref=sr_1_1?ie=UTF8&qid=1419716433&sr=8-1&keywords=smart+investors+gold

"The Smart Investor's Guide to Gold" is a professional and unbiased look at the investment considerations of gold as an asset, alongside an analysis of the current monetary and financial regime to provide a smart investment strategy for gold.

The book is based on the the same research and analysis that I use throughout the blog. In my opinion, too many writings on gold are based on scare stories and get-rich-quick schemes, which has cost investors a lot of money over recent years. I fully support the use of gold in portfolios, and believe we are nearing a bottom in gold prices, yet we must still observe the cycles and trends in order to invest wisely.

When to use volume

I don't use volume as an indicator too often as it can distract from the trend at hand, or create a bias in your mind when you see an increase.

The following chart on QQQ though, is an example of when volume can be used to assist your decisions on a market's next direction.

The yellow lines I've marked on the chart are highlighting big volume builds in the stock. It's clear looking at these, that the 'smart money' buys heavily into the bottoms. 

If you look at the October bottom, the volume was well above the average: a good sign that large transactions were building and a continuation of the up-trend was likely. We also got a nice bounce off the 200 moving average here.

Anatomy of a low

The following chart highlights the creation of a medium-term low in oil. Price was falling into the end of 2013, where the low was made.

The break of the downward trendline is important and the market usually rallies before retesting the lows (or near to).

The rally in price through the first half of 2014 gave us two important trendlines to gauge the breakdown in price. Note also that the rectangle around the bottom is around two months in length before the final low.

The next chart shows where price went in the second half of 2014.

The key points here are the trendline failures at rectangle A & B. The failure at A was the final attempt to form a low at the year-to-date low around $92.

My thoughts on the 'Black Swan'

Sorry to disappoint any ballet fans out there, but the 'Black Swan' I talk of here, is the metaphor popularized by Nicholas Naseem Taleb, in his excellent book, "Fooled by Randomness", which was used to describe market risk.

The idea was based on early studies on nature, where only white swans had been discovered. When the discovery of black swans was made, it turned previous thought and analysis on its head.

Taleb used the metaphor to describe events that the market does not see coming. One example of a Black Swan would be the Russian default in 1998, whose effects caused a market crash and the collapse of a Wall St hedge fund; complete with bailouts. The sub-prime mortgage debacle of late 2007, is another situation where previous expectations were flipped upside down. Ratios and risk measures that had created a boom in mortgage lending were suddenly irrelevant and the effects were chaotic.

My thoughts in relation to the Black Swan are based on my experience in the market. In mid-2007, the stock markets and housing markets seemed too-good-to-be-true (they were) BUT, until the Black Swan became clear it was only safe to play the current trends, regardless of your thoughts on the market. I use this only to highlight that when the market is showing extreme exuberance, there is still profit to be made going long with tight downside protection. In 2007, the bullish belief was so great, that the market bounced higher following the collapse of Lehman Brothers: one of the largest Wall St banks with extreme contagion risk.

The present action in the stock markets are similar to the markets of 2007, but until we get our 'Lehman moment', it is not advisable to fight the trend. When the Black Swan comes it will be clear.

Weekly closings - Stocks, Oil, Gold

Stocks

Another strong weekly close has been elected by the Dow bulls and we have approached some key overhead resistance.

The market has closed strongly through 17,800 and now eyes 18,000. Support above 18,000 and we would likely see clear-blue-skies for the equity markets again.

Love it, or hate it, I have written on the subject recently to give some ideas: http://seekingalpha.com/article/2634995-equity-bears-still-dont-get-it

I still don't think we have seen the 'blow-off' style top that accompanies bull markets like this, although, as the NASDAQ approaches it's all-time high I may be proved wrong. There is still the option that if sovereign debt contagion was to happen through Russia, Venezuela, emerging markets, Japan, Europe (large list) then tech may be shunned for 'bellweather' industrial stocks. We watch and wait.

If you think this action is crazy on stocks, understand that markets have exhibited the same types of insanity for over a hundred years or more. Psychology takes over from fundamentals until the top. We will however look back one day and see where the inflection points were. Until then, you have to stay with the trend.

'Don't fight the Fed' but protect the downside on longs.

Oil

Crude Oil has put in a promising bullish close this week and may stabilize/rally from here. Obvious target is to clear $60 and test $70.

I'm still wary of the $40 level but in my previous posts you'll see I talk about price action. Rallies happen in the middle of a basing setup. Market feeling for its lows.

Gold

A disappointing close for gold, with a bearish candle on the week and failure at $1200. This can all change rapidly in such a risky global economy and as the Dow reaches strong overhead resistance, it wouldn't be a surprise to see a top in stocks, rally in gold and oil.

On a portfolio basis, I am looking at oil ETFs and strong balance sheet oil/energy plays that have been unfairly dragged down.

Exxon for example, can be bought around 11-times earnings against Facebook's 70-times. No contest.

I will continue to look for a bottom in gold to test the highs but may come mid-2015.

If I see support on S&P or Dow then I might play ETFs with futures exposure incase of blow-off top mentioned above.

Good luck trading and please buy my book, advertised on the left to build the investment skills that I try to share here.

Oil charts look ominous

Despite a bounce on OPEC's statement that low oil was "temporary", the chart has fallen back to give a bearish signal. With the stock market rising strongly off the FED announcement and gold looking a little weak also, it's possible we will get another leg up in risk, with a leg down in commodities.

The weekly chart doesn't look any better on crude oil and the levels at $50, and more so $40, look like a potential magnet zone for crude. I wouldn't be surprised to see these levels targeted in the "risk off" move that I mentioned. 

***I went long oil at $60, with an extra position at 55, which allowed me to take the second portion at $60.

I will hold off any other buying now but the lows at $40 would be a strong entry for me. Further lows will ensure that oil stays depressed into 2015 but there are always bounces to take advantage of.

Remember also, that OPEC cut production by 75% in the 1980s and couldn't halt price so awaiting their actions here is also futile. As yesterday and today's rally showed, OPEC created a small opportunity to cut loss or take a small profit,

The 1980s chart is shown below for reference:

If the oil price was to stay depressed through 2015 - 2017 it would do considerable damage to economies and corporations as it did in the 1980s.