The Dow, Dollar, Gold and Oil
"Opportunity is often difficult to recognize; we usually expect it to beckon us with beepers and billboards." ~ William Arthur Ward
The dollar today traded below 85.50 another important key price point and as such it indicates that the correction is gathering steam. During this corrective phase the Dollar should not trade below the 83.70-84.00 ranges for more than 6 days, for if it does, the next target will be 81. After hitting 81, it should mount a rally and at least test the 83.00 ranges before pulling back; if it is unable to do this then the next target becomes 78. Full Article
The dollar mounted a hard correction, tested 81 but was unable to initially mount a rally from this level and traded as low as 78.44 before rebounding.
It is now mounting a secondary rally and if it can trade past 84 for 6 days in a row, it will have a very good chance of testing its old highs, and could go on to put in a new 52 week high. A new high will not change the overall trend; the dollar is destined to correct well into 2009 and possibly 2010 before attempting to put in a longer term bottom.
The current upside targets are 870-900; in order to get these ranges, Gold will need to trade past 810 once again and after doing so it should not trade below 780 on a closing basis. It should also trade above 780 for at least 9 days in a row. After the 870-900 ranges are tested, Gold will probably mount one final correction, which should take it to the 720 ranges; a break below this for more than 7-9 days will result in a test of the 650 ranges. The next correction should provide the basis for a long term bottom and gold will probably rally all the way to 1200 before correcting again. Full Article
Gold traded as high as 888, well within our suggested target range and subsequently pulled back. There is a chance it could trade into the suggested ranges one more time before putting in 3-6 month top, that should result in a re test of the 720 ranges. As stated before a break below 720 for more than 7-9 days could drag it all the way down to the 650 ranges. This will produce a mouth watering long term buying opportunity; the next leg up will probably result in gold testing the 1200 ranges.
On the other hand Oil should not trade below 39.00-40.10 ranges for more than a few days in a row. This zone initially provided years and year's worth of resistance and once overcome, this zone of resistance turned into a fortress of support. Thus a break below such a strong zone of support would not bode well for the oil market and could trigger a test of 28.00. Full Article
Oil traded as low as 33.44 before rebounding higher; in order to avoid trading down to 28 or lower, oil needs to rally to 45 and any pull back should not take it below 39.00. If it rallies to 45 but breaks below 39.00 again, the odds of testing 28 or trading below will go up significantly.
The Dow should not trade below 10500 for more than few days in a row; if it does it could indicate much lower prices. Market update Sept 23, 2008
While the massive pull back and failure to hold above 9000 is really nerve jarring, there could be a positive aspect to this; significantly higher volume would virtually guarantee a test of the 7200 ranges. The lower volume indicates that there is a decent chance that the Dow could go on to put in a double bottom formation (this would be very bullish only if the volume continues to come in towards the low end) that could lead to another 1000 point plus rally the Dow experienced the last time this zone was tested. Market update Nov 12, 2008.
Divide the money to be deployed into this trade into 3 lots and deploy one lot now.
Go long the Jan 105 or better DIA call options (traders can also purchase riskier OEX options or options on the QQQQ) only when and if the Dow tests its October lows (currently at 7882). Ideal entry range would be in the 7830-7860 ranges; if filled place a stop at 7740. Market update Nov 18, 2008.
The break below 10,500 really accelerated this downward move and this massive zone of support has now turned into an even stronger zone of resistance. After 10,500 was taken out, the next zone of support was 9600, this to was breached and hence has now also turned into a zone of resistance. As the support provided at this level was not as strong as the support provided at the 10,500 level, the resistance offered will be much less than that offered by the 10,500 price point level, but the longer the Dow takes to trade past this mark, the stronger the resistance becomes.
The Dow should not trade below its Dec lows if 8347 on a closing basis, if it is to maintain its short term bullish trend; a break below this level could result in a retest of the Nov lows.
Oil has now hit all our downside targets and for the time being we have turned neutral on the oil market (by the oil market we mean, the actual commodity oil and not the stocks in this sector), there are some signs that the stocks in the oil sector are starting to diverge from the commodity. Some examples are EGY, CRK, MMR, GDP, APA, OXY, etc.
Oil has major support in the 39-42 ranges and if it breaks below this support, then the situation could get so bad, that it will force oil producers into taking some very drastic and desperate measures; Russia could suddenly decide to severely slash production and form a secondary alliance with other major producers in order to control prices. It could also mount some sort of military attack as extremely low oil prices will cause unrest and result in more lay offs and cut backs. Historically governments have dealt with such issues by going to war; keep an eye on Belarus as it could potentially be Russia's next target and or Georgia, as some sort of new controversy could provide the trigger for yet another encounter.
In terms of price stability, it would be much better if oil stabilises around the 40 dollar ranges, for if Russia jumps into the control game, the long terms effects will be even more painful; in other words prices could start to spiral upwards instead of trending upwards in a somewhat controlled manner once the markets are out of this funk.
While the current credit crisis has throw the energy markets into chaos, one should not forget that oil and natural gas are rapidly depleting resources and those that control these resources will have the power to reshape the way business is done for yeas to come. These resources are extremely valuable and right now they are being mistaken for junk.
Almost no major new discoveries have been made and the large offshore discovery made in Brazil requires a price of over 75 dollars a barrel to make it worth developing. Worse yet not one drop of oil will be seen for years and even if they start to develop it now, it will not produce any oil until at least 2017 or 2018. Aside from this major discovery, no new monster fields have been discovered, yet almost all the major oil wells are experiencing declining rates of production. At some point in time, reality will set in and the majority will become aware of this fact and then oil and natural gas will be treated as the valuable commodities they are and not as junk. The credit crisis has actually worsened conditions (ironically it is very bullish for oil long term because less investments means lower future supplies of oil) for it has forced many companies to completely scale back on long term projects and in some cases completely abandon them; it takes years to re start a project once it has been mothballed.
One should go back to the 1990's and read the articles that were written when oil was trading in the 10-12 dollar ranges, you will think you are reading today's newspaper until you look at the date. Interestingly enough when oil took off, it never looked back and $10-12 oil was suddenly seen as a very good place to have opened up new positions. The problem is that individuals simply never take the time to study history and the volatility one has to go through to experience huge wins. Speak to any good business man or trader and he will in general sum investing with these words "no risk no reward and no pain, no gain". It is not easy to make money, it never was and never will be; the biggest obstacles are ones mindset; it seems to price an asset based on yesterday's price, it hardly values an asset based on a future price. How does one arrive at a future price; look at the conditions that were responsible for the price surge in the 1st place and if they are still applicable and if the conditions are worsening, then by logic, prices should be higher in the future. Short term fluctuations should be treated as aberrations and not as game changers.
Traders should keep an eye on certain stocks in the oil, precious metal, natural gas sectors, etc and watch how they react when the current rally fails and the Dow ends up testing its lows or trading down to the 7200 ranges. We believe that those stocks that diverge from the general market (higher lows while the markets put in lower lows) will be the ones that will blaze upwards once a long term bottom is set.
New notes, Dec 22, 2008
The Jan oil contract traded as low as 32.40 and this suggests that oil could test the $28 ranges before trading higher. The February contract is now trading under 40 dollars and if it should close below 39 for more than a few days, it would add further strength to our view that oil could trade as low as 28 before stabilizing.
Finally we would like to take this opportunity to wish all our readers a merry Christmas and a very happy and prosperous new year.
"Too many people overvalue what they are not and undervalue what they are." ~ Malcolm S. Forbes