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What's Next for the Stock Market, Gold, Silver and Crude Oil

Stock-Markets / Financial Markets 2011 May 07, 2011 - 08:06 AM GMT

By: J_W_Jones

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleThe price action in precious metals and oil this past week has been breathtaking. The last time we have seen this much volatility in commodity prices was amidst the financial crisis in 2008 and the early part of 2009. Does this mean we are at the brink and risk assets are going to decline precipitously? Obviously that question cannot be answered with any certainty, but the underlying price action in the S&P 500 has been relatively strong compared to gold, silver, and oil.


Talking heads everywhere are predicting the commodity bubble has burst and pointing fingers at excessive speculation in silver and oil. Margin requirement changes in silver futures have been fingered as the primary catalyst for the nasty sell off. Silver had gotten way ahead of itself in terms of price and parabolic moves higher are usually followed by parabolic moves lower. For silver buyers on Friday, April 29 a painful lesson has been learned as their investment has declined more than 30% in 5 days.

It doesn't take a genius to realize that we are going to bounce higher at some point. With a sell off of this magnitude it would not be shocking to see at least a 50% retracement of the entire move in coming weeks. It is also possible that this is a buying opportunity for precious metals and oil. It is too early to be certain, but a bounce next week is likely as silver went from being severely overbought to severely oversold on the daily chart in one week. The chart below illustrates the 50% retracement and the RSI reading for silver futures:

In the month of April OptionsTradingSignals members were able to capitalize on rising silver prices to close a trade that produced an 18% return in less than 5 days using a double calendar spread in order to produce outsized profits based on maximum risk. Members regularly receive trade alerts focusing on gold and silver using ETF's GLD & SLV which have extremely liquid options.

While silver prices have been absolutely crushed, gold prices have held up a bit better. In fact, in this selloff gold has been less volatile in terms of intraday percentage price movement and has not suffered from near the losses that we have witnessed in silver. The gold futures chart below illustrates key price levels:

Members of the OTS service received a trade alert on April 6th for a calendar spread that was converted to a vertical spread. When the vertical spread was closed on April 26th the members realized a gain close to 56% based on the maximum risk of the trade.

Recently we have received some poor economic data which has put a drag on equities the past few weeks. This morning we are seeing a strong bounce in the S&P 500 futures and if we have another light volume Friday prices tend to drift higher throughout the trading day. The S&P 500 futures spiked to around 1,370 on the news of Osama Bin Laden's death and then sold off from that point. The chart below illustrates the S&P 500 futures rally and subsequent sell off highlighting current key price levels:

Members of OptionsTradingSignals received a trade alert on April 12th to put on a call vertical spread to capitalize on rising prices. On April 21st partial profits were taken and eventually stop orders closed out the position on May 4th locking in a total gain of around 32% for the trade based on maximum risk.

Oil prices have sold off sharply, albeit not as sharp as the downside move in silver recently from a percentage standpoint, but a significant amount of the risk premium has come out of oil prices. I continue to believe that oil prices over the long term have only one direction to go based on tightening supply / demand going forward and lower production levels in the future. Similar to silver, a .500 retracement of the entire recent move is rather likely in coming weeks. The daily chart below illustrates key price levels in oil futures:

I continue to believe that oil prices are going to work higher over the longer term for a variety of reasons, but a drop in gasoline prices would not hurt U.S. Consumers and the domestic economy. Higher oil and gasoline prices weigh on the U.S. Economy heavily so this sudden decline in price is beneficial to most Americans which could juice consumption if prices stay lower for a longer period of time.

Overall, price action in the commodity space has been extremely volatile the past week with silver and oil really getting hammered lower. Gold and the S&P 500 held up a bit better and it would not be shocking to see the S&P 500 put on a rally from here if oil prices stabilize. However, if the U.S. Dollar continues its recent rally it will force the commodity space as well as equities lower. The daily chart of the U.S. Dollar Index futures is shown below:

In closing, I am expecting a bounce in coming days and a .382 or .500 retracement of the entire move in gold, silver, and oil would make sense so I would not be too aggressive shorting. However, I would not necessarily be an aggressive buyer either. It is going to take time for market participants to digest the recent moves. In weeks ahead it will be more apparent what price action is likely to do and I would be shocked if we did not see a few low risk, high probability trades setting up.

Speaking of low risk, high probability trades, the month of April was the best performance for the OptionsTradingSignals service so far year to date. Seven total trades were opened and six trades have been closed with sizable profits. Recent returns included an 18% return in SLV, a 56% return on a GLD trade, 32% return on an SPY call vertical spread, a 12% return on a RUT Calendar spread, and a 37% return on an AMZN calendar spread. The total cumulative return in April was 155%.

Assuming a trader had a $10,000 account and risked a maximum of $1,000 per trade, the gross gains would have been well over $1,400 in April alone. The overall service is up over 15% year to date handily beating the S&P 500 return while assuming less risk. Take advantage of the special offer going on now where new members get 3 months for the price of one!

Get My Trade Ideas Here: http://www.optionstradingsignals.com/profitable-options-solutions.php

J.W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J.W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized. 

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
08 May 11, 22:27
Why Bernanke Hates Gold

Mexico has for many years now been very proud of its US dollar reserves and publicizes increases in the reserves to assure its citizenry that its economy is sound. Now, all of a sudden and very quietly, the Mexican national bank bought 100 metric tons of gold to reduce its dollar holdings. In the very recent past, China, Russia, and India have also bought huge quantities of gold to reduce their dollar holdings (I think China has recently bought over 500 metric tons). These are not part of the daily changes of a sick and volatile world economy--these are permanent and increasing changes that not only cause the Fed many real and practical problems, but reflect a general growing lack of confidence of world governments in the US economy and the future of a rapidly weakening US dollar. The role of the US dollar as THE international currency will not end with a bang, but with a whimper.

I predict that all this will force the Fed to change Bernanke's job description--he will no longer be the Fed's cheerleader to increase stock prices at every speech; rather, he will become the US dollar's mortician.


asa
14 May 11, 11:03
SPX

The end of next week the S&P will crash down to 1200.Fasten your seat belts. First maybe up to 1370 and then fast down to 1200-1225.

regards Asa


Ben
15 May 11, 19:15
S&P500

I'd suggest going by the 2008 movements and late 2007-early 2008 movements, if I was to mirror those movements this year I would expect the S&P500 to lose roughly 25-35% during this year and an additional 30-40% next year, as the crash intensifies. The last crisis began in late 2007 and intensified in 2008 and ended up with ultimate lows in the stockmarket in early 2009. I expect ultimate lows to be reached in 2013 probably around February to April, with declines between now and that point.

Expect the Fed to monetize and inflate the currency into oblivion after the rout has caused the stockmarket to have lost most of it's nominal value and destroyed the value of most assets.


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