Oil Divergence From Copper Points To Coming Contraction

The most recent post was a video on how commodities were leading the market lower and how oil had remained buoyant considering the volatility in the overall equity market.

Charted below is a divergence between the price of copper and the price of oil. Oil may be getting close to an area that will put pressure on both the consumer and the producer should copper prices remain weak.

Oil began diverging from copper at the beginning of October when all markets made a YTD low. It took oil just 3 weeks to eclipse the September highs while copper lagged both commodities and equities. At the end of the month, oil made another thrust higher that lasted throughout November. That month, copper was down 2%.

For the month of December, oil is flat and copper is slightly lower though copper is in a much weaker technical position and like the economy, copper is directly vulnerable to headwinds such further elevation of oil prices.

Stocks And Yields Walk Down A Familiar Path In October

The 10 year is already 25% off of the August lows as yields closed out the week at 2.23%. The stock market has calmed and has acted relatively complacent since the shortened holiday trading week earlier this month. Stocks have shaken off poor earnings from market leaders such as Alcoa, J.P. Morgan, IBM, and Apple. The market is being lead by energy plays like Chevron, Exxon, and Conoco Phillips, up 18%, 16%, and 20% respectively from the September lows. Energy makes up a large portion of the SPX, and CVX and XOM are also two large components of the Dow Jones Industrial Average. It appears that many of the underlying issues with global markets are being ignored so long as the indices can post a gain. Volume on the SPY has been almost pathetic since Columbus Day which can be telling us that the market is up on hot air. On an intraday basis, most of the volume of late has come in the 3pm timeframe and it is clear that institutions have been buying the market late in the day in order to force positive closes above key resistance areas. This is not an uncommon occurrence, however the frequency of these actions have increased exponentially over the last three weeks.

Despite this, the uptrend is monumental and must be respected. There were many investors who bet against the market in the middle of 2009 and in fall 2010 for the same reasons I have listed only to have their portfolio evaporate at the hands of low volume bear market rally which was fueled by the Fed’s POMO.

The 10 year is forming a similar pattern as it did last year leading into November. In 2010, the TNX formed an inverse head and shoulders beginning in August, which ultimately played out after the Fed began QE 2. Currently, one could make a case that there is once again an inverse head and shoulders pattern on the TNX (albeit a very sloppy one) leading into November when the Fed makes its next policy decision. At the very least it has made higher lows, and as stated previously, it is already 25% off of the 52 week low.

Ultimately, there are two reasons as to why this may be happening. The market is either expecting more intervention by the Fed, or the market is being led higher which would be a setup for a selloff following any disappointment from the FOMC. The scenarios seem simple, but the market is just floating right now and barring any type of sharp reversal in the next couple of weeks, the market does not seem like it wants to budge from its current course just yet.

There are a few mixed signals regarding market breadth, commodities, and currencies. As far as market breadth goes, the Nasdaq 100 lagged the market this week, closing negatively for a loss of 1.42%. Meanwhile the S&P 500 finished positively gaining 1.12%, and the DJIA also finished positive with a gain of 1.41%. This is an unhealthy signal for the market. In a true bull market, the Nasdaq 100 should be keeping pace (and often should be leading) with the market. The DOW is composed of dividend yielding, safety plays such as WMT, MCD, CVX, and KFT. When the DOW is leading a rally in a bear market, it is a sign that investors are not comfortable putting their money into riskier stocks. Obviously AAPL’s miss had an effect on the Composite, however, GOOG, INTC, YHOO, and MSFT all posted better than expected numbers which gave the NDX an opportunity to drive higher. Small caps are also an important indicator to watch, the Russell 2000 finished flat this week, losing just .04 points, but still well behind the DOW and S&P. Again, if investors do not feel confident enough to take on more risk-heavy plays like small caps, then it tells us that there is still an air of caution in the market, despite the solid gains made in the past 3 weeks.

One thing that is worth mentioning about the chart of the NDX is that there is the potential for a massive W-V reversal should the market pull back – maybe to the 2225-2250 area. This will have to be monitored as it lines up with the idea that the market is leading into Fed intervention for a potential move higher.

On Friday the SPX was pushed higher in the last 10 minutes of trading in order to force a close above 1230.71, which was the previous higher of the recent trading range. However, this is not a breakout. a breakout comes after confirmation, which would be a close tomorrow above Friday’s high of 1239.03. Notice how in the beginning of the month, we closed below the August low of 1101.54, but the next day the pivot low was made and so began the current rally. Confirmation completes a breakout and therefore saves a trader from making a decision that can turn out to be a costly mistake.

In any case, should the SPX confirm above 1230, it has short term resistance at 1249 and then following that it has two master levels. One is 1260, the flatline of the year, which is needless to say, an extremely important level. The final area of short term resistance is the 200 MA. Confirmation above this area could signal a structural change in the market, though I personally do not expect that to play out.

Another slightly conflicting signal is the Euro. It is not conflicting in the sense that it has made a higher low, and looks identical to the yields chart. It also has an inverse head and shoulders pattern on the daily chart that has a target of 147.75. That exchange rate would be close to the YTD high, and though the pattern is somewhat sloppy, it has to be on the table as a possible scenario.

The conflicting signal I’m referring to is that the Euro broke a major trendline over the summer and will have a mountain of a task in getting back above the triple necktie of moving averages on the weekly chart. Also, the longer term view of this chart shows that the Euro may beginning to form a head and shoulders reversal starting in June 2010. If the Euro inches higher, but hypothetically, cannot get through the weekly MA’s, a right shoulder would be in play with a neckline around 132.50.

Oil like stocks, bond yields, and the Euro has recently made a higher low which indicates short term bullish momentum. However, there is a topside trendline that was closed above this week but without confirmation. In fact, the weekly chart of oil shows a doji candle which is more of a neutral signal, and not a candle to base a breakout on. Oil has support between the 50 and 20 MA on the daily chart and a pullback may allow it to build enough momentum to break through this trendline. If oil can get above $90/barrel it should coincide with a breakout above 1230 on the SPX and the next stop will be around $95.

Copper has also made a higher low but the bounce has been only half of what other major asset classes have had. Since the most recent low earlier this month, the SPX is up 14%, oil is up 15%, the 10 year yield is up 25%, and the NDX is up 13%. Meanwhile, copper is only up 8% off of the October lows. Another key difference between now and 1 year ago when the market was leading into QE 2 is that this year copper not only broke through a major 3 year trendline in August, but copper is also near it’s 52 week lows, while this time last year it was in the process of making new 52 week highs.

The weakness in the metal is probably the best indicator that this rally has been full of hot air. Copper leads the market and is still down over 30% from its YTD high, while the SPX is down only a mere 10% from its peak in early May of 1370. The only technical upside that copper has is that after many attempts it has still failed to confirm below the 200 MA on the weekly chart. Should copper stay in this area for the next 2-3 weeks and fail to break through, it will likely catch a bid and back test $3.70-$3.75 which should coincide with a higher equity market. If however, copper confirms below the 200, it will be headed for $2.70 and the equity markets will fall with it for another test of the 52 week lows.

Overall, the next 2-4 weeks should decide where the markets are headed over the next 4-6 months. Any large intervention program would probably make for a similar scenario as the one that we had last year, though I still do not expect the market to make new highs again. Conversely, any disappointment will take the air out of this rally and the October lows will be retested again. Therefore I think that regardless of the FOMC’s policy statement, we will be headed lower over the next 12 months. The market can rally on weak volume so long as Europe stays quiet. However, Greek bond yields reached another high this week of 188% and Merkel and Sarkozy believe that they have come to an agreement to bail out the banks with 100 billion Euros. The plan is pathetic, 100 billion Euros is enough to bail out community banks, not institutions with trillions in CDS exposure like Deutsche Bank, and Credit Suisse and in addition, the longer that they take to complete the EFSF, the more the market will price it’s ratification. Be sure to have a large cash base and keep positions small as news is going to be the driver of the market for the next couple of weeks.

Take A Look At Copper

Looks like a breakdown of a 3 year trendline in JJC after a bear flag from the July highs. Copper is a leading indicator and if this chart confirms, it could signal further downside for the equity markets.

Markets Limp Into The Weekend After EUR/USD Collapses

The EUR/USD collapsed in the shortened holiday week of trading as the dollar index may finally be close to strengthening in the manner that I had originally predicted it would earlier this year. The stock market performed poorly on Friday and did not hold onto to gains made in the beginning of the week. Currently I am almost completely in cash and I have a very neutral stance though things continue to get worse in Europe which gives me a slight bearish bias.

The dollar index is finally beginning to make moves versus the Euro which I had believed to be the fundamentally correct course of action for a while though until now, that scenario had not been the case price-wise. I have previously expressed that the dollar has remained suppressed (particularly over the last 5 months) due to Chinese GSE’s but also because of institutions like Goldman Sachs who have publicly stated that they are increasing long positions in the Euro and short positions in the dollar. It is in their interest to keep the dollar suppressed in order to maintain the illusion of recovery. However, now fresh shorts are already well underwater as the dollar pierced through the 200 MA with conviction this past Friday and a short squeeze could be in play after the dollar consolidates here as the $77 area is a major resistance level.

The 200 MA is obvious resistance, but there is also a pivot low from February at $76.88 which was also pierced and if you use the weekly chart, you will notice that the weekly 50 MA coincides with the 200 MA on the daily. Furthermore, $77.10 is a 50% retrace from the January 2011 high ($81.32) and the May 2011 low ($72.70). Last but not least, $77 is major resistance because the DXY did not consolidate before piercing the level and instead gapped higher in a very short period of time, indicating an overbought condition. Keep in mind though that the dollar was oversold (and suppressed) for a long period of time so despite this short-term overbought condition, any news out of Europe can causes short to cover and the dollar to rip higher yet again.

The bear flag on the SPX has all but broken down though support still remains at the lower trendline. This pattern is not valid until the market can confirm below the support trend and at that point it may be safe to short stocks that are still elevated in price, though I am personally not at all pressured to participate given the increased risk of volatility. The target for this bear flag is 1010, or the June 2010 lows.

If copper decisively closes below $3.99 tomorrow, that would indicate a technical breakdown of the bear flag and the pattern would then be in play. In other words, this chart is indicating a very bearish outlook over the next week to two weeks but again, there are other reasons to not take this as law and short the market.

One of those reasons is because oil held up well on Friday. There is the possibility that oil did not collapse because of the traveling that took place on Labor Day weekend and that it will begin to sell off next week, but that assumption leaves too much in question to base investment decisions on.

Another reason is that the financials have surprisingly held up, relative to the lows put in during the end of August. The pattern on the chart is beginning to look like a potential inverse head and shoulders or perhaps a W-V reversal. The entire situation that we’re in now has everything to do with the financial sector so the fate of financials is tied to the fate of the overall market and additionally, financials are a leading indicator of the market’s performance.

Again, there is no reason to leverage into excessive short positions at this point based on the news. We know Europe is bad, we know financials are a disaster. Every time the media mentions this, the short side looks less and less appealing. Today I saw that Forbes posted a chart of the bear flag on the SPX that I have pictured above. This tells me that retail investors may be looking to short the market. I never want to be on that side of the trade. In any case, be sure to look for oil and financials to confirm the other charts like the SPX, DXY, and Copper before beginning to go short, or long for that matter.

I may take short or long positions next week based on short term momentum but currently I don’t have much of a bias regarding permanent direction. If you do have your mind set on shorting the market in fear of missing the move, use a fractional position to buy November-January out of the money puts that coincide with the strike prices of the June 2010 lows. The small amount of capital committed to the option would not require high risk, and the distance away from the current strike could give you a high reward, regardless of the small capital commitment.

The Copper Divergence And The Fed’s Impact On The Market For Next Week

To follow up on yesterday’s analysis, I’d like to add two key points as to why we’ll get a bounce in the next week to week and a half. The first is point is that copper is yet again diverging from the equity markets. On May 10th, I pointed out the divergence between copper and the SPY as the copper ETF JJC literally tanked versus the SPY in just a few weeks. I noted that every parabolic move in the SPY to JJ ratio was met with another sharp movement downward, meaning that the divergence corrected itself. Coincidentally, or perhaps not, May 10th was the exact peak in which the SPY gained versus JJC and the ratio has fallen from 2.625 to 2.355 since then.

You can see that despite the recent decline the ratio is still in an uptrend and will find support at the 200 MA and the 2.3:1 pivot. What this means for the market in the near term is that copper is going to fall, and the market is going to rally.

Copper has outperformed the market during the market selloff and has actually maintained an uptrend. Copper is a leading indicator and is telling us that the market is about to rally, at least enough to shake off the oversold condition. I think that this also means that copper is about to break down and underperform the market. It is having trouble staying above the MA’s which are tightening, and has major resistance at the $55 pivot. Additionally, the uptrend it has traded in is simply an inside bar bearish consolidation from the move down in late April. I think in the short term JJC is headed to $51 before any major bounce occurs.

You can see above where the ratio began to increase exponentially, and where it peaked. It began right when the market staged a rally from a pullback off of the March lows and it peaked just after the market peaked in May. If the ratio does in fact find support at 2.3:1, then simply put, the market will rally and copper will fall, but ultimately that means that the market is headed lower after the bounce in equities plays out.

The second key point I’d like to make is the end of QE II and the Fed meeting’s impact on the markets. Clearly it is bearish for the market that QE II is coming to an end because POMO will no longer be active and there will not be that extra support for the market during trading hours. However, that is most certainly priced in at this time. Just take a look at the market before QE II was announced:

Immediately after QE II was announced the market got a nice pop but it was an obvious example of buy the rumor, sell the news as the market corrected just days after the gap higher. Don’t use this chart as a model for what will happen next week, just use it as an example. In other words, I’m not saying that we’ll have a rally that is proportionate to the correction we saw in November, just that the same concept applys to the situation we’re in. In any case, as I said yesterday, the market is still extremely oversold going into next week’s fed meeting and the idea that we’ll just crash through support on news that we all already know about is a poor mindset to have.

One last chart supporting an oversold rally is coming is the USO. After the completetion of a perfect bear pennant, oil has fallen dramatically in the last couple of trading sessions. Oil is very oversold and after the gap lower and the spinning top candle, it’s hard to say that this can go much lower especially since it is right above support at $36.

Once again, I’m still generally bearish overall and I am waiting for the next shorting opportunity. I am out of DXD now and may choose to take a long position this week but I am not planning on holding any long positions for more than a few days to a week depending on what the market looks like. My advice for the long side would be to pick extremely oversold stocks that are close to, or have pierced support and be sure to use tight stops on them and be ready and able to exit at any time. From the short side, I would stay out until the market gives you an opportunity. I talked about this yesterday, but you need to let the market come to you and for no reason whatsoever should you be chasing charts.

Revett Minerals (RVMID) Receives AMEX Approval!

http://finance.yahoo.com/news/Revett-Minerals-Approved-for-iw-4129780908.html?x=0&.v=1

SPOKANE VALLEY, WASHINGTON–(Marketwire – 05/04/11) – Revett Minerals Inc. (TSX:RVMNews) (OTC.BB:RVMIDNews) (“Revett” or the “Company”) has been authorized to list its common shares on the NYSE Amex. The Company expects the shares to begin trading on the NYSE Amex on Monday May 9th, 2011, under the trading symbol “RVM”. The Company will retain its current listing on the Toronto Stock Exchange under the trading symbol RVM:TSX.

We are pleased to welcome Revett Minerals to the NYSE Euronext family of listed companies,” said Scott Cutler, EVP and Co-Head of U.S. Listings and Cash Execution, NYSE Euronext. “Revett Minerals and its shareholders will benefit from the superior market quality, services and technology provided by NYSE Amex. We look forward to a great partnership.”

John Shanahan, President and Chief Executive Officer stated “This is the culmination and fitting recognition of many years of hard work to get Revett to where it is today. As a US based producer of silver and copper, and with the potential of becoming one of the largest silver producers in North America, it is appropriate that we are listed on the NYSE Amex with full exposure to the US capital markets”.

I’m a day late posting and I’m sure most of you have already heard but I wanted to re-post this as I have talked about Revett several times on this blog. I did take profits on the 25th but at $4.65 I am tempted to average back into a position. Certainly RVMID could go back to $4 on momentum if silver takes longer to recover but even at $30 silver, Revett is hardly fair-valued at $4/share. I said a few months ago when Revett was trading at the same price that it is now that they would be pushing $5-$6/share and that was when silver had just touched $28/oz. With Rock Creek on schedule, silver staying above $30 and the AMEX uplisting approved, Revett will be much higher than $6/share when silver recovers from this correction.