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Option Millionaires was started in February 2008 to provide traders with information about option trading. Led by three career option traders, whose pseudonyms are JimmyBob, UraniumPintoBeans, and Vantillian, they started one of the most popular option trading communities on the web. Now, Option... More
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  • You Might Want To Buy Gas This Week – And Stop Using Oil To Forecast Gasoline!

    A Sigh Of Relief, To End Shortly

    The last month has provided a slight relief to the consumer, as the average price of gas declined over thirty cents per gallon since the Valentine's Day short term top. Of course, $3.65/gallon is hardly a relief, especially when compared against gas prices a decade earlier, but that's besides the point. The point is that, given current conditions, it appears that gas prices are about to make another thrust upward, and perhaps to new record highs, in the coming months.

    Higher Oil Means Higher Gas, Right?

    It's very intuitive, since crude oil is a major input in unleaded gasoline. However, it is only one of hundreds of the ingredients that go in the gas tank with each fill. Even so, the price of gasoline should follow the price of oil, right? Sort of.

    A quick comparison of the ETF (NYSEARCA:USO), which tracks the daily percentage change of crude oil futures, and (NYSEARCA:UGA), which tracks the daily percentage change of unleaded gasoline futures, shows that the relationships that the price relationships that most would consider obvious are quite weak. For instance, the correlation between the two ETFs is 41%, which is only moderately statistically significant. Another relationship measurement, beta, shows that for every $1 crude oil goes up, gasoline only rises $0.69, but UGA is just under its 2008 highs, while USO is more than 40% off of its 2008 high.

    For that reason, I suggest for most to use UGA to forecast gas price rises and falls instead of USO. For those who have access to futures charts, use the actual spot price charts of gasoline. In this post, I will be commenting on UGA.

    Underlying Strength

    The failure of a stock or commodity to become fully oversold represents strength in the underlying. Since November, gasoline has done just that. On the opposite side of that coin, if a stock or commodity becomes fully overbought, it shows strength in the underlying trend, and suggests that any existing uptrend is strong. In January and February, gas UGA became extremely overbought.

    In addition, gasoline's decline was halted right at a key support zone before climbing three percent on Friday. The level that gasoline bounced off of was the 38.2% retracement of the entire rally since November, and also the 61.8% retracement of the smaller rally that began in mid-January. Such a strong support zone is expected to hold. If it does not, a proportional target to the downside would sit near $58.00, about 8.5% below the current price.

    (click to enlarge)

    The Buy Signal

    Price, in fact, gave the trader's buy signal on oil. The decline from Valentine's Day could be described as the consolidation period from a "flag pattern." The pattern is easiest to see on the 60-day chart. The $70 target corresponds to roughly a 10% advance from current levels, or gas prices around $4.05/gallon.

    (click to enlarge)

    Given that the volume was weak on the breakout, I would take a half position on this breakout, and then after a pullback, if one occurs, enter the other half of the position. My stop would be around $60, but the probability of that occurring appears low.

    For those who would rather not dabble in the commodity world and buy gasoline futures/ETFs, look back to the title. How about you just buy gas for your car today? Happy trading!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 10 4:16 PM | Link | Comment!
  • The Dollar Signal That Could Break The Bond Market (And Ignite Commodities) – What To Watch

    The world currency devaluation scramble of central banks is still in full gear! Whether it be the Fed, the ECB, Bank of Japan, the People's Bank of China, or the Swiss National Bank, monetary authorities continually try to aim policy initiatives with a goal of devaluation without inflation. It is certainly a difficult goal, unless every government in the world has the same objective, which seems to be the case.

    However, without explicit collusion of world leaders, world currency devaluation cannot be achieved in all countries. After all, one can only determine the value of a single currency by comparing it to another. In other words, even central banks with a desire to devalue a nation's currency may not be able to devalue it faster than another. Because of this, the nation's currency may actually become stronger. This article should provide some insight on the winners and losers of the world devaluation war.

    One of the clear winners, thanks to Ben Bernanke's monetary policy, which is easy, easier than solving a colorless Rubix Cube, is the United States. Continuing its long term downtrend since 2000 it looks like the US Dollar is once again ready to take a further plunge in value. Yes, that would mean to expect higher prices; maybe not of most consumer goods, but definitely of energy, gold, and likely food.

    Just as a quick side note, for gold bugs already getting excited about where this article is going, consider investing in gold denominated in Euros or Australian Dollars. Both currencies have been particularly strong and will likely continue their rises into the future. Therefore, investing in gold this way can achieve even greater returns via both gold and currency appreciation. The best way to do this, in my opinion, is to short a currency ETF, such as UUP, then invest that money into another currency ETF, such as the Euro ETF, FXE. Then, with other money, invest in a gold ETF of futures contract.

    The pattern I have keenly watched for the last six months has been that of the US Dollar futures prices. During this time, it has been bouncing around a key support level around 78, while internal measures of momentum are deteriorating. The pattern is a head and shoulders top, one of the most statistically validated technical patterns in existence.

    (click to enlarge)

    As you can see by the chart above, 78 is the support level that the dollar needs to hold above. If that level is broken, then the Fed's job of controlling inflation is about to get much more difficult. Continue to watch this level, and if it is broken, begin to prepare for an inflationary period. That means higher borrowing rates, lower bond prices, higher gold prices, higher energy prices, and higher stock prices (for a little while…). That also means that the "inflation sensitive" sectors will likely underperform, such as utilities, technology, and small caps.

    Only about two percent away from spitting out a sell signal, the dollar may carry a key to the future of the US economy in 2013. With the large spike downward in the last week, and the continual punishment of US treasuries, I would expect the signal to occur shortly. Eyes open!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 03 6:11 PM | Link | Comment!
  • Elliott Wave Analysis Of The S & P 500 – New Market Projections

    Before the August rally took the S & P 500 to new highs, I was convinced, within an Elliott Wave framework, that the bull market was over. My analysis showed that the 2011 high was a market top, and then the new highs shortly after that were corrective waves of a much larger bear market. That scenario was invalidated in the beginning of last September, and with no other probable bearish counts, the bullish scenario was activated.

    So here is where we are right now, according to my analysis.

    • The bull market starting in 2009 is a correction of a larger, deflationary bear market (especially in real terms. Did you know that the market is still over 35% lower than the 2000 high in inflation-adjusted dollars?).
    • ^^This scenario^^ would be invalidated only if the S & P and Dow could break above their 2000/2007 highs in nominal or real terms. Then another long term, secular bull market has begun.
    • Therefore, our wave count for this "corrective bull market" will take the form of an "A-B-C" wave, rather than a "1-2-3-4-5″ wave.

    (click to enlarge)

    • Still, with no valid bearish wave counts in the short term time frame, the market should still rise, giving a naive (just using the last few bullet points and logic) target range of anywhere from the current S & P level of 1466-1576.

    So, you may have figured out the bad news, which is that under this scenario, less than a 10% profit is still "up for grabs" by simply investing in the S & P. Therefore, it is important to invest in strong sectors at this point (Materials, Industrials, Financial) , rather than just buying and holding an S & P ETF.

    Using my analysis, I have come to the conclusion that we get one last proverbial "kick at the can" before the market tops. Instead of, however, focusing on individual wave labelings, let us just present the key target levels for the index.

    First, using a simple proportion target projection method, we have two targets. The immediate target, which I am confident will be touched is 1501. The second, 1566, given the current upward momentum and breadth of this rally (i.e. most stocks are rising), should also be touched. That will be the final market topping point, only 10 points away from the maximum of our naive target range.

    (click to enlarge)

    Now, if we use Elliott waves, you will find that each rally since fall of 2011 covered the same amount of price territory. That's three rallies in a row, so i do not think it is simply coincidence. It is expected then that this rally be the same exact magnitude. Here is the chart.

    (click to enlarge)

    Now, ordinarily, I would not say that this point will be the market top, but I am still working under the premise that this bull market is a long term correction, which means the SPX cannot rise above its 2000/2008 high. If that level is actually broken, well, back to the drawing board. Even if it is though, the current target still sits at 1552, and it will act as a strong resistance level.

    What's the time frame for this? I'll answer with the idiom, "Sell in May, go away!" No, really. Look at the RSI, and other indicators of overbought/oversold. If the speed of this rally continues at its previous pace, an overbought reading should be printed sometime in early April/late March that will eventually reverse the market by May.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jan 05 8:27 AM | Link | 3 Comments
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