The title to an AP article on yahoo.com’s finance page tells it all: World’s central banks act to ease market strains, Central banks take action to provide cheaper dollar liquidity to financial system.   Read the article if you want, but title really does tell it all.

This is not a novel “solution” to the world’s financial ills.  When push comes to shove, politicians typically take the easy way out.   Here is a gold-eagle.com article on this issue, which I wrote in June 2003: Fears of Deflation Guarantee Inflation.

Since gold topped in September at $1920, the Establishment has continued to disparage gold, nearly always warning of gold’s volatility.  The warning is valid.  Gold is volatile because its price reflects the emotions of buyers and sellers.

The warnings nearly always highlight gold’s 10% drawback from its September high but rarely notes that gold is up 600% over the last ten years.  And, it needs to be kept in mind that the same people who today diss gold told investors not to buy at $300.

Contrasting the Establishment’s negative position on gold is central bank buying.  And, nothing is more Establishment than central banks.  So, while the Establishment tells the investors not to buy gold, central banks  buy.

In the third quarter central banks, made their largest collectively quarterly gold purchases in four decades, adding 148.4 tons to their holdings, which puts central banks on track to buy more gold this year than in any year since the collapse of the Bretton Woods Agreement in 1971.  Over the last two decades, central banks were net sellers of gold, led by the Bank of England’s now infamous liquidation at the market bottom a decade ago.  Last year central banks became net buyers of gold; this year they are set to buy record amounts.

Central banks do not buy gold impulsively.  They normally set targets early in the year for the percentage of reserves that they want to hold in gold; to achieve those targets, central banks buy dips as they occur.   This, of course, puts an underpinning on the price of gold, and it appears that central bank buying provided the impetus for gold’s strong price action in September, weeks after gold topped.  Now, with gold selling off sharply over the last few days, central banks are looking at another opportunity to buy cheap gold.

Although Russia, Thailand and Bolivia disclosed recent gold purchases, most of the buyers that made it a record quarter have not yet been identified, but many are, according the World Gold Council, emerging nations.   Even the poor want to own gold.

All this begs the question:  Just how much gold are the central banks likely to buy?  One would have to be omniscient to know that.  However, we can look at the central banks’ potential for buying gold.

The most likely buyers are those central banks with large reserves but whose gold holdings make up a low percentage of those reserves, typically Asian nations.  Conversely, the central banks of countries that have high percentages of gold holdings are not likely to be buyers, Western nations.

The unlikely buyers include the United States (75.5%), Germany (72.6%), Italy (72.2%), France (71%) and the Netherlands (61%).  Other countries actually hold higher percentages in gold, but their total gold holdings are small compared with above mentioned countries.  Those include Portugal (88.9%) and Greece (80%).  (Italy, Portugal and Greece are more likely to be sellers than buyers as they are members of the PIIGS group of European counties that are facing serious debt problems.)

The counties with huge reserves but low gold holdings are China (1.7%), Japan (3.3%), Russia (8.6%) and Taiwan (5.7%).  Other notables are Brazil (.5%), which recently added gold reserves, and India (9.0%), which purchased 200 tons from the IMF in 2009. Additionally, Thailand is a recent gold buyer.

China’s total reserves are some $3.2 trillion but gold makes up only 1.7% of its reserves.  Japan’s central bank has more than $1.1 trillion in reserves, of which gold makes up only 3.3%.  Russia has $516 billion in reserves with only 8.6% being held in gold.  (The Russians are important in the gold market because they have shown to be steady buyers of gold albeit it quietly and domestically.  India, also an important player in the gold market, has shown a willingness to buy large in open transactions.)

One of Wall Street’s favorite bullish indicators is “cash on the sidelines,” which measures total cash held by mutual funds and entities that may enter the market.  Large quantities of cash on the sidelines is a significant bullish indicator according the Wall Street.  Nowhere is more cash on the sidelines than in the gold market. This includes not only the cash holdings of central banks but also the cash holdings of individuals.

If you’ve watched the news for any length of time you’ve probably heard mention of speculators and how they seem to be responsible for much of what ills us.  Last week, Japan’s Finance Minister Jun Azumi said that a massive intervention in the Yen market was necessary as there were signs of speculation.  Much of the price inflation in commodities over the last decade has been blamed on speculators.  And don’t forget Nixon closing the gold window in 1971, in order to protect the dollar from international speculators.

So who are these speculators and why have we not been able to rein them in after all of these years?  It’s difficult to find an agreed upon definition of a speculator.  Many seem to carry the same political overtones that are pushed by those who blame them.  But at its essence, a speculator is simply someone who attempts to profitably invest in an environment where some degree of risk is present.

If you’ve ever put money in a 401k, you are a speculator.  If you’ve ever bought gold to protect your savings, you are a speculator.  If you’ve saved your childhood baseball card collection because it might be worth something someday, you are a speculator.  Speculation is bad in the same way that seeking profit is bad.  They are both the driving forces that make a free market function.

The notion that speculators are bad is a fallacy generally used to draw attention away from the real problem. Nixon didn’t close the gold window because of speculators, he did it because the US got caught red handed writing bad checks to it’s trading partners and didn’t have enough gold to pay up.  Likewise, commodity price increases aren’t do to greedy speculators, but rather wealth fleeing paper assets that are failing as the inevitable result of a fiat money system.

So the next time you hear someone blaming speculators for a particular problem, don’t forget to take a closer look at who is pointing the finger.

Various reports coming out of last week’s G20 meeting in Cannes are suggesting that some member countries had proposed Germany use its gold reserves as collateral for a Eurozone bailout fund.  This brought a series of quick and unequivocal responses:

“German gold reserves must remain untouchable” said the German Economy Minister Philipp Rosler.

“Germany’s gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit in Cannes,” said Steffen Seibert, a German government spokesman.
An MP from Angela Merkel’s Christian Democratic Party stated that it is out of the question that Germany’s gold be used to fund Rome.  However, Italy could use its gold instead.

Well isn’t that interesting.  Central banks and their governments (I believe that is the correct hierarchy) don’t bat an eyelash at creating billions of dollars worth of their currencies to intervene in a market, or peg their currency to a sinking ship, but suggest that they might put some gold at risk and suddenly everyone has their hackles up.

If gold really is just a barbarous relic, or tradition, then why would anyone care?  Warren Buffet says it’s a useless metal that we spend money to dig out of the ground, then spend more money to guard in a vault.

Don’t believe a word of it.

Central bankers know that the only real asset they have on their books, apart from their fancy buildings, is gold.  It’s tough to get excited about accumulating a bunch of currency units created by another bank, at will, in exchange for a bunch of currency units, that you just created, at will.  It all seems rather valueless doesn’t it?

The Federal Reserve is the ultimate example of how little central banks value the currencies they produce.  Over the last several years they have created trillions of dollars to be handed out willy nilly to seemingly anyone who knows the proper person to ask.  After the crisis of 2008. two Wall Street wives created a legal entity called Waterfall TALF Opportunity (get it?) to grab $220 million from the Fed in near 0% rate non-recourse loans.  These ladies invest the money and pocket the profits.  If they lose money they just send a bunch of sub par paper back to the Fed and call it even. Getting rich is easy when you are an insider to the criminal currency creation monopoly.

Privately, central bankers are the ultimate gold bugs.  They, more than anyone else, understand the fleeting value of the digital currency units they produce at the stroke of a key.  They understand that the current money paradigm won’t last forever, because at the finish line for the race to devalue, waits the number zero.  And when the ultimate restructuring comes, it will largely be the amount of physical gold each possesses, that will determine their pecking order in whatever monetary system replaces the current one.

Various reports coming out of last week’s G20 meeting in Cannes are suggesting that some member countries had proposed Germany use its gold reserves as collateral for a Eurozone bailout fund.  This brought a series of quick and unequivocal responses:

“German gold reserves must remain untouchable” said the German Economy Minister Philipp Rosler.

“Germany’s gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit in Cannes,” said Steffen Seibert, a German government spokesman.
An MP from Angela Merkel’s Christian Democratic Party stated that it is out of the question that Germany’s gold be used to fund Rome.  However, Italy could use its gold instead.

Well isn’t that interesting.  Central banks and their governments (I believe that is the correct hierarchy) don’t bat an eyelash at creating billions of dollars worth of their currencies to intervene in a market, or peg their currency to a sinking ship, but suggest that they might put some gold at risk and suddenly everyone has their hackles up.

If gold really is just a barbarous relic, or tradition, then why would anyone care?  Warren Buffet says it’s a useless metal that we spend money to dig out of the ground, then spend more money to guard in a vault.

Don’t believe a word of it.

Central bankers know that the only real asset they have on their books, apart from their fancy buildings, is gold.  It’s tough to get excited about accumulating a bunch of currency units created by another bank, at will, in exchange for a bunch of currency units, that you just created, at will.  It all seems rather valueless doesn’t it?

The Federal Reserve is the ultimate example of how little central banks value the currencies they produce.  Over the last several years they have created trillions of dollars to be handed out willy nilly to seemingly anyone who knows the proper person to ask.  After the crisis of 2008. two Wall Street wives created a legal entity called Waterfall TALF Opportunity (get it?) to grab $220 million from the Fed in near 0% rate non-recourse loans.  These ladies invest the money and pocket the profits.  If they lose money they just send a bunch of sub par paper back to the Fed and call it even. Getting rich is easy when you are an insider to the criminal currency creation monopoly.

Privately, central bankers are the ultimate gold bugs.  They, more than anyone else, understand the fleeting value of the digital currency units they produce at the stroke of a key.  They understand that the current money paradigm won’t last forever, because at the finish line for the race to devalue, waits the number zero.  And when the ultimate restructuring comes, it will largely be the amount of physical gold each possesses, that will determine their pecking order in whatever monetary system replaces the current one.

Writing about financial markets is probably the most challenging endeavor I have ever immersed myself into. I am a trader first and a writer second, but I have really come to enjoy scribing missives about financial markets because it really forces me to concentrate on my analysis.

Writing for the general public has really enhanced my perception of the market and forced me to dig deeper and learn new forms of analysis. I find myself learning more and more every day and the beauty of trading is that even for the most experienced of traders there is always an opportunity to learn more. As members of my service know, I strive to be different than most of my peers as my focus is on education and being completely transparent and honest.

I want readers to know that I was wrong about my recent expectations regarding the European sovereign debt summit. I was expecting the Dollar to rally based on the recent price action and quite frankly I expected stocks to falter after running up nearly 15% into the announcement. My expectations could not have been more untimely and incorrect.

I share this with you because as I read and listen to market pundits discussing financial markets I find that too many writers and commentators flip-flop their positions to always have the appearance of accuracy. In some cases, there have been television pundits that stated we were possibly going to revisit a depression in 2012 no more than 5 weeks ago. These so-called experts have now changed their positions stating that we have started a new bull market in recent weeks. How can anyone take these people seriously?

Financial markets are dynamic and consistently fool the best minds and most experienced traders out there. Financial markets do not reward hubris. If a trader does not remain humble, Mr. Market will happily handle the humbling process for him. I was humbled this week. I was reminded yet again that  financial markets do not take prisoners and they show no mercy. I am sharing this with readers because I want you to know that I refuse to flip-flop my position without first declaring that I was wrong.

When I am wrong, I will own up to it purely out of sense of responsibility. My word and my name actually mean something to me, and while I strive to present accurate analysis I am fallible and I will make mistakes. The key however to the mistakes that I make is my ability to learn from them and the past week was a great learning opportunity.

After regrouping and stepping back after the price action on Thursday, a few key elements really stood out to me regarding recent price action. First of all, in the short-term we are extremely overbought. The chart below illustrates the number of stocks in domestic equity markets trading above their 20 period moving averages over the past 5 years:

What is apparent from the chart above is that prices are almost as overbought right now as they have been anytime in the past 5 years. The number of domestic equities trading above their 50 period moving average over the past 5 years is also nearing the highest levels seen during the same period as the chart below illustrates:

Equities trading above the 100, 150, and 200 period moving averages are somewhat subdued by comparison meaning in the short run a possible correction appears likely. The longer-term time frames are no longer oversold, but they have considerable upside to work with before we could declare that they are overbought.

Additionally, the details of the European Union’s supposed solution have not yet been released raising questions going forward. Every move that is made will create unintended consequences. As an example, since Greece had 50% of their debt written down why would Ireland or Portugal refuse to pay their debts in full?

The Irish and Portuguese governments are going to come under pressure from their constituents to renegotiate the terms of their debt based on the agreement that was made with Greece recently. Spain politicians will likely be under pressure as well. The decisions made in these so-called bailouts reverberate across the geopolitical spectrum. Moral hazard still exists, it just evolves over time.

The risk premium of sovereign debt has to be adjusted since credit default swaps did not trigger payment as the write-downs were considered “voluntary.” Thus credit default swaps are not the answer to hedge sovereign debt as it would appear that governments have the ability to write down debt without triggering a default based on the status of the write-down. The long-term unintended consequences could be severe and are unknown at this point in time.

In addition to the unknown factors impacting the European “solution”, next week the Federal Reserve will have their regular FOMC meeting and statement. There has been a lot of chatter regarding the potential for QE III to come out of this meeting. While I could be wrong, initiating QE III right after the Operation Twist announcement would lead many to believe that Operation Twist was a failure.

With interest rates at or near all time lows and the recent rally we have seen in the stock market, it does not make sense that QE III would be initiated during this meeting. It is possible that if QE III is not announced the U.S. Dollar could rally and put pressure on risk assets such as the S&P 500 in the short to intermediate term. If this sequence of events played out, a correction would be likely. The following is a daily chart of the S&P 500 with possible correction targets in place:

Right now it is a toss up in the financial blogosphere as to the expectations of where price action will head. Are we near a top? Is this the beginning of a new bull market? I scanned through several charts Friday evening and Saturday morning and came to this realization. If the market is going to breakout and this is not a top but the beginning of a major bullish wave higher, then the Nasdaq 100 Index (NDX) has to breakout over the 2011 highs.

The Nasdaq 100 Index is comprised of stocks such as AAPL, GOOG, INTC, and YHOO. In order for a new leg higher to transpire, hyper beta names like AAPL and GOOG have to breakout higher and show continuation with strong supporting volume. If the NDX does not breakout over the 2011 highs, a top could potentially be forming. The daily chart of the Nasdaq 100 Index is shown below:

In conclusion, the short term looks like a possible correction could play out. However, it is critical to note that the longer term time frames are more neutral at this time. Furthermore, if price action cannot penetrate the 2011 highs for the Nasdaq 100 Index, I do not believe that a new bull market will have begun. If the Nasdaq 100 Index cannot breakout above the 2011 highs, we could be putting in a potential top going into the holiday season.

In closing, I will leave you with the thoughtful muse of famed writer and minister Hugh Prather, “Almost any difficulty will move in the face of honesty. When I am honest I never feel stupid. And when I am honest I am automatically humble.”

Subscribers of OTS have pocketed more than 150% return in the past few months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at http://www.optionstradingsignals.com/specials/index.php and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

By: JW Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

Writing about financial markets is probably the most challenging endeavor I have ever immersed myself into. I am a trader first and a writer second, but I have really come to enjoy scribing missives about financial markets because it really forces me to concentrate on my analysis.

Writing for the general public has really enhanced my perception of the market and forced me to dig deeper and learn new forms of analysis. I find myself learning more and more every day and the beauty of trading is that even for the most experienced of traders there is always an opportunity to learn more. As members of my service know, I strive to be different than most of my peers as my focus is on education and being completely transparent and honest.

I want readers to know that I was wrong about my recent expectations regarding the European sovereign debt summit. I was expecting the Dollar to rally based on the recent price action and quite frankly I expected stocks to falter after running up nearly 15% into the announcement. My expectations could not have been more untimely and incorrect.

I share this with you because as I read and listen to market pundits discussing financial markets I find that too many writers and commentators flip-flop their positions to always have the appearance of accuracy. In some cases, there have been television pundits that stated we were possibly going to revisit a depression in 2012 no more than 5 weeks ago. These so-called experts have now changed their positions stating that we have started a new bull market in recent weeks. How can anyone take these people seriously?

Financial markets are dynamic and consistently fool the best minds and most experienced traders out there. Financial markets do not reward hubris. If a trader does not remain humble, Mr. Market will happily handle the humbling process for him. I was humbled this week. I was reminded yet again that  financial markets do not take prisoners and they show no mercy. I am sharing this with readers because I want you to know that I refuse to flip-flop my position without first declaring that I was wrong.

When I am wrong, I will own up to it purely out of sense of responsibility. My word and my name actually mean something to me, and while I strive to present accurate analysis I am fallible and I will make mistakes. The key however to the mistakes that I make is my ability to learn from them and the past week was a great learning opportunity.

After regrouping and stepping back after the price action on Thursday, a few key elements really stood out to me regarding recent price action. First of all, in the short-term we are extremely overbought. The chart below illustrates the number of stocks in domestic equity markets trading above their 20 period moving averages over the past 5 years:

What is apparent from the chart above is that prices are almost as overbought right now as they have been anytime in the past 5 years. The number of domestic equities trading above their 50 period moving average over the past 5 years is also nearing the highest levels seen during the same period as the chart below illustrates:

Equities trading above the 100, 150, and 200 period moving averages are somewhat subdued by comparison meaning in the short run a possible correction appears likely. The longer-term time frames are no longer oversold, but they have considerable upside to work with before we could declare that they are overbought.

Additionally, the details of the European Union’s supposed solution have not yet been released raising questions going forward. Every move that is made will create unintended consequences. As an example, since Greece had 50% of their debt written down why would Ireland or Portugal refuse to pay their debts in full?

The Irish and Portuguese governments are going to come under pressure from their constituents to renegotiate the terms of their debt based on the agreement that was made with Greece recently. Spain politicians will likely be under pressure as well. The decisions made in these so-called bailouts reverberate across the geopolitical spectrum. Moral hazard still exists, it just evolves over time.

The risk premium of sovereign debt has to be adjusted since credit default swaps did not trigger payment as the write-downs were considered “voluntary.” Thus credit default swaps are not the answer to hedge sovereign debt as it would appear that governments have the ability to write down debt without triggering a default based on the status of the write-down. The long-term unintended consequences could be severe and are unknown at this point in time.

In addition to the unknown factors impacting the European “solution”, next week the Federal Reserve will have their regular FOMC meeting and statement. There has been a lot of chatter regarding the potential for QE III to come out of this meeting. While I could be wrong, initiating QE III right after the Operation Twist announcement would lead many to believe that Operation Twist was a failure.

With interest rates at or near all time lows and the recent rally we have seen in the stock market, it does not make sense that QE III would be initiated during this meeting. It is possible that if QE III is not announced the U.S. Dollar could rally and put pressure on risk assets such as the S&P 500 in the short to intermediate term. If this sequence of events played out, a correction would be likely. The following is a daily chart of the S&P 500 with possible correction targets in place:

Right now it is a toss up in the financial blogosphere as to the expectations of where price action will head. Are we near a top? Is this the beginning of a new bull market? I scanned through several charts Friday evening and Saturday morning and came to this realization. If the market is going to breakout and this is not a top but the beginning of a major bullish wave higher, then the Nasdaq 100 Index (NDX) has to breakout over the 2011 highs.

The Nasdaq 100 Index is comprised of stocks such as AAPL, GOOG, INTC, and YHOO. In order for a new leg higher to transpire, hyper beta names like AAPL and GOOG have to breakout higher and show continuation with strong supporting volume. If the NDX does not breakout over the 2011 highs, a top could potentially be forming. The daily chart of the Nasdaq 100 Index is shown below:

In conclusion, the short term looks like a possible correction could play out. However, it is critical to note that the longer term time frames are more neutral at this time. Furthermore, if price action cannot penetrate the 2011 highs for the Nasdaq 100 Index, I do not believe that a new bull market will have begun. If the Nasdaq 100 Index cannot breakout above the 2011 highs, we could be putting in a potential top going into the holiday season.

In closing, I will leave you with the thoughtful muse of famed writer and minister Hugh Prather, “Almost any difficulty will move in the face of honesty. When I am honest I never feel stupid. And when I am honest I am automatically humble.”

Subscribers of OTS have pocketed more than 150% return in the past few months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at http://www.optionstradingsignals.com/specials/index.php and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

By: JW Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

David Banister- www.MarketTrendForecast.com

It’s been several weeks since I’ve written about Gold and we have had a wild ride since the 1910-1920 highs in August.  When gold was trading at that lofty price I forecasted a major correction was nearing. We were shorting gold from $1862- $910 prior to the huge $208 drop that took place over just a a few days.  We covered our short at $1725 and then Gold rallied back to a double top at $1920 and then fell back to $1531.

That pullback to $1531 qualifies as a Fibonacci retracement of the 34 month rally from $681 to $1920, and would also qualify for a price low for a 4th major wave correction that I discussed in prior forecasts.  My initial targets for the Gold pullback were $1480-$1520 if the $1650 area was violated.  Most recently we have seen Gold run up to 1681 which is another Fibonacci resistance zone a few times and then back off to the low $1600’s.

With the recent push over $1681, we can now confirm the 4th wave is over at $1531 lows and that the 5th wave is likely in the very early stages, but beginning to build steam. I will say that we want to make sure the 1650-1680’s areas are defended by Gold on any pullbacks in order for this forecast to remain valid.  During this 5th wave up, eventually we should see the $2380 ranges in Gold, but it will not take place overnight.  In the next few months I am looking for Gold to attack the $1900 range, possibly even by year end, and then in 2012 attacking the $2000 plus ranges.

With all of the Macro events in Europe changing on an almost daily basis, the whipsaws in both the precious metals and equities markets are difficult to forecast and trade for most investors. However, Gold has been moving in defined Fibonacci and wave patterns for ten years now, and has about three years left in a 13 year bull cycle if I’m right.

Below is the updated weekly chart of Gold.  You can see prior low’s as they related to oversold indicators, and where we just came off the 1531 lows and its Fibonacci pivot along with the oversold indicators below.

Look for Gold to attack 1775 first, then 1800, 1840, then 1900 in the coming 6-10 weeks or so.

You can get 3-5 updates a week on Gold, SP500, and Silver by visiting www.MarketTrendForecast.com

Writing about financial markets is probably the most challenging endeavor I have ever immersed myself into. I am a trader first and a writer second, but I have really come to enjoy scribing missives about financial markets because it really forces me to concentrate on my analysis.

Writing for the general public has really enhanced my perception of the market and forced me to dig deeper and learn new forms of analysis. I find myself learning more and more every day and the beauty of trading is that even for the most experienced of traders there is always an opportunity to learn more. As members of my service know, I strive to be different than most of my peers as my focus is on education and being completely transparent and honest.

I want readers to know that I was wrong about my recent expectations regarding the European sovereign debt summit. I was expecting the Dollar to rally based on the recent price action and quite frankly I expected stocks to falter after running up nearly 15% into the announcement. My expectations could not have been more untimely and incorrect.

I share this with you because as I read and listen to market pundits discussing financial markets I find that too many writers and commentators flip-flop their positions to always have the appearance of accuracy. In some cases, there have been television pundits that stated we were possibly going to revisit a depression in 2012 no more than 5 weeks ago. These so-called experts have now changed their positions stating that we have started a new bull market in recent weeks. How can anyone take these people seriously?

Financial markets are dynamic and consistently fool the best minds and most experienced traders out there. Financial markets do not reward hubris. If a trader does not remain humble, Mr. Market will happily handle the humbling process for him. I was humbled this week. I was reminded yet again that  financial markets do not take prisoners and they show no mercy. I am sharing this with readers because I want you to know that I refuse to flip-flop my position without first declaring that I was wrong.

When I am wrong, I will own up to it purely out of sense of responsibility. My word and my name actually mean something to me, and while I strive to present accurate analysis I am fallible and I will make mistakes. The key however to the mistakes that I make is my ability to learn from them and the past week was a great learning opportunity.

After regrouping and stepping back after the price action on Thursday, a few key elements really stood out to me regarding recent price action. First of all, in the short-term we are extremely overbought. The chart below illustrates the number of stocks in domestic equity markets trading above their 20 period moving averages over the past 5 years:

What is apparent from the chart above is that prices are almost as overbought right now as they have been anytime in the past 5 years. The number of domestic equities trading above their 50 period moving average over the past 5 years is also nearing the highest levels seen during the same period as the chart below illustrates:

Equities trading above the 100, 150, and 200 period moving averages are somewhat subdued by comparison meaning in the short run a possible correction appears likely. The longer-term time frames are no longer oversold, but they have considerable upside to work with before we could declare that they are overbought.

Additionally, the details of the European Union’s supposed solution have not yet been released raising questions going forward. Every move that is made will create unintended consequences. As an example, since Greece had 50% of their debt written down why would Ireland or Portugal refuse to pay their debts in full?

The Irish and Portuguese governments are going to come under pressure from their constituents to renegotiate the terms of their debt based on the agreement that was made with Greece recently. Spain politicians will likely be under pressure as well. The decisions made in these so-called bailouts reverberate across the geopolitical spectrum. Moral hazard still exists, it just evolves over time.

The risk premium of sovereign debt has to be adjusted since credit default swaps did not trigger payment as the write-downs were considered “voluntary.” Thus credit default swaps are not the answer to hedge sovereign debt as it would appear that governments have the ability to write down debt without triggering a default based on the status of the write-down. The long-term unintended consequences could be severe and are unknown at this point in time.

In addition to the unknown factors impacting the European “solution”, next week the Federal Reserve will have their regular FOMC meeting and statement. There has been a lot of chatter regarding the potential for QE III to come out of this meeting. While I could be wrong, initiating QE III right after the Operation Twist announcement would lead many to believe that Operation Twist was a failure.

With interest rates at or near all time lows and the recent rally we have seen in the stock market, it does not make sense that QE III would be initiated during this meeting. It is possible that if QE III is not announced the U.S. Dollar could rally and put pressure on risk assets such as the S&P 500 in the short to intermediate term. If this sequence of events played out, a correction would be likely. The following is a daily chart of the S&P 500 with possible correction targets in place:

Right now it is a toss up in the financial blogosphere as to the expectations of where price action will head. Are we near a top? Is this the beginning of a new bull market? I scanned through several charts Friday evening and Saturday morning and came to this realization. If the market is going to breakout and this is not a top but the beginning of a major bullish wave higher, then the Nasdaq 100 Index (NDX) has to breakout over the 2011 highs.

The Nasdaq 100 Index is comprised of stocks such as AAPL, GOOG, INTC, and YHOO. In order for a new leg higher to transpire, hyper beta names like AAPL and GOOG have to breakout higher and show continuation with strong supporting volume. If the NDX does not breakout over the 2011 highs, a top could potentially be forming. The daily chart of the Nasdaq 100 Index is shown below:

In conclusion, the short term looks like a possible correction could play out. However, it is critical to note that the longer term time frames are more neutral at this time. Furthermore, if price action cannot penetrate the 2011 highs for the Nasdaq 100 Index, I do not believe that a new bull market will have begun. If the Nasdaq 100 Index cannot breakout above the 2011 highs, we could be putting in a potential top going into the holiday season.

In closing, I will leave you with the thoughtful muse of famed writer and minister Hugh Prather, “Almost any difficulty will move in the face of honesty. When I am honest I never feel stupid. And when I am honest I am automatically humble.”

Subscribers of OTS have pocketed more than 150% return in the past few months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at http://www.optionstradingsignals.com/specials/index.php and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

By: JW Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

Writing about financial markets is probably the most challenging endeavor I have ever immersed myself into. I am a trader first and a writer second, but I have really come to enjoy scribing missives about financial markets because it really forces me to concentrate on my analysis.

Writing for the general public has really enhanced my perception of the market and forced me to dig deeper and learn new forms of analysis. I find myself learning more and more every day and the beauty of trading is that even for the most experienced of traders there is always an opportunity to learn more. As members of my service know, I strive to be different than most of my peers as my focus is on education and being completely transparent and honest.

I want readers to know that I was wrong about my recent expectations regarding the European sovereign debt summit. I was expecting the Dollar to rally based on the recent price action and quite frankly I expected stocks to falter after running up nearly 15% into the announcement. My expectations could not have been more untimely and incorrect.

I share this with you because as I read and listen to market pundits discussing financial markets I find that too many writers and commentators flip-flop their positions to always have the appearance of accuracy. In some cases, there have been television pundits that stated we were possibly going to revisit a depression in 2012 no more than 5 weeks ago. These so-called experts have now changed their positions stating that we have started a new bull market in recent weeks. How can anyone take these people seriously?

Financial markets are dynamic and consistently fool the best minds and most experienced traders out there. Financial markets do not reward hubris. If a trader does not remain humble, Mr. Market will happily handle the humbling process for him. I was humbled this week. I was reminded yet again that  financial markets do not take prisoners and they show no mercy. I am sharing this with readers because I want you to know that I refuse to flip-flop my position without first declaring that I was wrong.

When I am wrong, I will own up to it purely out of sense of responsibility. My word and my name actually mean something to me, and while I strive to present accurate analysis I am fallible and I will make mistakes. The key however to the mistakes that I make is my ability to learn from them and the past week was a great learning opportunity.

After regrouping and stepping back after the price action on Thursday, a few key elements really stood out to me regarding recent price action. First of all, in the short-term we are extremely overbought. The chart below illustrates the number of stocks in domestic equity markets trading above their 20 period moving averages over the past 5 years:

What is apparent from the chart above is that prices are almost as overbought right now as they have been anytime in the past 5 years. The number of domestic equities trading above their 50 period moving average over the past 5 years is also nearing the highest levels seen during the same period as the chart below illustrates:

Equities trading above the 100, 150, and 200 period moving averages are somewhat subdued by comparison meaning in the short run a possible correction appears likely. The longer-term time frames are no longer oversold, but they have considerable upside to work with before we could declare that they are overbought.

Additionally, the details of the European Union’s supposed solution have not yet been released raising questions going forward. Every move that is made will create unintended consequences. As an example, since Greece had 50% of their debt written down why would Ireland or Portugal refuse to pay their debts in full?

The Irish and Portuguese governments are going to come under pressure from their constituents to renegotiate the terms of their debt based on the agreement that was made with Greece recently. Spain politicians will likely be under pressure as well. The decisions made in these so-called bailouts reverberate across the geopolitical spectrum. Moral hazard still exists, it just evolves over time.

The risk premium of sovereign debt has to be adjusted since credit default swaps did not trigger payment as the write-downs were considered “voluntary.” Thus credit default swaps are not the answer to hedge sovereign debt as it would appear that governments have the ability to write down debt without triggering a default based on the status of the write-down. The long-term unintended consequences could be severe and are unknown at this point in time.

In addition to the unknown factors impacting the European “solution”, next week the Federal Reserve will have their regular FOMC meeting and statement. There has been a lot of chatter regarding the potential for QE III to come out of this meeting. While I could be wrong, initiating QE III right after the Operation Twist announcement would lead many to believe that Operation Twist was a failure.

With interest rates at or near all time lows and the recent rally we have seen in the stock market, it does not make sense that QE III would be initiated during this meeting. It is possible that if QE III is not announced the U.S. Dollar could rally and put pressure on risk assets such as the S&P 500 in the short to intermediate term. If this sequence of events played out, a correction would be likely. The following is a daily chart of the S&P 500 with possible correction targets in place:

Right now it is a toss up in the financial blogosphere as to the expectations of where price action will head. Are we near a top? Is this the beginning of a new bull market? I scanned through several charts Friday evening and Saturday morning and came to this realization. If the market is going to breakout and this is not a top but the beginning of a major bullish wave higher, then the Nasdaq 100 Index (NDX) has to breakout over the 2011 highs.

The Nasdaq 100 Index is comprised of stocks such as AAPL, GOOG, INTC, and YHOO. In order for a new leg higher to transpire, hyper beta names like AAPL and GOOG have to breakout higher and show continuation with strong supporting volume. If the NDX does not breakout over the 2011 highs, a top could potentially be forming. The daily chart of the Nasdaq 100 Index is shown below:

In conclusion, the short term looks like a possible correction could play out. However, it is critical to note that the longer term time frames are more neutral at this time. Furthermore, if price action cannot penetrate the 2011 highs for the Nasdaq 100 Index, I do not believe that a new bull market will have begun. If the Nasdaq 100 Index cannot breakout above the 2011 highs, we could be putting in a potential top going into the holiday season.

In closing, I will leave you with the thoughtful muse of famed writer and minister Hugh Prather, “Almost any difficulty will move in the face of honesty. When I am honest I never feel stupid. And when I am honest I am automatically humble.”

Subscribers of OTS have pocketed more than 150% return in the past few months. If you’d like to stay ahead of the market using My Low Risk Option Strategies and Trades check out OTS at http://www.optionstradingsignals.com/specials/index.php and take advantage of our free occasional trade ideas or a 66% coupon to sign up for daily market analysis, videos and Option Trades each week.

By: JW Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.