The S&P energy sector is in the midst of its worst losing streak in 25-plus years, but one technician sees opportunity to profit.» Read More
Crude oil continues to be a tremendously volatile trade, and it has presented traders with a plethora of opportunities.
In May, oil has certainly fluctuated inside of the current $91.50 to $97 band. On some days, WTI crude correlates to equities, and on others, the quantitative easing undercurrents seem to dominate. We are flush with supply domestically, but Middle East tensions still exist under the surface—producing somewhat of a tug-of-war.
We are focusing on equities holding this week's lows, as crude would indeed follow the S&P 500 lower on a violation. That could potentially break us out of this May range. However, until we see confirmation of an equity correction, we want to buy the low end of this range and sell the top of it. Of course, it is important to use tight stops—sentiment can turn on a dime, as we have seen this week.
(Read More: Oil Prices, Dollar May Set Off on New Relationship)
So which way is crude likely to break?
Due to the fact that $97 has served has strong resistance (it has been tested five times this month alone), we feel the price will breakout of the range to the downside before it breaks to the upside. For that reason, getting short on stops under the range is the way we'd like to play crude oil today.
Gold isn't trading like a safe haven—it's trading like a currency.
Gold retested major resistance on Thursday night, reaching $1,397.10 before falling back. The market was able to recover from pullbacks earlier Thursday to close back above $1,383.90. But early Friday trading finds gold getting back to this level from the highs.
We have been looking at a chart that discounts the quick move through the $1,411.70 retracement level up to $1,413.10, and this shows a market that has now tested resistance at $1,397 four times and has failed (and fallen back at least $10) each time. Traders have had a tremendous opportunity hedging longs as well as selling outright against this level.
Our level of support at $1,375 held very well Thursday, and a retest Friday will be very negative to the bull camp. However, the line in the sand is the support ranges from $1,464 to $1,467.70. If the market breaks this level, expect to see gold close at the lowest level in more than two weeks, which will put the bears in complete control. A close above major support at $1,380 to $1,383.90 will likely keep the market neutral to the slightest bit positive into the weekend.
The reality is that there is no imminent catalyst to help this market follow through. Recently, as the Japanese yen has moved lower, so has gold. The yen is positive against the U.S. dollar on Friday, but is still trading far from the highs (just as gold has fallen back). If the yen can climb back, you should expect gold to follow through to $1,400. Yes, this means that gold traders should also gauge the dollar, which is trading one point from this week's new swing high at $83.50. If the Dollar Index can climb back above 84, the yen should press lower and so should gold.
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"We're moving toward an ah-ha moment in the market where people begin to realize that these bouts of QE over four years have not produced escape velocity in the domestic economy," he said. "The domestic economy is not self-sustaining. Wealth in the stock market is not trickling down. And we saw flat revenues in the first quarter. Yes, earnings were up 3½ percent, but half of that was from buybacks. There's an artificiality in both bond prices and stock prices."
Kass said that he had misjudged the effect of quantitative easing by the world's central banks.
"I underestimated the impact that global monetary easing would have and that there were few alternatives to equities," he said.
Bond yields have surged in the month of May. So just how much have retail investors lost?
Almost five years.
On July 25, 2012, the 10-Year Treasury yield hit a low of 1.38 percent. And on Wednesday, yields finished the day just shy of 2.04 percent, as investors became concerned that the Federal Reserve will taper quantitative easing sooner than previously expected.
(Read More: Fed Mulls Tapering as Soon as June: Minutes)
That huge move in yields translates into a gigantic difference in how long it takes bond investors to get their money back. To make up for this jump in yields, bondholders would theoretically have to hold their bonds for 4.8 years longer to make the same amount of money that they would receive if they bought bonds today.
Worse, if bond yields continue to rise on the theory that the Federal Reserve is about to taper its bond purchases, then those who bought bonds at the bottom will be missing out on more and more money. Adding insult to injury, the S&P 500 has appreciated by 24 percent since then.
As Federal Reserve Chairman Ben Bernanke testified before Congress, yields on 10-Year Treasurys touched two percent for the first time since March. This as investors became nervous that the Fed could wind down their bond-buying program sooner than expected. Of course, this also has the potential to negatively impact the stock market.
All eyes are on the Federal Reserve.
Gold's choppy overnight trade kept the metal above $1,380, and it rallied to $1,388 shortly after midnight. Traders will be tuning into Fed Chairman Ben Bernanke's testimony in Congress on Wednesday morning for any clues about the bank's bond purchasing program.
Additionally, the Federal Open Market Committee Meeting minutes will be released in the afternoon, and traders again will be looking closely. The big question is when the Fed will stop or taper quantitative easing.
(Read More: Hilsenrath: Here's What Bernanke Will Say)
With Consumer Confidence at the highest levels in years, and the equity market continuing to rise, gold has taken a back seat as investors flock to more attractive investments. The metal was able to trade well off the lows it put in on Sunday night, but gold has been capped at $1,400. Only a close above $1,404 will be able to signal a potential bottom in this market.
In a hearing starting at 10 a.m. EDT, Federal Reserve Chairman Ben Bernanke will go before the Joint Economic Committee to give his outlook on the U.S. economy. But what investors will really be listening out for is what Bernanke says about when quantitative easing will end.
However, according to The Wall Street Journal's chief economics correspondent, Jon Hilsenrath, the chairman's testimony could be hamstrung by disagreement within the Fed.
Gold prices fell two percent on Tuesday, surrendering much of the previous session's hefty gains, as strength in the dollar against a basket of major currencies weighed on the precious metals.
Gold, down in seven of its last eight sessions, fell on a firm dollar, weak technical signals and speculation that the U.S. Federal Reserve might rein in its stimulus program.
Meanwhile, silver remained under pressure, but well off Monday's lows, when it slid nearly 10 percent to a 2-1/2 year trough, on heavy fund liquidation in Asian trade and generally weak fundamentals for the metal.
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