As most sophisticated investors and traders are aware, the U.S. Federal government has run up significant deficits and the long term debt burden is becoming a drain on Gross Domestic Product. That being said, most economists are discussing the possibility of a major decline in the value of the U.S. Dollar going forward as inflationary monetary policy begins to strangle growth. While that view point may prove right over the long haul, in the short run most traders are not likely expecting the U.S. Dollar to rally.

The U.S. Dollar is expected to reach a multi-year cycle low in the near future. From the cyclical low, I expect the U.S. Dollar to regain a strong footing and work higher against the crowd. This is not to say that the U.S. Dollar will not eventually decline, but financial markets do not work that easily. Shorting the U.S. Dollar is a crowded trade and Mr. Market punishes crowded trades quite often by pushing prices the opposite of what the heard is expecting. Should the U.S. Dollar find a strong underlying bid, precious metals and domestic equities would feel the brunt force of such a move. While it remains to be seen if the U.S. Dollar rallies, if it does it will catch many traders and economists by surprise and the unwinding of the short dollar trade could unleash a wave of buying that we have not seen for quite some time.

Let’s take a look inside the market…

Major Index Price Action Over The Past 12 Trading Sessions – Bearish
Below is a table showing the main indexes used for tracking the market. The interesting thing about this data is that the indexes which typically lead the market have been deteriorating for the past 12 days and no one has noticed.

In short, the Nasdaq, Russell and Dow Transport indexes typically lead the market

Every radio station and business channel covers the Dow and SP500 indexes therefor the general public hears the market performance based on the those indexes. The problem here is that the Dow only consists of 30 stocks and the SP500 only holds the top 500 companies which is not a full view of the overall market because there are thousands of stocks listed on the exchanges.

The analysis below can be taken two ways depending which boat you are in… which I will explain in just a minute. The way I see things is a bit of both, I’m not really in or boat or the other… rather I have one foot in each because I have seen the market do things which support both sides (manipulation and measured technical moves) during my 14 years trading.

Ok here are my thoughts/opinions/forecasts…

Idea #1: Dow and SP500 indexes which 99% of the public use to gauge the market are moving higher on light volume. I feel because these indexes hold the stocks which everyone knows and is comfortable buying that this is the reason why they keep going up while the rest of the market silently erodes. It’s the simple thought that big money is moving out of leveraged positions (small cap stocks, transports, technology) in anticipation of a market correction, and the Average Joe continue to buy into brand name stocks boosting the Dow and SP500 thinking things are peachy..

Idea #2: We all know there is market manipulation, the question is how much of the price action is manipulation and how much is real supply and demand? No one will ever really know and that’s just part of the market and trading we have to deal with as traders. But I know there are traders out there blaming the Feds, POMO, and PPT for pushing the market up month after month. So the question is if these invisible forces manipulating the top 30-500 stock prices by buying them up which naturally boosts the Dow and SP500 indexes to keep everyone bullish on the market?

My thinking is that it’s a bit of both and that a correction is just around the corner.

Gold Miner Stocks Underperform Gold – Not a good sign
Gold stocks today (Wednesday) underperformed the price of gold and are also forming a bearish chart pattern. If this plays out then we can expect another sizable pullback in both gold stocks and the price of gold because this index typically leads the gold.

US Dollar Multi Year Support Trendline
The US Dollar is trading down at a key support level and if we get a bounce and possibly even a rally then we could see a sizable correction in stocks and commodities across the board. As we all know everyone is shorting the dollar, buying gold and buying food commodities…. So it makes sense that all these crowded plays are about to see a major shift. Now this is just my contrarian point of view and those of you who follow my work know I’m not bias in my trading. I just take the market one day or week at a time and play the setups. But you must step back and look at the larger picture and at least give it some thought…

Concluding Thoughts:
In short, the major indexes are moving higher on light volume which is not a strong sign, and other key indexes are pointing to lower prices. The question everyone wants to know is how low will this correction be? The answer to that is that you must play the trend as you never know if a trend will last 2 days or a year. I take the market one day at a time continually analyzing price action.

If you would like to get my detailed reports and daily videos covering my analysis please join my newsletter at: www.TheGoldAndOilGuy.com

Chris Vermeulen

During a presentation in Chicago yesterday, Jim Rogers may have well laid the foundation for the next bubble predicted by Zero Hedge in October, namely rice. His comments may have also spooked some of the weaker hands in gold, which has tumbled by $20 today, primarily on concerns what Chinese tightening may do to demand for the precious metal. Of course, how tightening is bad for commodities and good for stocks is one of those questions that can only be explained by the Fed’s third mandate. From Bloomberg: “While gold “may go down for awhile,” the metal is “going to go over $2,000 in this decade,” Rogers, who owns gold, silver and rice, said today during a presentation to business executives in Chicago. Gold touched a record $1,432.50 an ounce in New York on Dec. 7. The price closed today at $1,387. “I’d rather own rice,” Rogers said. “I’d rather own something that’s more depressed than gold.””

Rogers has long been bullish the MOO complex, and the recent surge in food prices merely validates his most recent predictions:

Agricultural commodities are “going to boom” as demand increases in developing markets, primarily in Asia, he said. All commodities will be supported by the weakening dollar, which is losing value because Federal Reserve Chairman Ben S. Bernanke is “printing money” by buying Treasuries in an effort to shore up the U.S. economy, Rogers said.

“Paper money is made of cotton, and I’m long cotton, by the way,” Rogers said. “One reason I’m long cotton is because Dr. Bernanke is out there running the printing presses as fast as he can.”

Rogers said he doesn’t own shares in U.S. companies and is short U.S. long-term treasury bonds. The Chinese renminbi may provide “almost sure profits over the next five to 10 years,” he said.

“In the future, it’s the stock broker who’s going to be driving the cabs,” Rogers said. “The smart stock brokers will learn to drive tractors, and drive them for the farmers, because the farmers will have the money.”

In the meantime, with the fundamental thesis that printing money will do little to strengthen the dollar unchanged, non-dilutable currencies of the precious metal variety are merely enjoying this latest shake out, which is certainly being welcome by banks like the PBoC which has the buying a few billions worth of gold to even remotely approach the actual (supposed) holdings of “sovereigns” like the GLD.

As for those who wish to catch the next bubble during the parabolic phase, we may recommend an early positioning in rice and its derivatives. And yes, rubber will be next.

By Byron King

01/11/11 Pittsburgh, Pennsylvania – I’m going to countdown three of 2010’s biggest resource stories – not to reminisce about profitable investments from the year gone by, but to highlight what I believe will be very profitable investments in the year ahead…

No. 3: The Continuing Gold Rush

The gold price soared nearly 30% last year – punctuating a spectacular decade-long run that has seen the gold price quintuple! So has gold finally reach a “bubble phase?” Is the great gold bull market on its last legs?

In a word, No!

If gold is in a bubble, then it’s one heck of a bubble. Not even the 2008, economy-wrecking market crash could pop it. Gold is not in a bubble; it’s in a big bull market, plain and simple.

As stories about quantitative easing and other forms of overt currency debasement crossed the newswires last year, investors became increasingly concerned about the value of the paper they call “wealth.” Increasingly, these concerned investors have been shifting some of their wealth from paper to gold…and other hard assets.

Plus, it’s easier than ever to “own” gold (so to speak) via the rise of exchange-traded funds (ETFs) like SPDR Gold Trust (NYSE:GLD). With a click of your mouse, you can buy into the new gold rush – although in many respects it’s better to buy real gold and take delivery, a point that I’ve made over and over.

At the same time, the world’s gold buyers are chasing declining mine output. That is, despite the rising price of gold, the world is likely past the point of Peak Gold output. All the output from new mines isn’t replacing the decline in output from older mines.

But demand is the main story in the gold market…demand for real money, not the paper kind. The monetary universe is changing in a fundamental way, with the price of gold serving as the barometer, thermometer and inclinometer. The cozy old economic order – post World War II, with the US dollar as the world’s reserve currency – is passing away, and things won’t ever go back to the long, lost “good old days.”

I’ve had endless discussions with skeptics about “why gold prices are rising.” Of course, the skeptics can deny, up and down, the meaning of rising gold prices. But at the end of the day, investors and savers around the globe are becoming increasingly fearful of holding paper currencies.

I won’t even go into the monetary problems that national governments across the world are facing with fiat currencies. Just accept the fact that mankind’s monetary default position is gold, and that’s been the case for 5,000 years or more. Don’t fight history.

Here at Agora Financial, we’ve been recommending that readers buy gold since the late 1990s, when it was selling for under $300 per ounce. We still like it at $1,375 an ounce.

When it comes to gold, there’s one key idea to take into 2011: Gold is money. And gold makes better money than the government-issued kind. The big risk of owning currency and bonds is that any Tom, Dick & Harry – OK, the politicians and bankers – can create as much of it as they want. This year and next, your biggest risk is in not understanding that concept.

No. 2: The Shale Gas Revolution

Just a few years ago, the energy investment idea du jour was to build liquefied natural gas (LNG) terminals to handle future imports to the voracious US hydrocarbon market. Remember Cheniere Energy, once the darling of newsletter writers? Now there’s talk of re-tooling some of America’s LNG systems for the exportation of natural gas. Instead of bringing foreign gas to our shores, the newest idea is to liquefy natural gas in North America and export it to Europe and China. In terms of gas, the world has turned upside down.

The world energy landscape has changed with new developments in extracting natural gas from shale beds and tight sands. Innovative extraction technologies have dramatically altered the economics of natural gas extraction in North America. South Africa’s Sasol Corp., for example, is teaming up with Talisman (NYSE:TLM) to turn otherwise stranded gas into liquid fuel in northern British Columbia. It’s a truly revolutionary process – a point that The New York Times made a few days after I mentioned this joint-venture to the subscribers of Outstanding Investments.

Companies like Consol Energy (NYSE:CNX) and MarkWest Energy (NYSE:MWE) are also benefitting from US, Canadian and now global shale gas development. Even our friends the Chinese are coming to the US, to learn how we’re cracking shale for gas, so they can duplicate the effort back in the Motherland.

At the same time, the technology for freeing shale gas is finding its way into the oil patch, with companies like Venoco (NYSE:VQ) working to turn California’s Monterey Shale into a vast new oil resource. There are a lot of hydrocarbon molecules out there. The trick is to harvest them.

Forward-looking investors should not ignore the fact that shale gas development will provide enormous opportunities for the oil service guys, particularly Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI).

There’s much more to come with the shale gas revolution. We’re just in the early innings on this one. There’s plenty of good investing ahead, and a lot of hydrocarbon molecules yet to be sucked out of the crust.

No. 1: The Rare Earths Boom

Rare earths are a group of exotic elements of the Periodic Table (Lanthanides, mostly), with unique electrical, magnetic, optical and other properties. Without them there’s basically no clean tech, green tech, advanced electronics, electric cars, and much more. It’s not that rare earths are geologically “rare.” It’s more that they’re so darned hard to process in industrial quantities, and into high tolerance end products. That is, the end products are mostly in the nature of “designer molecules.”

Thus, doing the rare earths gig is far more than basic exploration, mining and crushing. Doing rare earths correctly involves being really good in chemistry and chemical engineering as well. There’s nothing easy about it.

The big rare earths story for 2010 was how an otherwise obscure sector of the mining and processing industry became a destination point for billions of dollars of new investment. As 2010 drew to a close, we were in a market mania, in some respects, with some rare earth stocks “melting up.” The story was driven by China and its precipitous reductions in export quotas – front page news across the globe.

You may have seen the statistic that China controls about 97% of the world’s rare earths supply. Let’s not quibble about the exact number – a few fractions one way or the other. And when China ratcheted down its rare earths quotas during 2010 – part of a long-range strategic industrial policy, I must add – it shook the Western world to its industrial foundations. It’s all been a shock to the global trading system.

This shock has produced some shockingly large gains in the shares of rare earth mining companies. A lot of these stocks have become very volatile and frothy. So caution is warranted. But the rare earth story is very real and very exciting.

Don’t miss this one!

Regards,

Byron King
for The Daily Reckoning

Read more: The Biggest Resource Stories for 2011…and Beyond! http://dailyreckoning.com/the-biggest-resource-stories-for-2011-and-beyond/#ixzz1AmMi1bZZ

The outlook for the U.S. stock market in the New Year figures to be an exasperating mixture of promise and peril. Positive momentum is building going into 2011, but so are dangerous bubbles.

The high-tech, energy, materials and commodities sectors will be hot in the New Year. And the U.S. stock market will get an added boost from the fact that U.S. Treasuries, municipal bonds (munis) and euro-based investments will not.

Here’s what’s in store for the U.S. stock market in 2011.

Three Little Rules

U.S. stock market investors who want to survive and thrive in the New Year would do well to remember three basic rules – each of them born out of the old stock-market adage that “the trend is your friend.”

In 2011, the three rules U.S stock-market investors would do well to remember are:

• The trend is your friend.
• And if that trend has momentum, it will be your best friend.
• But that friendship will only hold until the trend turns on you – at which point it becomes your worst enemy.

The “trend” that we’re referring to here is market liquidity – and lots of it. All this liquidity is washing through the U.S. economy courtesy of the Obama stimulus package, the “quantitative-easing” strategy of the U.S. Federal Reserve, the just-enacted extension of the Bush tax cuts, a cut in payroll taxes, expanded unemployment benefits and accelerated expensing of capital investments in 2011.

A key point to understand about all this liquidity is that “more is always better sooner.” And that’s certainly the case here: We don’t have to wait and worry about getting these simulative measures in 2011 – they’re already in motion.

In this kind of market, fundamentals take a backseat (though they’re not totally irrelevant). Liquidity determines the direction of stocks and other asset prices.

And there could be more liquidity to come.

The Fed’s Plan For a Happy New Year

In a recent appearance on the CBS News “60 Minutes” program, U.S. Federal Reserve Chairman Ben S. Bernanke declared that the already-existing second round of quantitative easing – referred to by the market moniker of “QE2″ – could very well be followed by more of the same.

That’s more fuel for the stock-market fire in the New Year.

Liquidity – in all its forms, and all around the world – has been the engine of rising global prices for stocks, bonds, commodities, and even precious metals such as silver and gold.

Much of this liquidity has been stimulus-fueled. The liquidity then drives markets and asset prices higher because most of it ends up being injected into the very pipelines that supply liquidity.

Here in the U.S. market, this is all part of the Fed’s “real” plan to “save” the economy. That central bank plan calls for the central bank to:

• Liquefy the banks and all the financial intermediaries.
• Inflate the stock market and create a “wealth effect” where people see stock prices rising and assume the economy is getting stronger.
• Inflate commodity prices so deflationary fears don’t destroy consumer spending because shoppers put off purchases, rightly reasoning that prices will be lower later.

In other words, the Fed wants to inflate everything, first by devaluing the dollar, the currency in which oil and most major commodities are priced. Then it plans to continue to devalue the dollar by printing money to make our exports cheap on world markets.

Sure, it’s a “liquidity trap,” and a momentum shift in the flood of liquidity is the greatest danger to rising equity prices. But as long as every crisis is met with another massive dose of liquidity, the levy will keep rising, until it eventually breaks.

Long before that happens, however, I’ll have you out of all your longs and will help you start constructing strategic “shorts.” In fact, I’ll have all of you short everything.

That change in direction is what I mean when I refer to the prevailing trend “turning on you,” and becoming your biggest enemy. That will happen when the liquidity is withdrawn.

In the meantime, there’s money to be made through equity investments in different sectors and across different asset classes (courtesy of exchange-traded funds, or ETFs), by going long on positive momentum plays and by shorting some investments about to get the wind knocked out of their sails.

Let’s look at some specifics.

Tapping Into Technology

The brightest stock-market star in 2011 will be tech. Right now, the hot growth areas in the world don’t include the U.S. market. But that’s okay: A research study of high-tech firms in the Standard & Poor’s 500 Index conducted by top-tier market researcher Bespoke Investment Group found that 54% of the gross revenue recorded in 2009 was derived from international markets.

What is spectacular about tech is that technology combines global growth prospects with every company’s need to improve productivity gains through advanced applicable technologies. That’s everywhere. What’s more, here in the U.S. market, a major corporate tax break for capital investments in technology, factories and other equipment will serve as an added tailwind to drive tech sales – and tech stocks – even higher.

U.S. companies are sitting on nearly $2 trillion in cash – their biggest hoard in 51 years. And tech firms boast some of the biggest caches of cash. As a percentage of total assets, their cash holdings are highest among all S&P 500 industry groups. Whether they use their cash to pay dividends, buy back stock, or embark on merger-and-acquisition deals – all of which we’re already seeing – tech-stock investors figure to be the big beneficiaries.

There are plenty of great tech companies and slices of the tech pie. Personally, my favorite trends are cloud computing and data storage. But, maybe the easiest and broadest approach is the best. I like buying the Nasdaq Composite Index in the form of PowerShares QQQ Trust ETF (Nasdaq: QQQQ).

Put a Charge Into Your Portfolio

Energy – specifically oil, the drillers and integrated multinational giants – is poised to soar in the New Year, especially if the emerging markets stay healthy, Europe stabilizes, and the U.S. recovery hits its stride.

With a modicum of inflationary fear back in the spring and summer of 2008, oil rose to more than $145 per barrel. Given the devaluation of the U.S. dollar and rising commodity prices worldwide, crude oil is almost certain to zoom beyond its current trading range at about $85 to $89 a barrel.

The Organization of the Petroleum Exporting Countries (OPEC) has announced a target price of $90 a barrel. Given that oil was trading at $89 yesterday (Tuesday), this looks ridiculously low if demand increases as global economies recover.

ConocoPhillips (NYSE: COP) and Chevron Corp. (NYSE: CVX) are poised to rise handsomely in tandem with the price of oil. So are a few of the drillers, especially the deepwater drillers. Transocean Ltd. (NYSE: RIG), in particular, looks cheap. If the company can escape the worst of the fallout from the Gulf oil spill, it could be a big winner.

Materials, Commodities and Precious Metals Plays

The materials sector is also in good shape to benefit from a U.S. recovery and global growth. S&P 500 materials-based companies derive 45% of their revenue internationally. Rising demand in terms of growing industrial production will put upward pressure on the supply side of materials. I like keeping it simple here and play this big space by buying Materials SPDR ETF (NYSE: XLB).

Commodities investments were once the purview of the high-net-worth investor only. Today, however, every investor needs to have money invested in this crucial sector. We covered oil as part of our energy strategy (and oil, by the way, constitutes a major weighting in most commodities index funds, so be careful not to overweight your portfolio with more “black gold” than you are comfortable with).

Other key commodities groups include agriculture, minerals, livestock and metals (not including precious metals) – of which can be invested in via ETFs.

In agriculture, for example, there is the PowerShares DB Agriculture ETF (NYSE: DBA) and the MarketVectors Agribusiness ETF (NYSE: MOO).

Mostly, I like copper, cocoa, corn and cotton.

For corn, take a look at the Teucrium Corn Fund (NYSE: CORN). If you are an international investor, or have access to the London markets, the ETFS company has a series of ETFs based on the corn futures markets, including the ETFS CORN Fund (LON: CORN.LN).

With cotton, there’s the iPath Dow Jones-AIG Cotton Total Return Sub-Index ETN (NYSE: BAL), which is based on the total return sub-index for cotton. It is based on the return of a single futures contract in cotton.

I also like some of the minerals and metals. There are ETFs for palladium [the ETFS Physical Palladium Fund (NYSE: PALL)] and for platinum [the ETFS Physical Platinum Shares (NYSE: PPLT) ETF]. Platinum, by the way, is a metal whose potential we’ve written about extensively in past issues of Money Morning.

The only caveat to loading up on commodities as we enter 2011 is that they’ve had a big run already and while I expect momentum to continue, there’s a big wild card out there (more on that later) and I suggest either buying small and adding to positions later, or waiting until April to see if the Fed is going to keep the “QE” ship sailing at full speed.

Then there are the precious metals. I like gold, just not in over abundance. A 10% allocation to gold is never going to hurt you and it stands to be a steady winner as long as currency wars and a decimated euro bring the “store of value” discussion to Main Street investors. Money Morning has published special reports on silver and gold investing.

Playing the Downside

As I explained earlier, there is a potential downside when the trend is no longer our friend. And there’s also downward momentum, which comes after upward momentum sputters.

Unless we are headed into another global meltdown or experience a devastating shock to financial markets, bonds have had their ride.

Treasury yields have backed up considerably since QE2 began. While the Fed was trying to keep interest rates low by buying Treasuries and flooding the system with liquidity, bond prices actually fell and yields rose – a lot! If the Fed is successful, or in spite of its efforts, U.S. growth gains traction and global demand for investment capital continues, rates have nowhere to go but up.

Over a trillion dollars have been invested in Treasury bonds since the fall of 2008. That safe harbor isn’t going to look so safe when investors open up their fourth quarter statements and see they have losses in their bond holdings. If stocks keep rising and bond prices keep falling, there will be a capital wave out of bonds that just might upend world stability. We’ll cross that bridge if we get there, but to ride the downward momentum in Treasury bonds I recommend buying ProShares Short 20+ Treasury ETF (NYSE: TBF).

Another mind-bending momentum-mayhem possibility is an exodus of investors from the municipal bond market. There’s no escaping the fact that almost all U.S. states are making ends meet by means of federal handouts. County and municipal governments are almost all out of money and deep in hock.

Rising rates will be the canary in the coal mine, signaling a possible default – or, more likely, several high-profile defaults – if the Fed and the U.S. Treasury Department don’t open up the spigot and keep liquidity flowing into the financial system.

If you’re a muni-bond investor, think about hedging or cashing out. The timing on this one will be difficult, but it’s coming. Because timing on the municipal front is so difficult, I’m not inclined to recommend what to short right now. But I will offer an update on this subject, with specific recommendations, later in 2011.

Lastly, there’s the euro, the currency of the European Union. The euro has been weak lately after bouncing to heights that didn’t make any sense after last summer’s Greek debt woes subsided. What didn’t make sense is that the euro climbed even on the heels of news about Ireland. Not until fears arose that Portugal and Spain could be next to need emergency first aid did the euro start to falter again.

The euro has nowhere to go but down. I like buying three-month-out “calls” on the ProShares UltraShort Euro ETF (NYSE: EUO). This fund is a leveraged, double-short ETF that is designed to move twice as much as the cash market for the euro currency against the dollar. That means that if the euro is falling in value relative to the dollar, EUO will rise in price.

Key Caveats

As we head into 2011 with positive momentum, there are some key warning signals that we need to watch for – since they would serve as warnings of a reversal in momentum. These warning signals include:

• Any sovereign defaults anywhere in the world.
• National governments or cross-government unions backing away from debt support and liquidity-supply measures.
• Or any serious banking or financial markets crises in China.

There are plenty of reasons to be optimistic about 2011, and a few mayhem makers that can turn things upside down.

So just remember this: Your friends are only your friends until you can’t trust them any more.

[Editor's Note: Shah Gilani, a retired hedge-fund manager and renowned financial-crisis expert, has made some astounding market calls. Take his forecast for the 2009 U.S. economy. He predicted a steep decline in both the economy and the stock market – followed by a steep rebound in stocks. And that's just what happened.

Not long ago, in a Money Morning exposé, Gilani warned that high-frequency traders (HFT) were artificially pumping up market-volume numbers, meaning stocks were extremely susceptible to a downdraft.

When that downdraft came, Gilani was ready - and so were subscribers to his new advisory service: The Capital Wave Forecast. The next morning, because of that market move, investors were up 186% on a short-term euro play, and more than 300% on a call-option play on the VIX volatility index.

Now Gilani has crafted a stock-market strategy for the New Year. It's worth a look. If you like what you see, take a close look at his Capital Wave Forecast advisory service. You'll find it was time well-spent.]

News and Related Story Links:

• Money Morning News Archive:

  Outlook 2011 Economic Forecasting Series.

• Money Morning Outlook 2011 Economic Forecast Series:

  Bush Tax Cuts: How to Profit From the Compromise Tax Deal In 2011.

• CBS News “60 Minutes” News Magazine:

  Ben Bernanke’s Appearance.

• Money Morning Investment Research:

  Special Report: How to Buy Silver.

• Wikipedia:

  Wealth Effect.

• Money Morning Investment Research:

  Special Report: How to Buy Gold.

• Bespoke Investment Group:

  Official Website.

• Money Morning News Analysis:

  U.S. Companies’ $1.93 Trillion Cash Hoard Biggest in 51 Years

• Money Morning News Archives:

  Cloud Computing.

• OPEC.org:

  Official Website.

• Money Morning News Archive:

  Gulf Oil Spill News Stories.

• Money Morning Investment Research:

  Investing in Cotton: The New “King” of the Commodities Sector.

• WiseGeek.com:

  What Does It Mean to be a “Canary in a Coal Mine?”

• Money Morning Investment Research:

  Three Ways to Profit as Growing Demand and Tight Supplies Send Corn Prices Higher.

• Money Morning Outlook 2011 Economic Forecast Series:

  A Bond Investment Strategy For the New Year.

The US dollar advanced for the fifth consecutive session today but we think there is more room to run. Continue to fade rallies in the Euro, Swissie and Pound. Our downside targets are as follows: 129.00, 1.0100, and 1.5250 respectively.

Live cattle is back above the 20 day MA; our suggestion is gain bullish exposure in either February or April contracts looking for new contract highs and potential record highs into next year. Silver and gold have yet to correct but we have yet to rule out this possibility. As we said yesterday on a settlement below the 50 day MA in gold and 20 day MA in silver expect sellers to be in the driver’s seat. Until then we’re cautiously optimistic. Copper is at a fresh two year high and though we’re not suggesting shorts we do not think this appreciation is sustainable without a healthy correction. That likely means 40-50 cents but the question is from what level…$4.30 or $4.50? We still want to see a correction in Agriculture, namely corn and soybeans before re-establishing bullish plays for clients. In reality we probably will hold off until early 11′ but we do want some type of long exposure before the January USDA report. Another limit move higher in cotton today. Some of our more aggressive clients own March put options and premiums were crushed today. Being we think we could get a violent move lower we will stay the course for now. DO NOT trade futures in cotton right now and options traders take your size down as we’re in uncharted waters. We missed a long entry in coffee with clients and remain onlookers from the sidelines. We will be looking to buy a set back of 15 cents if we are given that opportunity for clients. If you trailed your stops in lumber futures you should have been stopped on your longs at a profit today.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

There are few things about which history is unanimous. Land wars in Asia, for example… always a bad idea.

Paper money falls into this category. Paper money always fails and wipes out the people who depend on it.

Or as our friend Rick Rule likes to say, paper money’s track record is unblemished by success. The return of paper money to its intrinsic value (nothing) is guaranteed. All we need is time (though politics certainly help move things along).

We would not argue that organizing a system of sound money based on paper receipts is impossible. We would merely point out that keeping such systems sound and reliable has proven elusive to this point in human history.

Paper money is like many other types of idealized virtue humans cannot attain. It’s simply beyond human nature to avoid perdition. Sin, as they say, is part of man.

Every government that has used paper money has succumbed to a fatal level of borrowing. Rather than a restructuring of these debts, paper money systems allow for the rapid expansion of the monetary base to facilitate paying off debts in devalued money.

This is no different than stealing. And yet… that is what happens every time, resulting in a massive crisis and a breakdown of social norms.

It normally happens faster in democracies, where no strong interest group votes for living within the country’s means and repaying its creditors in sound money. No, people vote for more spending and more debt. And they always expect someone else to pay. Case in point… Greece.

Researching problems in the Greek economy is like reading a financial comic book. All the players are clowns.

For example, the national railroad has annual revenues of €100 million… against a wage bill of €400 million and another €300 million in expenses. The Ministry of Agriculture hired 270 people to digitize photographs of Greek public lands… with one digital camera.

In 2001, the Greek government borrowed $1 billion from Goldman Sachs to help balance the budget. The deal relinquished future receipts from the national lottery, national highway tolls, airport landing fees, and even funds promised to Greece in the future from the European Union.

The government was burning the family furniture to pay current expenses. And now, they’re out of furniture. It’s all been burnt.

Has the current economy got you feeling like you drew the “short straw”?

Then you need to know how to become a “Short Straw Millionaire.” The fact is, hard economic times can provide the best wealth-building opportunities available… if you know where to look. Don’t miss out on strategies that can turn hard times into financial independence.

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In total, the Greek government owes €1.2 trillion. That’s €250,000 for every adult.

Obviously, Greece cannot repay this money in sound currency. The only way out is for the Greeks to inflate the debt away — effectively stealing from their creditors with a printing press. That they haven’t done so yet is only because they no longer have their own currency, the drachma.

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Please, whatever you do, do not wait on taking these actions. Right now they are easy and cheap… but I can promise you that this will not be the case for very long. To watch the free presentation, click here.

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Over the past few months it seems as though everything has been tied to the dollar. Simple inter-market analysis makes it obvious that almost everything in the financial market eventually has an affect on stocks and commodities in some way. But recently trading has really been all about the dollar. If you watch the SP500 and gold prices you will notice at times virtually every tick the dollar makes directly affects the price and direction of gold and the SP500 index.

Let’s take a look at some charts to see the underlying trends and what they are telling us…

Dollar Index – Daily Chart

As you can see the trend is clearly down. Currently the dollar is trying to find a bottom as it bounces and pierces the previous high. The question everyone wants to know is if the dollar is about to rally and reverse trends or was Friday’s pierce of the October high just a shake out before the next leg down?

Back in late August the dollar pierced the July high on an intraday basis (shake out) just before prices dropped sharply. I think this could very easily happen again but when you see what gold volume is doing, it’s a different story.

Those who follow me closely know I focus on trading with the underlying trend, but manage my risk by trading smaller position sizes when the market has more uncertainty than normal with is what we are currently experiencing.

GLD – Gold Fund – Daily Chart

Gold and the dollar are almost inverse charts when comparing the two. Gold happens to be testing a key support level and its going to be interesting to see how the price holds up going forward. The one thing that has me concerned is the amount of selling taking place. The chart shows heavy volume selling and could be warning us of a possible trend change in the dollar, gold, oil and equities in the coming weeks.

Again the trend for gold is still up, so I would not be trying to short it at this time, rather look to buy into dips until the market trend proves us wrong. That being said, with the selling volume giving off a negative vibe and the fact that gold has rallied for such a long time, any new positions should be very small…

Crude Oil – Daily Chart

Oil looks to be forming a possible cup and handle pattern. If the Dollar continues to consolidate for another 1-3 weeks and breaks down, then we should see the price of oil trade in the range shown on the chart and eventually breakout to the upside. I have a $95-100 price target on oil if the dollar continues to trend down. Until we see some type of handle form here I am not trading oil.

SPY – SP500 Fund – Daily Chart

The equities market looks to have had one of those days which spooked the herd. Friday the price dropped triggering protective stops with rising volume. I was watching the intraday chart as the SP500 broke below the weeks low, and this triggered protective stops which can be seen on the 1 minute charts. In an uptrend I prefer watching stops get triggered because it means traders are getting taking out of long positions and most likely looking to play the short side. When the masses become bearish on the market, that’s when I start looking to play the upside in a bull market (buy the dip).

The chart below clearly shows the days when the shake outs/running of the stops took place. Most traders were exiting their positions and/or going short because the chart looked bearish. One thing I find that helps my trading is that if the chart looks rally scary (bearish) then I start looking at a shorter term time frame for a possible entry point to go long using price and volume analysis.

Weekend Market Trend Trading Conclusion:

In short, I feel the market is at a critical point which will trigger a very strong movement in the coming days or weeks. Because the dollar, gold, oil and the equities market have had such big moves I think trading VERY DEFENSIVE is the only way to play right now. That means trading small position sizes. Right now I am trading 1/8 – 1/4 the amount of capital I generally use on a trade. Meaning if I typically put $40,000 to work, right now I am only taking positions valued at $10,000.

Remember not to anticipate trend reversals by taking a position early. Continue to trade with the underlying trend with small positions or skip a couple setups if you feel strongly of a possible reversal. Once the trend reverses and the volume confirms, only then should you be playing the new trend. Picking tops can be expensive and stressful.

Get My Daily Pre-Market Trading Analysis Videos, Intraday Updates & Trade Alerts Here: www.GoldAndOilGuy.com

Chris Vermeulen

Numerous factors and markets are telling us the odds of short-to-intermediate-term reversals are elevated for numerous markets including silver (SLV), gold (GLD), the U.S. dollar (UUP), the euro (FXE), stocks (SPY), and the VIX (VXX). The objective of both fundamental and technical analysis of the financial markets is to help us better understand the risk-reward ratio and relative attractiveness of a wide variety of investments. Since no chart or annual report can help us predict the future, our study of markets deals in probable outcomes.

The possible drivers for market reversals in dollar, euro, gold, silver, and VIX include:

• Concerns about Irish debt
• Uncertainty related to the G20 summit
• High levels of optimism (bullish sentiment/contrarian indicator)
• Near vertical, and correction-less ascents in numerous markets
• Mania-like moves in gold and silver
• Stretched valuations

We at CCM, along with many others, believe the sharp gains in many asset classes off the summer lows were primarily driven by the expectation of money printing and a weaker dollar. As the dollar weakened, many risk assets or inflation-protection assets rose. One example is gold; note the negative correlation between the yellow metal and the U.S. dollar.

These charts can help us from both a bullish and bearish perspective. If the markets reverse near the areas highlighted below, we would be more apt to become risk averse in the short-term, especially in terms of decisions related to cash. If these markets break through areas of potential resistance, then another leg up in risk assets becomes more likely, and we would be more amenable to increasing risk exposure in the short-term.

Just as a declining dollar increased the appetite for risk over the past five months, a countertrend rally in the dollar may open the door to corrective action in stocks and commodities. The Dollar Bear ETF (UDN) was down Tuesday on a 56% increase over average daily volume. As you review the charts below, ask yourself, “Is this market at a logical point for a possible reversal based on the recent action of buyers and sellers?”

The euro may have reached a point where buyers have become less interested. Recent concerns about Irish debt may also give currency traders a reason to cut back their exposure to the euro. Since the euro makes up roughly 60% of the U.S. Dollar Index, a drop in the euro would help propel the dollar higher. The desire to sell the euro ETF (FXE) was not atypical from a volume perspective on Tuesday, which tells us not to assume anything in terms of a reversal. A decline in FXE over the next few days on strong volume would add credence to the trendline. Average daily volume for FXE over the past three months was 1,556,260 shares. A decline over the coming days on more than 1,867,512 would add to our bearish concerns. A break to the upside on more than 1,867,512 would lean toward favorable outcomes for risk (stocks, commodity-dependent currencies, and commodities).

Technical analysis can look complex, but many of the most useful tools are very easy to understand. Trendlines are used to identify areas of past importance in the minds of buyers and sellers. Buyers tend to see value at areas of “support” and sellers tend to see “overvaluation” at areas of resistance.

The VIX, or the “fear index”, has reached what many would term as a level of “complacency”. A rise in the VIX, especially a sharp one, often occurs during periods of risk aversion. The VIX ETF (VXX) was up Tuesday on strong volume.

Silver tends to outperform gold during periods of risk-taking and when the economic outlook skews toward the more favorable end of the spectrum. Silver may have experienced a blow-off rally yesterday (SLV). Markets cannot logically rise in a vertical fashion forever; silver will correct at some point. Another day of high-volume selling would increase the odds that Tuesday’s intraday selloff on extremely high volume was indeed significant from a bearish perspective. As we head into trading on Wednesday, silver gets the benefit of the doubt since the bulls have been firmly in control, but Tuesday was a big yellow flag for the silver bulls.

Gold’s appeal has increased as fiat currencies are being debased around the globe. Gold has not had the high degree of mini-mania seen recently in silver, but the yellow metal has also reached a point where the desire to sell may now exceed the desire to buy. The gold ETF (GLD) was down Tuesday on strong volume.

The S&P 500’s intraday high on November 5th was 1,227.08. A 61.8% Fibonacci retracement of the October 2007 to March 2009 bear market falls near 1,228 on the S&P 500. These levels can be important to traders, so it is helpful to keep them on your radar, especially when you have trouble understanding why a market is stalling with no apparent resistance nearby.

The chart of the S&P 500 seems to be a little better positioned relative to overhead resistance. If stocks can push higher, a move to 1,234ish to 1,256ish on the S&P 500 seems within reason. The S&P 500 ETF (SPY) was down Tuesday on below average volume, which again highlights the need to pay attention rather than assume reversals are going to take place – no one knows what is going to happen, especially over the short-term. Over the summer, many were convinced the Hindenburg Omen spelled doom for the markets; the S&P 500 is now 16.7% above the Hindenburg Omen lows made in late August 2010, which is just one example of the importance of remaining flexible in terms of market outcomes (bullish and bearish).

Trendlines are broken all the time, which reinforces the probabilistic nature of this analysis. We cannot predict the future, but we can say it makes sense to pay attention over the next week or so. With the information we have in hand now, we believe many market reversals will represent corrections within ongoing trends. We believe gold, silver, and stocks will eventually make higher highs after the next correction, which will come at some point. We recently outlined other concerns about the dollar, and concerns about gold, which still apply to the current market.

If you are a little perplexed by the recent gains in inflation-friendly assets, it may be helpful to scan some of the charts on the lower portion of this Quantitative Easing page. The Fed’s objective of re-inflating asset prices and debasing the dollar will probably lend support to gold, silver, and stocks after the next round of corrective activity. Since there will probably be a QE3, QE4, and QE5 over the next few years, it is worth the time to understand how QE works, what the Fed is trying to accomplish, and the possible impact on your purchasing power and investments.

One day does not make a trend, but sometimes early leadership after an event like the November 3rd QE2 announcement holds for the next leg up in asset prices. The early read after the first hour and forty-five minutes in the new QE2 world is bullish. With markets extended and sentiment getting a little on the giddy side, a correction could come at anytime. Given what we know as of the November 3rd close, the odds favor risk assets making higher highs before we turn the page on 2010. If a correction comes, it should represent a buying opportunity. Early leaders include the NASDAQ (QQQQ) and emerging market stocks (EEM).The bottom portion of the chart below shows the relative strength of (a) silver (SLV) vs. gold (GLD), (b) consumer discretionary (XLY) vs. consumer staples (XLP), and (c) “junk” bonds (JNK) vs. Treasuries (TLT). Silver has more industrial uses than gold. Gold has more appeal than silver when times are tough. Silver carried the day on November 3rd relative to gold which is bullish for risk and the economic outlook. Under bullish market, monetary, and economic conditions, we would expect to see more interest in consumer discretionary stocks relative to the more defensive consumer staples. The early read with discretionary vs. staples is also bullish. Similarly, “junk” bonds had more interest from buyers than defensive Treasuries after the QE2 details became known – again pointing toward bullish outcomes. Notice the evidence below has nothing to do with a personal bias or an opinion – it is what it is.

There were some concerns from the November 3rd trading day relative to volume, breadth, resistance, and volatility. Volume was impressive yesterday, but we would like to see better intraday results on November 4th and/or 5th.

Market breadth on the day of the Fed’s QE2 announcement improved into the close, but we would like to see more conviction in the coming days. A day with roughly 70% of stocks advancing would improve the odds of the S&P 500 moving toward 1,230 or 1,250. Trading activity on November 2nd and 3rd helped clear up some short-term concerns about the market, including those related to market breadth. We still need to see more improvement on a few fronts, but the last two days have us moving in the right direction.

As we noted on October 13th in Possible QE Upside Targets, a barrier of resistance stands directly in front of the S&P 500. We believe the market will break through, but the question is pre-correction or post-correction. Longer-term (next few weeks) higher highs are probably in the cards for most risk assets, but we will continue to monitor conditions with an open mind.Another concern which may be moving us closer to a correction is volatility. The currency markets, which have been big drivers of weak-dollar assets such as copper, gold, silver, and emerging market stocks, have seen a significant pick-up in volatility, indicating indecision among market players. While things look good at the moment, just when investors begin to get more confident is typically when we need to be on “correction alert”.

As we described in Quantitative Easing: How Does The Money Get Into The Real Economy?, the global reach of the Fed’s eighteen primary QE dealers will assist the freshly printed U.S. dollars in finding their way into a wide variety of countries and global markets.

One way to monitor the health of a market rally is to monitor the rally’s leadership. As long as the current leaders remain healthy, the market in general is probably healthy as well. The move in tech stocks after the Fed’s Quantitative Easing announcement (QE2) gives an early bullish read on Chairman Bernanke’s plans to print more money.

The most notable reaction to QE2 may have been in TBT, which allows holders to “go short” U.S. Treasuries, meaning TBT makes money when the price of the Treasury EFT (TLT) falls.

Gold has yet to make a new high, but the short duration of the recent correction was impressive from a bullish perspective. The fact gold is lagging silver tells us the economy may be better off than most believe – not strong, but not headed for a double-dip. As we repeatedly stated over the summer, an objective review of the economic data never placed high odds on a GDP double-dip – that could change, but currently the double-dip scenario remains the lower probability outcome.

One advantage to owning agricultural commodities, like corn, is their aggregate gains over the last year have been a little more subdued relative to copper and silver.

Like gold and silver, the U.S. dollar gave us a head-fake looking like it may rally. Dealing in probabilities takes into account you could be wrong. It also allows you to focus on the task at hand (trying to make money) rather than defending a forecast. Flexibility remains key as we head into unchartered QE2 waters.

The dollar should play a role in the next market correction, which may be due to arrive sometime in the next few weeks. Keep an eye on market sentiment, which is currently extended and concerning.

The video below is part six in a six part series on quantitative easing and its possible impact on the markets and your purchasing power. Part six gives an overview of QE investment strategies. The video was recorded a few weeks ago, but the basic concepts still apply. You can access all six parts in the QE series on this quantitative easing page.

The CCM 80-20 Correction Index has firmed in the last two days which indicates the threat of an imminent correction has been reduced (not passed entirely, but reduced). The CCM Bull Market Sustainability Index (BMSI) also remains firmly in bullish territory relative to the longer-term outlook (next few months). We will continue to post frequent updates on Short Takes. We still believe the next correction may be a buying opportunity, but we will have to see how things unfold.Chris Ciovacco
Ciovacco Capital Management