Resistance Nearby for Several Markets

04/04/2011 11:14 am EST

Focus: STOCKS

With corporate earnings and new economic data coming soon, we check key resistance levels and what to watch for in stocks, gold, oil, and the dollar.

I was starting to put on my bullish hat on Friday morning when out of the blue an ugly close has forced me to rethink my position. After viewing a few hundred charts, I have determined that while I am still leaning towards higher prices at this point in time, I will not totally rule out a rollover on the S&P 500.

In coming days, the news flow will be extreme and headline risk will be everywhere we look. The S&P 500 has been able to deflect worry for quite some time now, and in every case the resiliency is unquestionable.

However, we are nearing the beginning of another earnings season, which will start in just a few weeks’ time. First quarter earnings for 2011 are going to be quite interesting, and most analysts’ estimates are relatively challenging.

Will the rubber hit the road into earnings? Are we about to see a double top play out into earnings, or is there going to be a breakout that will take us to the SPX 1,400-1,415 price level?

Even with the recent rally, SPX is not yet out of the woods, and the price action on Friday indicated that there is some serious supply overhead and two key resistance levels to break through before the index gets back to clear blue skies overhead.

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In addition to the uncertainty that earnings season can bring, the primary reason why I am still leaning into a bullish move in the S&P 500 is the recent price action in the US dollar index futures. The US dollar is scheduled to make its three-year cycle low sometime this spring, and the recent price action is indicative that the recent lows may not be the cycle lows. If the US dollar index breaks down below recent lows, I would expect to see a nasty selloff.

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Whether readers believe that we are going to be in an inflationary or deflationary environment is a topic for a different time, but the chart above proves undeniably that the US dollar has recently declined in value and is exhibiting weak price action.

On Friday morning it looked as though the US dollar was going to rip higher, but by the end of the day, sellers had stepped in and forced the dollar into the red for the session. The price action on Friday highlighted the weakness in the US dollar and the high levels of overhead supply.

If the dollar continues to weaken, in the short run, I would view this as a positive for the S&P 500, crude oil, and precious metals. If the dollar breaks down to new lows, it should help buoy the S&P 500 and gold prices.

NEXT: What's Ahead for Hot Commodities Like Gold and Oil?

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Gold has been consolidating for nearly six months, and a breakout higher from current price levels would make a trip to $1,500 an ounce very likely. I would not be surprised to see gold work even higher than $1,500 an ounce depending on how violent the selloff in the dollar might be.

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I would think that most investors are aware that crude oil futures have been trading higher recently. On Friday, oil prices climbed above recent resistance around the $107/barrel price level and reached new recent highs.

Members that belong to my paid service enjoyed a relatively low-risk options trade that we put on several weeks ago that involved selling cash-secured naked puts on the United States Oil Fund (USO). The trade was closed on Friday for a total gain of 85% of the premium that was sold. For longtime readers, my stance on energy has been pretty obvious. In the longer term, energy prices almost have to go up as the world’s demand for energy increases while supplies remain flat.

I will likely get involved in another oil trade at some point in the future, but for right now, I’m going to wait for a more prudent entry. Based on current price action, it would not surprise me to see crude oil futures test the $110-$112/barrel price range in the near future. If the $112/barrel price level is breached to the upside, a test of the $120/barrel price level will be likely.

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The S&P 500 is in an interesting place as far as the price action is concerned. With earnings season rapidly approaching and a possible breakdown in the US dollar index likely, future price action is uncertain. I am leaning into the bullish camp at this point, but that could change rather quickly based on the price action later this week in both the S&P 500 and the dollar index.

One thing worth mentioning is that if the dollar index were to bottom around these levels and a bounce higher transpired, it would put negative price pressure on most asset classes. The fact that price action in the dollar index has been weak lately makes me believe a breakdown is likely, but as most readers know, Mr. Market offers few guarantees.

Assuming the US dollar breaks down, we should see the S&P 500, precious metals, and oil continue to work higher. My eyes are going to be watching the dollar index closely in coming days/weeks. If a breakdown transpires, the potential upside in precious metals and oil could be intense.

Ultimately, I remain slightly bullish on stocks and extremely bullish on oil and precious metals. However, my entire thesis could change if the US dollar index starts to firm up and begins to work higher. There are simply too many question marks surrounding price action to take on significant amounts of risk at this point in time.

By JW Jones of OptionsTradingSignals.com

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