S&P 500 E Mini:

I am going to start this weekend’s wrap with the S&P 500. This market has become very stretched and at the very least, we should see a pullback to the 50 day moving average of 1241 basis the March S&P 500 E mini. From January 3, 2012 through January 19, the E mini is up 49.75 points, or 3.97%. Open interest in this period has increased only 54,847 contracts. This is an abysmal number, and indicates a lack of conviction on the part of new buyers and new sellers. There are other troubling signs such as a narrowing of the daily range. For example, on December 20 the 21 day average true range of the S&P 500 E mini was 28.40 points. Essentially, 21 trading days represents a calendar month and therefore for the previous month the average daily range from high to low was 28.40 points. As of January 20, the 21 average true range is 17.30 points per day. As a matter of fact, on January 20, the range for the day was 7 points. The narrowing of the range during the rally that started on December 20 is troubling because range contraction is followed by range expansion. I believe that the range expansion will occur on the downside. Low volume has characterized this rally, but the real story is the failure of new 52-week highs to expand with the rally. I brought this up in last weekend’s wrap and the story continued this week as well. On Friday, January 13, new 52-week highs stood at 166 for the New York Stock Exchange. For the week ending January 20, the number of new 52-week highs stood at 163. The problem with this is that the S&P 500 E mini was up 21.75 points or 1.69%.

The failure of new 52-week highs to rally with the market is best illustrated in the following table.

Date                      New 52-Week Highs (NYSE)       S&P 500 E mini (close)

December 20                 158                                                      1236.00

December 27                  270                                                     1260.25

January 3                        267                                                     1273.00

January 10                     200                                                      1286.00

January 19                      231                                                       1310.50

January 20                     163                                                       1310.75

Note that on January 20, the S&P E mini closed almost unchanged from the previous day, yet the number of new 52-week highs dropped by 68. Also, the number of new 52 week highs as of January 20 are just 5 stocks above the number of 52 week highs recorded on December 20 when the market was 75 points lower. This is clearly indicative of a market that is internally weak. The market may continue to be propped up if the earnings reported is net positive. However, after this is over, the market is at risk. On Friday, Apple lost 7.45 points on volume of 14,784, 600. This is unusually heavy volume for Apple and it was the highest since December 16, 2011 when Apple closed at 378.31. Clearly a lot of sellers decided to take profits before Apple announces its earnings on Tuesday.

Gasoline:

Gasoline has been a terrific performing commodity since December 16 when it made a low of $2.49 and reached a high of 285.58 on January 18. Open interest increased by 39,381 contracts during the move of December 16, 2011 through January 19, 2012. The open interest was large and so the move. The backwardation on the April-August spread continued to widen an additional 2.46 cents for the week. The market is overbought in relation to its 50 day moving average, which is $2.65 and its 200 day moving average of $2.73. Since January 4, the 200 day moving average has served as support. If we see a further erosion in the price of crude oil, I believe the gas market will trade below the 200 day moving average and test the 50 day moving average of 2.65. From a seasonal standpoint, it’s early to put on long positions and my opinion would be to wait a couple more weeks. As mentioned in previous posts gasoline can be traded through the ETN ticker symbol UGA.

Silver:

March silver penetrated through major pivot points on Friday. Pivot point number one was at $31.49 and the market closed above that at 31.67. Also, it penetrated a higher pivot point of 32.12. The problem with silver is that from the low of 26.14 made on December 29, 2011, through the January 19, 2012 high of 30.90, open interest declined by 3,927 contracts. This is certainly bearish open interest action and the rise in price has been accompanied by low volume. In my January 20 report, which will be released Monday, we will be able to see what happened to open interest as a result of the $1.16 increase on Friday. If silver’s low in a future trading session is above above my highest pivot point of 32.12 and the open interest and volume increase, then the market can be traded from the long side.

Sugar:

The sugar market acted acted very well last week and March sugar closed by 1.05 cents higher. In addition, the backwardation between the front and the back months increased which is a bullish indication. The open interest action for the week through Thursday was very positive. I will provide Friday’s numbers in the January 20 report. Since January 9, 2012, with one exception, the lows in sugar have been higher and the highs have been higher. This is bullish. On Friday, the market, the market closed at 24.89 cents, which is above my major pivot of 24.77 cents. On January 17, I suggested for those that wanted to get long, a sell stop should be placed a stop at 22.82. Also, I suggested that the ETF, ticker symbol SGG can be used in place of futures. As I’ve pointed out before, this period is not a strong seasonal period for sugar, and as a result we could get a shakeout at any time.

10 Year Treasury Notes:

March 10 year treasury notes closed 41 points lower for the week. The open interest action on declines was positive, at least through Thursday. Friday’s numbers will be released in the January 20 report. There are three key pivot points to watch. The high pivot point of 130-00, the secondary pivot point of 129-23 and the pivot point low of 129-10. If the market, closes under one of these points, extreme caution should be exercised on the long side. Interest rates are at historical lows and it is highly unlikely that they will stay there.

The American Association of Individual investors survey for the most recent week shows that 47.2% are bullish down 1.9% from the previous week. Bearish sentiment is at 23.6%, which is an increase of 6.4% from the previous week. Neutral sentiment stands at 29.2%, which is down 4.5% from the previous week. Bullish sentiment readings can stay at lofty levels, but despite this, it is warning of caution for the bulls.