Tuesday, July 31, 2012

Developing Your Own Profitable Trading Path



Some years back, I used to follow a particular market analyst very closely. He was rather unorthodox in his approach and wrote richly detailed predictions with so much historical perspective and meticulous analysis that I was convinced he understood what the market was doing and where it was going.

Recently, his company sent out a ridiculously low-priced trial subscription offer for his newsletter, so I decided to sign up and see what he was saying these days. He’s been bearish since the late 1990s, and it turns out he’s still pretty bearish. In fact, he just presented a long-term stock market log scale chart that looked something like this:



Years ago, I would have looked at a chart like this one and believe that the red arrow was going to happen. All those pages of analysis, historical research and a track record of correctly calling major turning points clearly proved that this guy knew! All I needed to do was think about how big and how short I could get so that I could simply sit back and enjoy the long ride down.

When I consider now that I used to think and trade like that, I actually shake my head and shudder a little. It amazes me how lucky I was that I never lost significant amounts of money doing things that way.

Still, when I first saw the above chart last month, the old feelings came flooding back. I felt the excitement I used to feel and thought about the huge gain I could reap from such a large move. But this time, I immediately started asking myself some questions.

1. Is the chart true? Is the drop going to happen?

I don’t know. Before understanding Tharp Think principles, I used to believe that good traders had to know where the market was going in order to trade well. Now, I believe that I don’t know what the market will do, and I don’t care that I don’t know. In fact, not knowing can be quite liberating. Why? Because the market could go down, or sideways, or up some more. The market is going to do what it’s going to do, and it’s not my job to figure that out. My job is to be ready with systems so that I can trade whatever type of market shows up (Byron Katie writes at length about the “don’t know” mind, but that’s another article in itself).

2. Could it happen?

I have my own big picture written out now, and a significant move down in the coming years fits with that picture, but I don’t try to predict the degree or the timing of that drop. All I can say is that such a drop wouldn’t surprise me. I’m not willing to risk money on it, because I also wouldn’t be surprised if the market moved up a bit more or sideways for a long time. Central banks have more monetary engineering strategies left to try to buoy the markets, and some might actually work for a while.

3. Is a long-term short the best way to trade such a move?

I used to think so, but now that I have a number of trading systems at hand and a better understanding of my objectives, abilities and limitations, LEAP puts or a massive short would definitely not be the best way for me to trade such a move. I believe I could earn a lot more and risk a lot less by trading shorter-term systems. After all, there would still be plenty of strong up days, weeks and months during the years over which the move would play out. Take a look at the DJIA chart from 1930 to 1932—down >80% in that period. Within that decline, however, were numerous rallies of 10%-40%. I’d like to benefit from bear market volatility in both directions rather than watch (sweat) a long-term short position expand and contract with lots of fluctuations.

After asking myself these questions, I came to the realization that I found the analyst’s predictions interesting, and that was all. They aren't particularly useful to me anymore.

Traders Evolve, Trading Evolves

I’ve noticed a number of other changes in my thinking in recent months as well.

Late last year, Van requested that I rework my business plan. I began the process by applying one of recently-deceased Stephen Covey’s seven habits — “to start with the end in mind.”

First, I revisited and revised my long-term objectives, which I really hadn’t looked at in a few years, even though a number of my personal circumstances had changed. To that end, I built a multi-year cash-flow model of my trading business and personal financial situation. After developing a long list of assumptions and calculations for the model, I discovered that financial freedom wasn’t some distant possibility, but something that was actually achievable—and long before I’d thought it would be. That was more than heartening; it was thoroughly invigorating. Just thinking about it now gets my heart going.

Second, I built my objectives for the rest of 2012 in line with my longer-term objectives.

Third, I rewrote a good chunk of my business plan. What’s come out of that process has proved very interesting, and I'm looking forward to trading in a very different manner for the rest of this year. Before, my focus was on trading often and minimizing mistakes. Now, it will be on flawless execution—on trading when and how the system rules dictate so that each system generates the results it “should” generate. To help with this new focus, my business plan now reflects the following:

The number of trading systems I intend to actively trade at any one time is way down—by more than half. Before, I was interested in taking lots of trades from lots of systems, but now, I’m more interested in taking a few trades and executing those trades flawlessly to achieve the expectancy of each system.

Also, the systems are different in nature. One of the day trading systems would have seemed quite boring to me before; it has what I would have judged to be a low expectancy and a low win rate. What it also has, however, is consistency and lots of setups. Those factors give it a decent SQN score and a high expectunity. Understanding the importance and power of position sizing strategies has dramatically changed how I think about trading systems and what kinds of systems I want to trade from now on.

I’ve also invested much more time in the position sizing strategies themselves. Given my objectives for the rest of the year, I created an independent position sizing strategy for each system. Why? Because each system has very different performance characteristics, but they all need to help me reach my business goals. Each position sizing strategy will help each trading system accomplish that in different ways.

What Happens Now?

What happens when the predictions of an analyst you used to follow become nothing more than interesting to you, and you attempt flawless execution with effective position sizing strategies for a few systems? In all honesty, I don’t know yet, but I’ll share that with you sometime soon.

About the Author: RJ Hixson is a devoted husband and active father. At the Van Tharp Institute, he researches and develops new products and services that will help traders trade better. Among myriad aspirations, he dreams of moving dirt around his yard with a Bobcat and going for a sail on an America’s Cup yacht. He can be contacted Dr Van Tharp Institute of Trading Mastery.

Monday, July 30, 2012

US Markets To Drop Like a Rock?



SP500 Hitting Major Resistance

The SP500 last Friday closed up at major resistance of 1386.03. Many of the world's global equity indicies have already been going down for quite some time. The SP500 from here to the downside is wide open long-term and a long way down to find major support if it does start selling off.

Will the US Fed do more quantitative easing to help stocks? If they do will it even help and lift stock prices beyond this point with average to disappointing earnings reports lately, and slowing GDP growth around the world? The risk reward ratio currently favors far more reward to the downside with equities than the upside.

If you don't want to sell stocks short, we suggest trading long and short in the forex, gold, and oil markets to make money in the markets for the time being.

See below for this weeks four short-sell stock candidates.

The Drop Like a Rock Scenario for U.S. Markets and Third waves are "wonders to behold" By Elliott Wave International

Financial markets always have and always will pose two basic questions that investors seek to answer:

What's the direction of the main trend?

How far will it go?

Systematic approaches to these questions commonly belong to either fundamental or technical analysis. Let's consider each one briefly.

Fundamental analysis studies how a market behaves in response to external influences such as earnings, sales, competitive outlook, economic outlook and the like.

Technical analysis studies a market's internal behavior -- mainly price, but also internal measures like volume.

Elliott wave analysis is a branch of technical analysis, specifically pattern recognition.

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns . . . Elliott isolated five such patterns, or "waves," that recur in market price data.

Elliott Wave Principle: Key to Market Behavior (p. 19)

In a five-wave progression, the third wave is the most powerful.

Third waves unfold in bull and bear markets alike. Elliott Wave Principle (p. 80) describes a third wave in a bull market:

Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable...Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series. It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence.

Third waves can be more powerful during market declines because fear is a stronger emotion than greed.

Look at the third wave on this S&P 500 chart which published in the January 2009 Elliott Wave Financial Forecast. Notice that prices dropped like a rock, plunging well over 600 points in less than a year. (The third wave starts where the chart shows (2) and ends at (3)):



You can see on the chart that the S&P 500 had rebounded after the third wave had bottomed. Even so, the chart's title states that there was "Room for a New Low." Indeed, after the rebound which was wave (4), wave (5) took prices to a March 6, 2009 intraday low of 666.79.

How about now?

That depends on who you ask.

On July 10, CNBC reported on the sentiment of a chief market strategist of a capital management firm:

Ever the optimist, he is holding to his market call this year for the S&P 500 to hit 1,500.

A principal of a financial advisory firm and guest columnist for Marketwatch wrote a July 10 article titled "Stock charts don't lie: the trend is up." The article says:

Shares continue their winning ways, technically. The averages show a stair-step series of higher highs and higher lows, the definition of an uptrend.

By contrast, the latest Financial Forecast flat out says:

The stock market is nowhere near a lasting low.

Why does the Financial Forecast differ from the two opinions above?

Because Elliott analysts know that during a market downtrend, second waves can convince investors that the rally is a new bull market.

That can be a financially dangerous mind-set.

Optimism precedes third waves lower. Then, seemingly out of nowhere, a third wave can commence with unrelenting violence and speed.

In the chart above, you saw the optimism-driven rebound just before prices plunged.

Do not expect the financial media to provide you with advance warning of a third wave. The crowd is almost always on the wrong side of the market. Third waves arrive unannounced.

Short-Sell Stock Picks This Week

Below is a list of short-sell stock candidates from Zacks Investment Research. This is group of stocks that are currently members of the exclusive Zacks #5 Rank List – Stocks to Sell Now. These stocks are currently rated as a Zacks Rank #5 (Strong Sell): Biglari Holdings Inc (BH) and Systemax Inc. (SYX). Further, Zacks announced #4 Rankings (Sell) on two other widely held stocks: Dr Pepper Snapple Group Inc. (DPS) and Leggett & Platt, Inc. (LEG).

Since inception in 1988, the S&P 500 has outperformed the Zacks #5 Rank List of Stocks to Sell Now by 80% annually (+2% vs. +10%). While the rest of Wall Street continued to tout stocks during the market declines of the last few years, Zacks told investors which stocks to sell or avoid.

Here is a synopsis of why BH and SYX have a Zacks Rank of #5 (Strong Sell) and should most likely be sold or avoided for the next one to three months. Note that a #5 Strong Sell rating is applied to 5% of all the stocks in the Zacks Rank universe:

Biglari Holdings Inc (BH) announced second -quarter profit of $3.39 per share on May 18 which came behind the Zacks Consensus Estimate by $1.74. However, the diluted earnings per share fell by 17.32 on a year-over-year basis. The Zacks Consensus Estimate for the current year slipped $3.7 per share to $23.41 in the last 60 days. Next year’s estimate also dipped $2.43 per share to $26.57 per share in that time span.

Systemax Inc. (SYX) posted a first -quarter profit of 22 cents per share on May 8, which came in 16 cents wider than the average forecast. The Zacks Consensus Estimate for 2012 fell to a profit of $1.28 per share from $1.35 over the past month with 1 out of 2 covering analysts slashing forecasts. Next year’s forecasts slipped 16 cents to $1.72 per share in the same time span.

Here is a synopsis of why DPS and LEG have a Zacks Rank of 4 (Sell) and should also most likely be sold or avoided for the next one to three months. Note that a #4 Sell rating is applied to 15% of all the stocks ranked by Zacks;

Dr Pepper Snapple Group Inc. (DPS) first-quarter profit of 46 cents per share, posted on April 25, lagged analysts projections by nearly 4.17%.For 2012, the Zacks Consensus Estimate moved down 1 cent in the last 30 days as 1 of the 12 covering analysts cut back on forecasts. The forecast for next year slid 1 cent to $3.18 per share in the same time span.

Leggett & Platt, Inc. (LEG) reported a first-quarter profit of 30 cents per share on April 26, that fell 6.52% short of the Zacks Consensus Estimate. The full-year average forecast is currently pegged at $1.31 per share, compared with the projection of $1.32 in 60 days ago. Next year’s forecast dropped 2 cents per share in the same period.

Click here for more short-selling information and resources.

Friday, July 27, 2012

Financial Markets Fake Out or Shake Out?



Today has been quite a trading session with risk assets rocketing higher after Mario Draghi of the European Central Bank reiterated what has already been stated. The S&P 500 Index (SPX) is posting some nice gains, but price has not taken out the recent ascending trendline illustrated in the daily chart of SPX shown below. Until that ascending trendline is taken out, the bears remain in control of the price action.

S&P 500 Index (SPX) Daily Chart



Today’s rally has certainly served to work off short term oversold conditions. With the first GDP estimate for the 2nd Quarter scheduled for tomorrow things could get interesting. In the meantime, the closing price today is key. My expectation is that we will not see the S&P 500 Index push back above the ascending trendline today. For the price action to flip back bullish, we need a much stronger than expected GDP result tomorrow.

Another key daily chart which helps provide support that the bears remain in control of the price action is the Russell 2000 Index (RUT). The RUT has given back roughly 50% of its entire move and at this point has failed to even regain the 200 period moving average on the daily chart. Price action would need to climb over 20 points to simply backtest the breakdown level illustrated below.

Russell 2000 Index (RUT) Daily Chart



As long as the RUT holds below the key rising trendline, the bulls must be questioned. However, should the S&P 500 Index and the RUT push back above the ascending trendlines on their daily charts I will become much more constructive regarding the short to intermediate time frames for risk assets.

The other key chart of the day can be found no further than the U.S. Dollar Index futures. The U.S. Dollar Index futures absolutely collapsed today and move all the way down to test the 50 period moving average on the daily chart. So far, the short-term rising trendline has offered support along with the 50 period moving average and the Dollar has bounced sharply higher.

U.S. Dollar Index Futures Daily Chart



As long as price holds above the short-term rising trendline, the Dollar will be able to continue to push higher from this level. Should a breakdown occur we have even more support below around the $81 price level. After a move this strong, it could take days and maybe even weeks for the Dollar to regain its footing. However, the forthcoming Federal Reserve announcement next week will likely seal the Dollar’s fate.

Gold and silver futures are both trading nicely higher on the session in light of the weaker Dollar. However, both precious metals have faded later today as the Dollar started to drift back to the upside. Gold and silver are trying to breakout, but we need to see some continuation before I intend to get involved.

Gold Futures Daily Chart



Sometimes weak breakouts in price action can lead to ugly reversals. I’m not suggesting that a failed breakout will occur in gold and silver futures, but I remain cautious as the breakout so far does not have me totally convinced. Volume in silver is not spiking like it should be and gold volume is also weak considering the possibility that major breakouts are taking place. Another element that is simply not confirming with strong price action or volume is the gold miners. On a day like today, all that they can muster is a relatively small gain on super light volume. Caution is warranted!

Oil futures are also not shooting considerably higher even though the Dollar remains under pressure. To me, today seems like it could be a misdirection day based on the price action and lack of volume we are seeing to the upside in hard assets like gold, silver, and oil. In addition, volume in the major equity indices and futures is super light. For now, I am going to remain cautious and will likely look to avoid taking on any major risk until the dust settles on the GDP number and the Fed’s future decision. Sometimes sitting in cash is not so bad afterall! Simple ONE Trade Per Week Trading Strategy?

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Thursday, July 26, 2012

Monthly Long-Term Stock Market Forecast



As mentioned last Friday just before things took a dive on the weekend, a look at the major market indices did not look promising. If we take an even longer term look and examine the monthly charts we can see that The S&P 500 as well as the Dow Jones have been approaching multi-decade rising channel resistance lines. Further, they also appear to be forming bearish rising wedge patterns.

Monthly Long Term Chart Analysis & Thoughts:



As many of my longer term subscribers can attest to, I always preach that technical analysis is one part art and one part science: you can never be completely certain on what the outcome of a pattern is going to be. However, we can use historical analysis to make better investments. The great American Novelist Mark Twain probably said it best in that “history does not repeat itself, but it rhymes”. Regarding a rising wedge pattern, we know that roughly two-thirds of the time they will break to the downside. This also means that one-third of the time they break to the upside.

In accomplishing our goal of capital growth we must do a number of things. We must make returns on our investments, we must protect our investments, and we must limit our losses. While all three aspects work in tandem with each other, there are times when focus must be allocated to one specific approach.

Regarding the current technical setup, I’m not so focused on the 67% chance that these wedges will break to the downside, but more so the impact of each outcome on the average Joe’s portfolio and mom and pop businesses. The S&P 500 and the Dow are approaching long term resistance lines that have been in place for decades. If we do break to the downside, which I suspect we will, there could be a very significant sell off with consequences that no one can predict at this point though I mention some things in the chart above. Alternatively, there is significant overhead resistance in the various indices, and I don’t believe an upside break would be too monumental.

That being said, I always like to keep an open outlook and wait for the right opportunity. I’m trying to think of scenarios that would prelude further upside action and I really am not coming up with much. As evidenced by the completion of the recent 5 wave uptrend on the S&P that coincided nicely with the various quantitative easing policies, Ben Bernanke and the fed have had less and less impact. I truly can’t see many fiscal developments that would prompt any significant bullish action.

The only scenario I really think that could pump up equities is a series of positive earnings announcements. A lot of expectations, earnings numbers, guidance, etc… have been revised downwards over the last couple of quarters, so there is the opportunity for some positive surprises that could lead to some bullish price action. In absence of such a scenario, I really can’t think of much else that would prompt a run up.

Look at these charts of positive and negative earnings surprises and the dates and remember what happened following this negative data….

Positive Earnings Surprise



Negative Earnings Surprise



That being said, I am recommending two courses of action. For those steadfast bulls, lock in some profits and/or buy some protection. Missing out on some of the upside is a lot better than losing some of the gains you have fought so hard for over the past couple of years. For the more aggressive traders and investors, start following my updates a little more regularly as I foresee many shorting opportunities coming up in the future. As many of you know, sell-offs are often quick and abrupt, and timing is extremely important when playing the downside.

Further, trading could get very volatile in the near future. Historically, and even more so looking forward as August and September have been very costly for the average investor. Our focus will be in taking the highest probability trades that offer the best risk to reward scenarios. There will be times when we miss trades, and times when they’re not timed perfectly. But, as those who have been with me for a while can attest to, patience pays off in the long run.

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Wednesday, July 25, 2012

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Tuesday, July 24, 2012

Stocks Commodities Forecast is Looking Bleak



This week could be a huge one for stocks and commodities. This morning the dollar index is taking another run at our weekly chart resistance level. If it can break out and start to rally this week then a possible 4-6 week sell off in stocks and commodities may be just starting.

Watch the morning video or at least the last 4 minutes where I cover the SP500 intraday and daily chart which shows the main cycles and what we should be expecting within the coming days and weeks.



Pre- Market Analysis Points:

Dollar index is making new highs this morning and if it can hold up into the close today then I would expect it to keep running higher for a few weeks.

Oils has pulled back 5% from its high last Thursday and is now testing support and starting to bounce.

Natural gas is holding up well after Friday’s strong rally to new highs. It may be forming a bearish pattern with the three sharp surges to new highs pattern which I explain in the video.

Gold and silver trader trading down 1+% and are likely to find a little support today as they test support levels. They are at risk of a major breakdown but currently they are still holding up.

Bonds are reaching new highs this morning but looking ready for a 1-3 day pause. They are a little overbought.

SP500 charts have been the most interesting the past couple months which is why I keep focusing on it.

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Monday, July 23, 2012

Short Selling this Independent Energy Company



No new buy long stock picks this week, but only a short sell on Noble Energy. This week I highly suggest standing aside on buying into any new long positions, and also suggest lightening up on long positions for the time being.

Major resistance for the SP500 is about 1,388.87 right now. We could see a trading range on the SP500 between 1,388.87 and 1,344.50 for the next month or two and with the current global economy the way it is right now we could possible see a downside break of 1,344.50 and if so, we could be seeing some significant downside price moves that could last for some time and possibly wipeout a lot of equity.

I recommend extreme caution on going long at this time, and suggest selling stocks short. If Fed Chief Ben Bernanke keeps buying assets with his quantitative easing program then stocks could continue to grind higher but the risk reward on buying into quantitative easing is not favorable right now in our opinion. If you don't want to sell short and still want to try making money this week we suggest trading the forex, gold and oil markets and stay away from buying stocks or sell them short for now.

Zacks Investment Research reports that oil and natural gas exploration company Noble Energy Inc. (NBL) inked an agreement for sale with Unit Petroleum Company, a wholly owned subsidiary of Tulsa, Oklahoma based Unit Corporation (UNT). Per the agreement, Noble Energy will divest its non-core oil and natural gas assets in western Oklahoma and Texas Panhandle for an amount of $617 million. The agreement is expected to close in September 2012.

As per the deal, Unit Corporation will own 900 oil and gas producing wells on roughly 84,000 acres in the Granite Wash and Marmaton fields of western Oklahoma and Texas Panhandle. As of the effective date, net production was 60 million cubic feet equivalent per day with net proved reserves of approximately 250 billion cubic feet equivalent.

Output mix consists of 65% natural gas, 27% natural gas liquids, and 8% crude oil. Unit Corporation plans to finance the acquisition through issue of long term debt.

This divestiture was part of Noble’s previously announced strategic plan to divert capital and human resources to high value areas. The funds will increase its financial flexibility to execute international programs and enhance its horizontal crude oil operations in the DJ Basin in Colorado and Wyoming.

Noble Energy has been involved in high profile agreements which will aid in improving its topline position. The company in the first quarter of 2012 entered into a 15 year agreement with Israel Electric Corporation Limited (IEC) for sale of 2.7 trillion cubic feet of natural gas, which is expected to significantly augment Noble’s earnings prospects. Noble’s market share will likely be strengthened on the basis of this sales. This is slated to render its portfolio attractive to investors.

The company anticipates second quarter 2012 average sales volume to be around 224–232 thousand barrels of oil equivalent per day (MBoe/d), while it retains its 2012 guidance at 244–256 MBoe/d. The company expects natural gas and liquid production in the second quarter to be affected by a planned maintenance outage at the Alba facilities in Equatorial Guinea.

The Zacks Consensus Estimates for the second quarter and full year of 2012 is currently estimated at $1.21 per share and $5.93 per share respectively.

Noble Energy’s closest competitor is Anadarko Petroleum Corporation (APC). Anadarko has joined forces with an undisclosed party to develop Lucius oil and natural gas field in its deepwater Gulf of Mexico operations. The company sold 7.2% working interest of its Lucius play and in return received $556 million, which will allow the company to fund the development cost till the first phase of production.

Based in Houston Texas, Noble Energy is an independent oil and gas exploration and production (E&P) company, having high-grade hydrocarbon assets across the U.S. and several international locations. The company holds a Zacks #4 Rank (short-term Sell).

Sell Short Noble Energy - Ticker NBL

Sell Entry: 88.83 to 94.46

Stop-Loss: 98.97

Take Profit Areas: 76.12 to 75.32, 70.65 to 69.85, 59.18 to 58.52

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Click the Noble Energy Stock Chart Below for a Larger View



Friday, July 20, 2012

Investor Hope and Investor Fear



Collective investor psychology: an insight from the long forgotten Mr. Gates

Can an investor ever know enough about financial markets to make a truly informed decision?

Even professionals must cope with imperfect knowledge, and the constant uncertainty that comes with it. That's why every investor looks to others for signals about what to do.

Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do.

Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions. The Elliott Wave Theorist, May 2009

Around the turn of the last century, Elmer Gates also observed how people take cues from others. He once ran the largest private non-commercial laboratory in the United States and obtained more invention patents than Thomas Edison. Remarkably, he worked on his inventions only during his spare time. His regular working hours were devoted to the study of the mind. Gates noted:

A companion, helper, associate, co-worker, influences one's mental functioning by every gesture, tone, look, suggestion, opinion, approval or disapproval, argument, and mood. Minds interact consciously and subconsciously especially during quiescence, dirigation, introspection, and awareness; by their congeniality, presence and other ways. Elmer Gates and the Art of Mind-Using (p. 246)

Investors take their cues from others then rationally justify their buy or sell decisions

Most market observers believe that investors respond logically to the latest news and buy or sell based on objective valuations.

Nothing could be further from the truth.

If investor behavior was rational, price charts would be linear and without sharp rises or declines. But that is not the case. The market's price charts do show sharp price rises and steep declines, often when the market's fundamentals offer no explanation to justify such a move. In a word, those near-vertical price moves are irrational. They're not driven by logic, but by hope or fear.

People have no idea where prices are going, so to satisfy the reasoning portions of their brains, they make up reasons to justify their buying and selling actions . . . Investors are not reasoning but unconsciously herding, and unconscious processes aren't random; they proceed according to mental constructs. That's why financial markets display patterns such as persistent trends, head and shoulders formations, trend channels, Elliott waves, and so on. [emphasis added]. The Elliott Wave Theorist, January 2008

These price patterns occur at all degrees of trend. That means collective investor psychology is evident in 5-minute, hourly, daily, weekly, monthly, quarterly and yearly charts.

Investor hope is even on display during major market downtrends

Notice how the Dow Industrials rebounded after the 1929 crash but before the worst part of the price decline of 1930-32 (see wave b in the chart below



In the chart, you'll notice that bursts of "hope" even occurred several times during the worst part of the decline itself. Memories of the Roaring 'Twenties bull market still lingered.

More recently, investor hope lasted over three years after U.S. markets bottomed in March 2009.

Today's market is a full degree of trend larger than even 1929-1932

After the market declined in May and the start of June, yet another burst of hope started on June 4. But brace yourself.

Get ready for a psychological change that will be reflected in the price patterns of U.S. markets

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Thursday, July 19, 2012

Survey Finds 15 Bank Accounts Per Household



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Tuesday, July 17, 2012

The Most Profitable Commodities Over the Centuries



When Nothing Seems To Work . . .

And When Forex Feels As If It's Gambling . . .

Look back to what is PROVEN over the centuries.

Gold, Silver and Oil

How can you profit from these commodities?

Buy a Gold bar? An Oil barrel? And wait for 10 years for the price to grow?

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Monday, July 16, 2012

Delivering Freight On Time with Strong Earnings



This week I've got a low-risk high-reward short-sell stock pick on United Parcel Service. Bernanke is talking on Tuesday and if he says ok for more quantitative easing then then this downside trade may not work out and equities may continue higher so use stop-loss in case you take a position today. I suggest waiting until Tuesdaay after Bernanke's speech to Congress to take new positions.

The Markets This Week

The markets this week will be looking at European debt crisis as last week. Spain is looking to collect 30 billions euros from the European Central bank now. Spanish 10 year bond yields will be under the microscope eyeing the very important 7% area. Spain is holding more bond auctions on Tuesday and Thursday of this week so be ready for that. More important Euro events this week are the European Stability Mechanism (ESM), and the Eurozone's rescue fund issues. Eurozone CPI is due today Monday, the German ZEW July Survey on Tuesday, and the European Central Bank is meeting on Thursday. US June Retail Sales and Fed Chief Bernanke is addressing Congress on Tuesday. The markets are looking to Bernanke for the ever so critical news of continued quantitative easing or not. With China's GDP slowing to 7.6% now, the markets are wondering if they will be doing quantitative easing of their own to prop up their equity markets. US Corporate earnings reporting season is now on with the markets also focused on profit or loss reports, and earnings guidance going forward.

This Weeks Stock Pick

Zacks Investment Research recently reported eading package delivery company United Parcel Service, Inc. (UPS) has increased its freight rate by 5.9% on non-contractual shipments in the U.S., Canada and Mexico. The increase is effective July 16, 2012.

The company offers a variety of less-than-truckload (LTL) and truckload (:TL) services to customers through its Freight segment, which remains a significant source of revenue with approximately 20% contribution in total revenue as of the first quarter 2012

UPS remains well positioned to benefit from firming industrial fundamentals and the LTL industry pricing discipline despite the prevailing economic volatility in the global market. The current price hike should support UPS' long-term goal of robust revenue and margin expansion plus earnings improvement.

Continued focus on pricing improvement signifies UPS' initiative to better its revenue and margins along with earnings improvement over the next several years. Earlier, UPS hiked its general rate by 4.9% for ground packages, air express and the U.S. origin international shipments, effective January 2012.

Apart from the routine rate hikes, UPS has a series of initiatives underway that is expected to deliver industry leading margin and earnings growth over the long term. Key among these is renewed focus on yield improvement in the U.S. Domestic Package division.

Other drivers include increased export volumes, operating leverage benefits and capacity expansion plans. Further, the company continues to expand its footprint in emerging markets such as health care, which could be a larger contributor to growth in the future. The business wins are expected to expand the distribution reach further to Asian and Latin American markets as well as emerging countries like China and Brazil.

We believe the growth initiatives will aid the company to deal with near-term headwinds such as rising fuel prices, substantial capital investment and high labor unionization. These would give UPS a competitive advantage over its peers like FedEx Corporation (FDX).

We are currently maintaining our long-term Neutral recommendation on UPS.

UPS retains a Zacks #4 Rank (Sell) for the short term (1–3 months).

Invest2Success Short-Sell on UPS - Ticker UPS

Sell Entry: 82.16 to 79.14

Stop-Loss: 88.73

Take Profit Areas: 72.57 to 71.68, 70.68 to 69.88, 64.91 to 64.06, 53.44 to 52.77

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Click the UPS stock chart below for a larger view.



Friday, July 13, 2012

What the GLD ETF is Indicating About Gold



Gold had remained in a rough 1550-1640 range for several weeks now. Tonight, we look at the GLD ETF, which represents the Gold spot price movements. Over the past 5 months we can see in the chart below the clear downtrend lines.

Recently, in the past 6 weeks we have seen a series of 3 higher lows including today where a lower gap filled in and then Gold reversed upwards.

What Gold needs to do, in terms of this GLD ETF is clear the 158 hurdle on a closing basis to set up a stage for a new advance. I would expect in the intervening months to October for Gold to continuing meandering and correcting to as low as 1445-1455, my longstanding Gold worst case low targets I’ve had since last September.

Near term key levels are 150 on the downside and 158 on the upside. If we close below 150 on GLD ETF then we should be looking for my 1445-1455 areas to be hit this summer before a low. If we clear 158 on the GLD ETF, then the triple bottom at 1520 is likely confirmed and we can start tracking some upside for Gold.





Click here to review more gold information and resources.

Thursday, July 12, 2012

Gold Cycles Price Forecast



Gold Cycles Will Soon Forecast Where Prices Are Headed by the Gold and Oil Guy

Gold and stock market forecasters have been using cycles in price that repeat every certain amount of trading days to help them spot key reversal areas in the financial market. Almost everything in life seems to go in cycles and commodity prices and the stock market are no different.

As we all know the market is very difficult to forecast when using only one set of analysis like cycles. Analyzing price action, volume, market sentiment, market breadth, trends and inter-market analysis are the other key areas which one must understand before they can be in the zone (ZEN) with the financial market and properly forecast future prices.

This report will show you just how well cycles work if applied and traded properly.

How to Buy Dips and Sell Rips in Gold Using Cycle Analysis

The chart below is of gold and shows its short term trading cycles. I will admit this chart is hard on the eyes and as ugly as they get to bear with me.

Three different cycles have been applied to the chart using a short, intermediate and long term cycle wave length. The general idea here is that you want to trade with the underlying trend, then use these short term cycles to profit from weekly price swings.

Gold has been in a down trend for a year so the focus should be on shorting the bounces. Focusing on selling short gold during a time with 2 or more cycles are topping as you stand a great chance of the price moving in your favor within 1-3 days.

Once the price starts to move in your favor you want to scalp to profits once the short term (green) cycle drops near a reversal level. Once this takes place I always tighten my stops to breakeven, lock in some profits and continue to wait for another cycle to reach the bottom at which point I take more profit off the table and tighten my protective stop once again.

As you can see this is not the perfect system but it makes money, and if you apply more analysis to the market you can lock in more of these moves using intraday charts, volume, and sentiment levels.



How to Find Market Cycles

You must have an analysis tool that can read the market and find cycles within it. Once you know how many days the most frequent cycles are occurring you can then use a custom cycle indicator to overlay them on the charts as seen in the gold chart above. The visual overlay is the key to spotting market reversals and areas to add to a position or trim profits. Look at the chart below for a visual of how I find my cycles.



Gold Cycle Forecast Conclusion:

In short, gold overall remains in a down trend. But from looking at the gold chart and its short term cycles I have a feeling we will be seeing price trade sideways this week and a bounce next week.

The next week will be very interesting as these cycles will actually give us an early warning if the overall gold market is about to bounce or sell off. The question is what the cycles do in the next few days while gold flirts with support…

It does take some time/experience to read the cycles and get a feel for how they move so don’t worry about it if you don’t fully grasp the idea from this short article.

Click here to review more Gold trading information and resources.

Wednesday, July 11, 2012

Today's Oil Gold and Silver Forecast Outlook



Today's Oil Gold and Silver Forecast for Intraday Trading

August Crude Oil closed lower due to profit taking on Tuesday as it consolidates some of the rally off June's low. The low-range close sets the stage for a steady to lower opening when Wednesday's night session begins. Stochastics and the RSI are turning bearish hinting that a short-term top might be in or is near. Closes below the 20-day moving average crossing at 82.84 would temper the near-term friendly outlook. If August renews the rally off June's low, the 38% retracement level of this year's decline crossing at 90.43 is the next upside target. First resistance is last Thursday's high crossing at 88.98. Second resistance is the 38% retracement level of this year's decline crossing at 90.43. First support is the 20-day moving average crossing at 82.84. Second support is June's low crossing at 77.28.

August Gold closed lower on Tuesday as it extended the decline off last week's high. The low-range close sets the stage for a steady to lower opening when Wednesday's night session begins trading. Stochastics and the RSI have turned bearish signaling that sideways to lower prices are possible near-term. If August renews the decline off June's high, May's low crossing at 1529.30 is the next downside target. If August renews the rally off June's low, June's high crossing at 1642.40 is the next upside target. First resistance is June's high crossing at 1642.40. Second resistance is reaction high crossing at 1674.30. First support is June's low crossing at 1547.60. Second support is May's low crossing at 1529.30.

September Silver closed lower on Tuesday as it extended the decline off last week's high. The low-range close set the stage for a steady to lower opening when Wednesday's night session begins trading. Stochastics and the RSI are bearish signaling that sideways to lower prices are possible near-term. If September renews this year's decline, weekly support crossing at 24.689 is the next downside target. If September renews the rally off June's low, June's high crossing at 29.915 is the next upside target. First resistance is the reaction high crossing at 29.135. Second resistance is June's high crossing at 29.915. First support is June's low crossing at 26.105. Second support is weekly support crossing at 24.689.

Forecasts By Ino.com

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Tuesday, July 10, 2012

Profitable Auto Trading Gold Silver and Oil



Review below today's commodities intraday gold forecast outlook. With the Commodity Code Metatrader Expert Advisor and a Metatrader forex account you can auto-trade the gold, silver, and oil markets with their very high liquidity and daily market moving news and events.

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July 10, 2012 - GOLD Intraday Technical Analysis

By Instaforex




Gold is presently testing the intermediate resistance of its medium term bearish channel at 1 594 and looks like making a decline. Nevertheless, a puncture of these levels will provide potential and the pair will be able to reach the upper limit of this one to 1 620.

Technical indicators provide sell-signals and until the resistance is not broken the assumption of a decline is most likely. Bollinger bands are much discarded as a result of a strong decline these days. Stabilization is expected in a short term.

According to previous events the market will provide a bullish opportunity as soon as gold has broken through its resistance of 1 594 with the 1st objective at 1 605 and then at 1 610. A break through 1 591 will invalidate this scenario.

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Monday, July 09, 2012

The Next Major Markets Move



No low-risk high-reward buy or sell stock pick this week. Instead I've got a board market forecast outlook on the SP500, the US Dollar Index, and Gold.

The term Stock market predictions is a very controversial topic and does seem to give off a negative/non-credible overtone to most traders, investors and the general public. We all know you cannot predict the market with 100% certainty, but knowing that you can still predict the market more times than not if done correctly. Keep in mind that the term “market prediction” is also known as a market forecast or technical analysis outlook and is nothing more than a estimated guess of where the price for a specific investment is likely to move in the coming minutes, hours, days, weeks and even months.

Getting back on topic, this report clearly shows how the US dollar plays a dominant role in the price of other investments. Understanding how to read the Dollar Index will make you a better trader all around when trading stocks, ETF’s, options or futures.

SP500 Stock Market predictions – 10 Minute Chart:

These charts clearly show the inverse relationship between the stock market and the dollar index. Knowing how to read charts (candle sticks, chart patterns, volume etc…) is not enough to give you a winning edge. You must also understand inter-market analysis as all markets are linked together in some way and the dollar plays a major role in where stock prices will move next. Review the charts and comments below on how I came up with my stock market prediction and trade idea.



Gold Market Prediction – 10 Minute Charts

Gold is another investment which is directly affected by the price of the dollar. Review charts for more details.



Long Term Stock Market Forecast:

The weekly dollar chart is VERY IMPORTANT to watch as a short term trader and long term investor because trend changes in the dollar means you open positions will also likely change direction.

So, if we apply technical analysis to the dollar chart as seen below. You will notice we are able to create a market forecast and predict roughly where price is likely to move and how long it should take to get there. If the dollar can break above the red resistance level then we can expect a rally for 4 – 8 weeks and a price target around the 87-88 level.

If this is the case then stocks and commodities would likely do the inverse price action and move lower, sharply lower…



Stock Market Predictions & Gold Market Forecast Conclusion:

In short, the next weekly candle stick on the dollar chart could be a game changer for those who are long the overall stock market.

I will admit that the current market conditions are not easy to trade because of all the headline news rolling out of Europe each week along with economic data. And I feel as though we have been tip toeing through a mine field for the past 12+ months waiting for extremely negative news are extremely positive news to trigging a wave of buying or selling that will make our jaw drop, but it has yet to happen. Remember always use stops and don’t get over committed in a headline driven market.

Click here to review more Market Trend Forecasts

Monday, July 02, 2012

Metals & Mining Stock Outlook



No new stock picks this week in these current economic and market conditions. The comments from some of the EU Summit leaders on Friday created a big fast reversal in the Euro Dollar and global equities around the world. This looks more like an oversold dead cat bounce rather some real substance that's going to actually happen after the Summit.

I'm looking for stock equities heading lower again after they hit and test major support areas in the DJIA of 13,059.00, the SP500 of 1,388.87 and the Nasdaq of 3,046.08 which they are pretty close to right now. If Bernanke comes in with the rest of the US Fed and they go for more quantitative easing then maybe stocks will keep grinding higher, so be aware of that possibility.

For now I suggest trading the forex gold silver and oil markets for their high liquidity and market moving news and events. Gold and Silver are working out a bottoming process in my opinion getting ready and setup for long-term buys again. Stay tuned to our Daily Gold Silver Copper Forecast Outlook for the potential upside reversal.

Metals & Mining Stock Outlook

The Metals & Mining industry encompasses the extraction (mining) as well as primary and secondary processing of metals and minerals. These include aluminum and gold, other precious metals, coal and steel. The industry is oligarchic in structure, with a few producers accounting for a lion’s share of the output.

Iron and steel commands the largest segment of the global metals market. They comprise more than half the metals industry in terms of volume, followed by aluminum. The iron and steel industry includes metal ore exploration and mining services, as well as iron and steel foundries for smelting, rolling, forging, spinning, recycling, stamping, polishing and plating of iron and steel products. These include pipe and tube, wire and spring, rolls and bars.

The precious metal and minerals industry consists of companies engaged in the extraction and primary processing of gold, silver, platinum, diamond, semi-precious stones, uranium and other rare minerals and ores, along with the cultivation of pearls.

The global metal industry is highly cyclical and competitive. Historically it has suffered from overcapacity (excess of supply over demand). Metal producers are subject to cyclical fluctuations in prices, general economic conditions and end-user markets. The recent focus on the weakening outlook for global economic growth has emerged as a major headwind for the global metal industry. These near-term challenges aside, the group’s long-term dynamics appear attractive.

A Detailed Look into Metals: Performance and Outlook

Steel

As the major stakeholder (about 60%) of the metals market, the steel industry was severely bruised by the global economic downturn. Recovery, however, has been swift and forceful. According to the World Steel Association, world crude steel production reached a record level of 1,527 million tons (Mt) in 2011, outperforming the 2010 record of 1,414 Mt, a 6.8% jump. This trend has largely remained in place this year, though the emerging growth worries will likely force some producers to take production off-line.

China remains the largest steel-producing country, accounting for roughly half of all global production at 46%, though its first quarter 2012 volumes were barely up from the year-earlier level. Japan, the second largest producer, posted a 4.1% decline. The U.S. is in the third position, though its first quarter production was 9.2% higher year over year. North American crude steel production was up 7.7% in the first quarter, Asia was flat, while Europe dipped 3.8%. In April 2012, world crude steel production was down 3% from March, but up 1% from the April 2011 levels.

As we look into the first quarter results of the steel companies in our coverage -- ArcelorMittal (MT), United States Steel Corp. (X), Nucor Corporation (NUE) and AK Steel Holding Corporation (AKS) -- we find revenues benefitted from higher average steel prices. On the volume front, ArcelorMittal and U.S. Steel saw a rise, while Nucor and AK Steel suffered declines. Revenues increased at all the companies except AK Steel. However, we note margin compression across the board.

The automotive and construction markets have historically been the largest consumers of steel. The automotive sector has shown significant promise. In February 2012, total motor vehicle sales reached their highest level since February 2008 at 15.1 million SAAR (Seasonally Adjusted Annual Rate). For the first five months of 2012, sales have averaged 14.4 million SAAR. Many auto manufacturers made their best Memorial Day sales in over five years. Motor vehicle sales were at 13.8 million in May, declining from 14.4 million in April. Even though sales slid to the lowest level so far in 2012, it is still better than consensus expectations from the beginning of the year. On a year-over-year basis, sales increased 26% in May.

The construction sector has been a drag on steel companies’ earnings. According to the American Institute of Architects, the architecture billings index, an economic indicator that provides an approximately nine- to twelve-month glimpse into the future of non-residential construction spending activity, was 48.4 in April 2012. This followed a 50.4 reading in March, and of significance since any score above 50 indicates an increase in billings. After remaining at a level over 50 for five consecutive months, the index has slipped into negative territory. Given the continued uncertainty in the market, we do not expect any immediate recovery in this sector.

The residential construction market has improved in recent months, but the pace of improvement has been very slow and halting. This means that this end market is unlikely to emerge as a key growth driver for steel producers any time soon.

The World Steel Association projects global steel usage to rise 3.6% in 2012, a sharp deceleration from 2011’s 5.6% growth. This reflects continuing slowdown of Chinese steel demand and Eurozone debt crisis uncertainties. Questions about the U.S. growth outlook make another cloud on the horizon.

China’s steel use in 2012 is estimated to grow 4% to 648.8 million tons, following 6.2% growth in 2011. The slackening is due to the economy entering a less steel-intensive growth phase as a result of the government’s efforts to rebalance the economy and restrain the real estate bubble. After a weak performance in 2011, India is expected to grow by 6.9% to reach 72.5 Mt.

Apparent steel use in the U.S. is forecast to grow 5.7% in 2012. In Central and South America, apparent steel use will attain a historical high of 49.1 Mt, up 6.8% in 2012. Brazil is expected to return to positive growth. Japan’s steel use is expected to drop 0.6% to 63.7 Mt in 2012 due to the impact of exchange rate appreciation, despite the reconstruction efforts following the March 2011 earthquake.

Steel usage in the European Union is expected to decline by 1.2% to 150.9 Mt in 2012 as sovereign debt problems persist. Given the scenario in Europe, ArcelorMittal, the world's largest steelmaker by volume and Europe's largest steelmaker, had earlier decided to idle five of its 25 blast furnaces in Europe and announced the extended idling of a number of facilities. The company will continue to align its steel growth projects to match demand situations.

Furthermore, the company’s focus on its mining business given its more attractive returns has resulted in some planned steel investments being deferred. To reduce its exposure to Europe, the company recently sold its 24% share in European energy company Enovos International.

To sum it up, despite relatively over-supplied conditions and softening prices, the outlook for the sector is not that bad. Prices could potentially stabilize, as visibility on the economic growth questions of countries like China, India and South Korea improves. The outlook for key end-markets in the automotive, transportation, energy, industrial and agricultural sectors remains favorable. However, the European debt crisis and its potential global impact remain an overhang on the industry.

Gold

As per the World Gold Council, last year was a milestone year for gold as global demand for the yellow metal grew 0.4% to 4,067.1 tons at an estimated value of $205.5 billion -- the highest tonnage level with a value exceeding $200 billion since 1997. The increase was mainly propelled by the investment sector, particularly in India, China and Europe.

In the first quarter of fiscal 2012, gold demand was at 1097.6 tons, a 5% year over year decline. Increase in investment demand was offset by declines in demand for jewelry and in the technology sectors, due to higher prices. Central banks continued to be purchasers of gold, accounting for around 7% of total gold demand, at 80.8 tons.

However, in absolute terms, gold demand in the quarter was valued at $59.7 billion, a 16% jump compared with the first quarter of fiscal 2011. Average gold price in the first quarter stood at $1,690.57. This was 22% above the prior fiscal’s quarter. In value terms, all the sectors of gold demand posted growth, barring physical bars and the official sector.

Investment demand posted robust growth in the quarter, particularly led by ETFs and similar products. Gold demand in the technology sector was at 107.7 tons, a 7% decline year-over-year due to higher gold prices, weak consumer demand, higher inventories and the uncertainty in Europe.

Jewelry demand dipped 6% to 519.8 tons due to higher price levels. The 22% higher quarterly average price suggests that jewelry demand is not directly related to price. Value of jewelry demand grew 14% to a record $28.3 billion. China, Russia and Egypt recorded growth, while weakness was witnessed in India, a number of Middle Eastern markets and in Europe.

Jewelry demand in India, otherwise a major consumer of gold, was down 19% and investment demand declined 46%. This was mainly due to a sharp decline in the rupee, which led to higher local prices, rise in import taxes on gold and imposition of excise duty on jewelry in that country. However the excise duty was later withdrawn by the government. Gold in India is currently at an all-time high in rupee terms.

In China, demand for gold increased 10% to a record high of 255.5 tons. China remained the largest jewelry market for the third consecutive quarter. Boosted by the local New Year holiday earlier this year, jewelry demand was at 156.6 tons, up 8% year over year, and accounting for 30% of global jewelry demand. Even though the pace of growth is slowing, gold demand remains high due to rising income levels, urbanization, economic growth and inflation.

Mine production increased to 673.8 tons, up 3% year over year. The additional supply came from new projects coming on stream and the continued ramping up of projects that entered into production two to three years ago across the globe. Recycling activity increased 11% to 391.5 tons, bringing the total supply to 1,070.3 tons, up 5% year over year.

Gold prices in 2011 ranged from a low of $1,310 per ounce to a high of $1,895 per ounce, with an average gold price of $1,572 per ounce in 2011. The record gold price of $1,895 per ounce was attained in September, 33% higher than the 2010 peak of $1,421 per ounce recorded in November 2010. So far in 2012, gold has ranged from $1,540 per ounce to $1,781 per ounce, with an average of $1,657 per ounce. Continuing concerns about Europe's financial problems and China’s reduced economic growth forecast led to the climb. Given the performance in 2011, and thus far in 2012, we expect this year to be stellar for gold.

It also remains a coveted asset, given its long-term supply and demand dynamics and influenced by macro-economic factors. Concerns regarding economic growth in developed countries have made gold an attractive and safe investment option. The European sovereign debt crisis promoted gold as a currency hedge for European investors. Lingering economic concerns, higher inflation expectations in many countries, including India and China, the relentless Euro-zone debt crisis and a still-high American unemployment rate will continue to support gold prices this year, as well.

The value and wealth preservation attributes of gold continue to attract investors and consumers, and is considered a safe-haven investment. Jewelry and investment demand in non-western markets continue to rebound, while industrial demand has started to recover in response to an improvement in economic conditions. India, which alone consumes nearly 45%−50% of the world’s gold, should drive demand for gold along with China. China will likely emerge as the largest gold market in the world in 2012 and Chinese gold demand is expected to double in 10 years.

Analyzing the results of the gold companies in our coverage -- Barrick Gold Corporation (ABX), Kinross Gold Corporation (KGC), Goldcorp Inc. (GG) and Agnico-Eagle Mines Ltd. (AEM) -- we find that first-quarter profits were driven by higher average realized gold prices. As prices for gold rise further, gold giants such as these will benefit. On the other hand, gold producers like Newmont Mining Corp. (NEM) and Kinross are slated to suffer from lower ore grades that subdue production levels, increase mining costs and negate the benefits of rising gold prices.

Ironically, rallying gold prices have not had the same effect on the share prices of the gold companies. This is reflected in our overall long-term Neutral view on the space. Investors prefer alternative financial products that allow them to invest in gold, rather than investment in gold companies per se. These companies may have labor issues, escalating cost and other risks.

Aluminum

The aluminum industry is highly cyclical, with prices subject to worldwide supply and demand.

In the first quarter of fiscal 2012, Alcoa, Inc. (AA), the world leader in the production of primary aluminum, reported better-than-expected results on the back of growth in the aerospace and automobile sectors.

The company anticipates that global aluminum demand will go up by 7% this year. It also expects that burgeoning demand for aluminum along with market-related production cutbacks will lead to a global aluminum industry deficit of 600,000 metric tons in 2012. Region-wise, in 2012, China and India are expected to lead with double-digit growth. Russia and Brazil are projected to have 4% to 5% increases in aluminum consumption rates. Overall, Alcoa believes that the long-term prospects for aluminum remain bright and envisions that global demand for aluminum will double by 2020.

Alcoa’s positive outlook notwithstanding, prices have been under pressure, prompting companies to cut back on production. Rio Tinto (RIO) plans to sell its aluminium assets and close its smelter in order to cut costs. Alcoa plans to close or curtail 390,000 metric tons, or approximately 12% of its global smelting capacity, in 2012. This will lower the company’s cost position by 10 percentage points in smelting and 7 percentage points in refining, by 2015 and improve its competitiveness.

This trend will continue until aluminum prices recover. Energy prices and other input costs are expected to pose challenges for the aluminum industry, though oil prices have been trending down lately. In addition to the curtailments, the company will step up action to reduce the escalating cost of raw materials.

In the medium to long term, aluminum consumption is expected to improve globally. The revival is palpable in the automotive and packaging industries, one of the key consumer markets.

The automobile market is also becoming increasingly aluminum-intensive, benefiting from the recyclability and its light-weight properties. The global push to improve fuel efficiency in vehicles is expected to more than double demand for aluminum in the auto industry by 2025.

Further, the surge in copper prices this year is triggering a switch among manufacturers to aluminum. Automobiles, air conditioners and industrial components manufacturers are now shifting their focus on the more economical metal. In response to the spurt in automotive demand, Alcoa has invested $300 million in expansion projects at its Davenport, Iowa rolled products plant.

We expect aluminum demand to increase over the next three years, outstripping supply growth. As a result, the aluminum market is likely to witness deficits for a prolonged period. This provides a backdrop supportive of high alumina and aluminum prices. China and India are undergoing rapid industrialization.

Both these factors are positive for underlying aluminum demand. Leading aluminum producers such as Alcoa and Aluminum Corporation of China Limited, or Chalco (ACH) should benefit from the improving demand outlook.

Copper

Copper is a major industrial metal, with its price strongly correlated with the outlook for economic growth. The metal’s strong cyclical leverage accounts for its nickname “Dr. Copper.”

The metal’s popularity in industrial usage reflects its high ductility, malleability and thermal and electrical conductivity, and its resistance to corrosion. In terms of consumption, copper ranks third after iron and aluminum. Construction is the single largest market for copper, followed by electronics and electronic products, transportation, industrial machinery, and consumer and general products.

Copper prices were at high levels from 2006 through most of 2008 as limited supplies, growing demand from China and other emerging economies resulted in high copper prices and low level of inventories. In December 2008 copper prices dipped to a low of $1.26 per pound, due to reduced consumption, turbulence in the U.S. financial markets and concerns about the global economy.

However, copper prices have since improved, thanks to strong demand from emerging markets and limited supply. During 2011, London Metal Exchange (:LME) spot-copper prices ranged from $3.08 per pound to a record high of $4.60 per pound, with an average of $4.00 per pound. In the first quarter of 2012, LME spot copper prices ranged from $3.39 per pound to $3.93 per pound, averaging $3.77. This rising trend has benefited copper producers like Freeport-McMoRan Copper & Gold Inc. (FCX) and Southern Copper Corp. (SCCO).

Notwithstanding the volatility in prices, we have a long-term bullish stance on copper prices. Prices will be influenced by demand from China, economic activity in the U.S. and other industrialized countries, the timing of new supplies of copper and production levels of mines and copper smelters.

Despite near-term challenges, the outlook for the copper remains positive, supported by widespread use of copper, limited supplies from existing mines and the absence of significant new development projects. Companies that have a high leverage to copper prices will benefit immensely from the potential demand for the metal in the developing markets.

Overall Industry Outlook

Growth in the emerging markets, particularly China and India, was a major driver of metals demand over the last few years. In the developed world, Europe’s problems have likely pushed it into a recession already, which will have residual effects elsewhere in the world. The U.S. economy, which looked very promising earlier this year, no longer offers a robust picture.

This synchronized global economic slowdown is the biggest headwind for the metals space overall at present. That said, the long-term picture remains a lot more promising as the emerging market economies are expected to get back in shape with the help of expected fiscal and monetary stimuli.

The U.S. Federal Reserve also appears to be actively engaged in sustaining the economy’s momentum. But the Fed’s ability to make a meaningful change may be limited in the absence of fiscal measures that are unlikely to come through in this election year.

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