Oil Signals Economic Slowdown; Stocks at Risk

NEW YORK ( TheStreet) -- The Federal Reserve has kept the federal funds rate at zero to 0.25% since mid-December 2008, and they bloated their balance sheet. This monetary policy has failed to give traction to an economy experiencing "moderate" growth.

Federal Reserve policy has allowed Wall Street to speculate in the U.S. capital markets, while the lack of Fed programs to help the housing and mortgage markets has the economy on Main Street in limbo. If the housing sector is not helped, the economy is ripe for further disappointments.

U.S. Treasury yields remain near record lows on the "flight to quality" component, and there's help from the extension of "operation twist" until year-end.

The FOMC has instructed the Open Market Trading Desk to implement about $267 billion in a securities twist again. In addition, the FOMC will continue to reinvest principal payments of maturing agency debt and agency mortgage-backed securities into newer agency mortgage-backed securities. The program to re-invest maturing Treasury holdings into new issues at auction has been suspended. This means that Wall Street will have more new supply to underwrite! This could cause an unintended rise in longer-term yields.

Comex Gold held the $1,525 the Troy ounce base of the popped bubble as I predicted, but getting back above its 200-day simple moving average at $1,672 has been a problem. My guess is that being long gold is a crowded trade in an environment of economic uncertainties. A weekly close below my annual pivot at $1,575.80 provides a downside warning. The risk below $1,525 is to my annual value level at $1,388.40 by year end.

Nymex Crude Oil appears vulnerable for at least a test of its Oct. 4, 2011 low at $74.95 a barrel given a weekly close below my semiannual pivot at $79.83. Weakness in energy prices is a clear sign of global economic weakness.

With crude this low, how can the major equity averages hold the solid gains achieved since their Oct. 4, 2011 lows? Sure Fed policy has provided the liquidity for speculation in the stock market, but now major corporations are beginning to fall like a rock after lowering guidance. The upcoming earnings reports for the second quarter could be problematic given a weak Europe, a slower China, and weaker economic projections at home from the Federal Reserve. A QE3 may not work in this environment.

The euro vs. the dollar has been in a downtrend since the end of August 2011 and stocks normally trade with the direction of the euro. This is another warning against stocks continuing to move higher.

When you analyze the major equity averages, watch how these averages hopped above key levels to highs set on Tuesday, June 18, then cascaded back below those levels on Thursday. I call this the "Power of the Pivot", where there's an 85% chance that a market returns to a pivot during that time horizon.

As this week began, the equity averages moved above my quarterly pivots at 12,794 Dow Industrials, 1337.7 S&P 500 and 2911 on the Nasdaq. This put the focus on whether or not this week's close would be above or below my annual pivot at 1363.2 on the S&P 500. SPX ( SPX.X) tested 1363.2 at Tuesday's high.

Back on Friday, March 9, the S&P 500 closed above its annual pivot at 1363.2 triggering the rally to 1422.38 on April 2. Then on Friday, May 11, the S&P 500 closed back below the annual pivot at 1363.2, which indicated downside risk, and the low on June 4 was 1266.74. Further proving the "Power of the Pivot", the S&P 500 tested and failed at the annual pivot at 1363.2 on Tuesday, June 18.

The downside risk for the major equity averages is trading back down to the June 4 lows. At these lows the Nasdaq held just above my annual value level at 2698. Beware of lower lows in the second half of 2012.

Next Friday is the last day of the month, quarter and mid-year. Closes on June 29 will establish new weekly, monthly, quarterly and semiannual value levels, pivots and risky levels. New semiannual value levels will be the downside targets for the second half of the year. I won't know the exact semiannual value levels until after next Friday, but they could be around 10,500 Dow, 1020 S&P 500, and 2400 Nasdaq.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.