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Trading Blog Friday, January 29th, 2016

1/29/2016

BRIEF END OF WEEK MARKETS UPDATE (2:15 pm EST)

To rally or not to rally. That has been the question for the broad stock market for most of the week as equity markets have surged up and down in roller coaster fashion. Today may be decisive, however, as the DOW is making a new high for the week and is again breaking above the important 16,100 level. This supports the idea that the Jan. 20 low was the start of a new medium-term cycle and that we will now see a rally into the first or second week of February. As long as directional momentum remains bearish in this market we will be looking to sell short the top of that rally as a severe correction could follow. We can start looking for that high towards the end of next week. Still out of the broad stock market.

Gold and silver may have made significant highs on Wednesday, especially as gold penetrated the lower part of our target range for a top ($1127 - $1147) before reversing down. We are not yet in our next reversal zone (which begins next Wednesday), but the current cycle structure indicates the possibility of a sharp, quick drop in precious metal prices right now. This means that our reversal zone (next Wednesday into the second week of February) could correspond to a low instead of a high. If so, we will look for a buy spot. Otherwise, we will watch for gold to push higher into that $1127 - $1147 range over the next week or two for a top to sell short. Technical signals suggest that precious metals could continue to be very volatile all next week so we need to be cautious in our trading. Still on the sidelines of gold and silver.

Any traders who were able to go long in crude oil on Tuesday (I missed my entry price as it happened on the overnight market here in the U.S.) may wish to take some profits now as the price has already risen to my original $34 - $35 target area where there is some resistance. Directional momentum in crude is still nearly 100% bearish so this rally could be short-term. Out of crude oil for now.

Trading Blog Wednesday, January 27, 2016

1/27/2016

COMMENT ON THE TODAY'S FED STATEMENT (9:00 pm EST)

The Federal Reserve released its policy statement at 2:00 PM today with no follow-up press conference. To no one's surprise, the Fed left interest rates unchanged. The Fed's statement gave a mixed view of the economy (labor markets improved while economic growth slowed) but expressed the optimistic view that "...with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen." The Fed reiterated its concern about inflation running below a desired 2% level but also said that 2% could be achieved over the "medium term" with a strengthening labor market. Most importantly, the Fed said that it expects "...economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data." In other words, they are not in a hurry to raise interest rates, and, as the Fed has stated many times before, all is dependent on the economic data.

This statement from the Fed is rather dovish, but apparently it was not dovish enough for Wall Street. (Perhaps they expected the Fed to take back the recent rate hike?) The DOW dropped over 200 points immediately following the FOMC statement, and the DOW closed at 15,944. We will have to wait and see if this bearish reaction continues over the next few days or even into next week. If it does, we could see equity markets make new yearly lows into our early February reversal zone instead of the rally and high we've been anticipating. On the other hand, the DOW seems to be finding support this week just above the 15,800 level. If the reaction to the Fed is just short-term, we could still see more rallying into the next week or two. Still on the sidelines of the broad stock market.

Trading Blog Tuesday (night), January 26, 2016

1/26/2016

MARKETS UPDATE (10:15 pm EST)

Crude oil prices dipped down below $29.50 in yesterday's overnight market, but when the U.S. exchanges opened this morning the price was close to $31 so we did not buy. The Jan. 20 low at $27.56 still looks like the medium-term cycle bottom so we will continue to watch for a good buy spot as long as that low holds. Any trader that went long on the overnight market can hold that position for a possible rally into early February with a stop loss at the Jan. 20 low.
Still on the sidelines of crude.

The broad stock market rallied strongly today with the DOW rising 287 points and closing at 16,167 which is above the important resistance level we were watching at 16,100. This is supporting the idea that Jan. 20 was the start of a new medium-term cycle. If that is the case then the target for this rally could be anywhere between 16,200 and 17,000, and we would expect it to peak around Feb. 8 (+/- a few trading days). That is only nine trading days from now. The market could rally strongly into next week, but we still want to watch for an important top starting as early as next Wednesday. A rally with a top that stays under 17,000 in the DOW and under 2000 in the S&P 500 could be an important turning point marking a reversal and the start of a serious correction in the market (as I described in last Sunday's blog). The question right now is whether or not to go long for a potential rally into next week. It is still possible for the market to turn back down and make a new cycle bottom next week instead of a top (although this is looking less likely now). This week's Federal Reserve meeting will end tomorrow with the FOMC releasing its policy statement at 2 PM in the afternoon. Today's rally in equities may reflect Wall Street's hope that the Fed will signal more modest rate hikes than it had previously planned in view of the recent turmoil in the markets. Many economists, however, are expecting the Fed to "stay the course" and not indicate any changes in policy one way or the other. It is probably best for us to stay on the sidelines for at least another day. We know from the past that market reactions to Fed meetings can sometimes be dramatic (although they are often short-term). Remaining on the sidelines of the broad stock market for now.

Precious metal prices also rallied today with gold pushing closer to our target range for a top ($1127 - $1147). Silver's rally was especially significant as it made a new high for the month (in the March contract chart) which suggests that it started a new medium-term cycle on Dec. 14. (We had previously thought that the old cycle was still bottoming.) This increases the likelihood of higher prices now (possibly $15 or higher); however, we have to keep in mind that gold and silver are susceptible to large price swings (both up and down) this week and next, and we are also expecting a significant top and reversal in both metals in the first two weeks of February. There are also some short-term technical signals suggesting the possibility of a sharp decline in prices on Thursday (note that this is the day after the Fed statement) or Friday this week. As with the broad stock market, it is probably best to remain on the sidelines of gold and silver for at least the next day or two as price fluctuations could be erratic. On the sidelines of gold and silver.

Trading Blog Tuesday (early AM), January 26, 2016

1/26/2016

CRUDE OIL TRADE HEADS UP and MARKETS UPDATE (12:30 am EST)

Those who have been reading this blog over the last few months will know that I have been waiting for a medium-term cycle bottom in crude oil to buy. It was looking like that bottom was in at the end of a reversal zone on Jan. 17. I thus went long on the 19th with a tight stop loss close beneath my buy price. The next day crude dropped abruptly and stopped us out of our trade with a small loss but then surged back up above our original buy price over the following two days. We were caught in a classical "whipsaw" market reversal which is typical of volatile markets. In hindsight I can see that I should have set a wider stop loss for that trade in view of the high volatility in all markets now. (Of course hindsight is always 20/20.) Crude oil's bottom on Jan. 20 at $27.56 was technically one day out of our market reversal zone, but that is probably close enough. The next major reversal zone for crude is not until March, and the end of the current medium-term cycle is due. That low on Jan. 20 was probably it. Prices today backed down significantly and entered the $29 range. It looks like we may have another opportunity to go long here for a possible rally to $34 or higher. We can now set our stop loss on a close below the Jan. 20 low or around $27.50 (March contract). Because of crude's low price and high market volatility now, small moves in crude can result in large losses (or gains) so some conservative traders may wish to avoid this trade or fund it sparingly. I plan on entering a long position in crude in early trading tomorrow morning if prices remain between $28 and $30.
Stay tuned for the trade confirmation early tomorrow (Tuesday) .

We took profits in our gold long positions last Wednesday because we were getting mixed bullish and bearish signals on the short-term direction these metals were taking. That situation hasn't changed much, and it still is not clear whether or not gold wants to rally higher or pause and take a significant correction now. Directional trend in the precious metals is more bearish than bullish right now (especially in silver) so even if they rally now, that rally may not get far before turning down again (the target for gold is $1127 - $1147). It is still not clear whether or not silver has started a new cycle yet so both metals could still turn down now with silver making its cycle low in the first or second week of February. This could present us with a buying opportunity, but if these metals rally into that time frame, we will look to sell short instead. Right now the new gold cycle looks bearish which means that we could see new cycle lows ($1145 or lower) over the next two or three months. If gold starts to break above $1150 and silver above $15 then we may have to abandon that bearish view and start trading with bullish strategies.
On the sidelines of both gold and silver for now.

Wall Street's excitement last week over ECB president Mario Draghi talking up the idea of more QE stimulus for the eurozone's weak economy may be fading as the broad stock market dropped significantly today. Please refer to my last two blogs (Jan. 20, Jan. 24) for important analysis of the current situation in the broad stock market. We may look to go long this week for a short-term rally into early February. That may be as early as tomorrow if the market drops some more and can stay above 15,640 in the DOW and 1833 in the S&P 500. Still on the sidelines of the broad stock market.

Trading Blog Sunday (night), January 24, 2016

1/24/2016

ANOTHER IMPORTANT UPDATE ON THE BROAD STOCK MARKET (10:45 pm EST)

The analysis of the broad stock market that I gave in last Wednesday's blog is still valid and is relevant to today's update so I would suggest readers go through it again to fully understand the importance of what is happening now as we could be close to a major breakdown in equity markets.

In Wednesday's blog I wrote: "We need a cautious approach in our trading now because of this market's high volatility and strong downward momentum. If today's lows hold and the market starts to rally over the next two days, we will consider a long position and will watch for the DOW to exceed and close above 16,100. This would be a sign that a new cycle has started and a rally could get up into a range between 16,600 and 17,200 in the first half of February." On Thursday and Friday the DOW did indeed rally and briefly broke above 16,100 but then closed on Friday just below that line at 16,093 which leaves things a little ambiguous. That rally into February could be starting now, but there is still a chance of the market turning back down and making new lows over the next several weeks.
There is support for the DOW this week in the 15,640 - 15,740 area so we will try to go long on any dips with a stop loss there.

I also wrote in Wednesday's blog: "If market momentum starts to turn bullish, the rally could go even higher, but right now it looks more likely that such a rally towards 17,000 would soon turn down again, and we would probably be looking to sell short the peak of any surge into the second week of February." So even if we see a rally now, there is a good chance it will peak in early February. The target for this peak could get to 17,000 or even higher, but it doesn't have to. Timing is more important here, and whatever high the market is making by the second week of February we will look to sell short. If that high is below 17,800, there is a strong possibility that the correction that follows will be the start of a major market meltdown similar to or even worse than the one in 2008-2009. A sign that this is happening would be if the DOW starts closing below 15,370 and especially if the S&P 500 starts closing below 1800.

For those who doubt that such a serious crash could happen now, I would like to point out that in the chart for the S&P 500 a gigantic and very symmetrical "dome top" has been forming since early 2012, and that dome is now rounding over and pointing down. This means that unless this index breaks above the dome soon, the market is heading down, possibly in a dramatic fashion because a breakdown from the right side of a dome top is usually erratic (as it is driven by panic) and not as symmetrical as the left side. There is also a huge "head and shoulders top" chart formation positioned directly underneath this dome which any chart analyst will tell you is an ominous bearish sign. This "head and shoulders top" is nearly complete and therefore ready to turn south which further makes the case that a severe downturn in this market is imminent. On top of all this (no pun intended), the chart of the DOW has been forming a giant "megaphone" pattern since early 2000, and this index has now rolled over at the top edge of this "megaphone" (around 18,000). If the "megaphone" pattern is valid (i.e. if the market does not start making new all-time highs above 18,400) then the DOW is now poised for an immense fall, possibly down to the 6000 area ! I apologize for not including chart pictures to illustrate these formations, but most of the charts I am analyzing are copyright protected, and I do not have the time to create my own. Anyone interested in seeing these current patterns can just google the terms "S&P 500 dome top", "S&P 500 head and shoulders top" and "DOW megaphone pattern" and find many pictures and descriptions.

We can summarize the current situation in the broad stock market with three possible scenarios:

1) The market rallies into the first half of February and the DOW stays under 17,800. The market then turns down and falls to new lows that possibly lead to a "meltdown" and severe crash.

2) The market turns back down now and makes a new monthly low (or double bottom to its 15,400 low) in the first two weeks of February and then reverses to begin a new medium-term cycle with a strong rally.

3) The market continues to rally and turns bullish with the DOW closing above 17,800, and the DOW, S&P 500 and NASDAQ all start making new all-time highs.

At the moment it seems like scenario 1 is the most likely with scenario 2 a close second. Scenario 3 seems very unlikely right now, but we should never underestimate the power of market manipulators (overt and covert) to keep equity markets buoyant if it serves their political or personal agendas. I don't think the Federal Reserve expected their recent minuscule rate hike to have the negative impact on the stock market that it may be having now so it is possible they might resort to desperate measures such as another round of QE to stem a potential crash. Last week European Central Bank president Mario Draghi announced that he would provide more QE stimulus to Europe's floundering economy as early as March if it seems necessary to do so. His statement made on Thursday seemed to trigger a rally in equity markets, but will this just be a short-term reaction? Will the U.S. Federal Reserve take a cue from Draghi and roll out another round of QE to buoy the stock markets? We will have to wait and see.

Still on the sidelines of the broad stock market.

Trading Blog Wednesday (night), January 20, 2016

1/21/2016

IMPORTANT UPDATE ON THE BROAD STOCK MARKET (10:45 pm EST)

Equity markets continued their losing streak today with the DOW dropping over 500 points by mid-day before recovering a bit and closing with a 249 point loss. The S&P 500 lost 22 points. The DOW is now down about 12% from last year's Nov.3 high in what is the worst start to the new year in the history of the U.S. stock market. Pessimism, fear and panic is clearly driving this market. Could this be the start of a full blown "crash" similar to
2008 -2009 ? It is possible. We need to look closely at our technical, cycle, and timing parameters to gauge our trading strategy now.

We are now nearing the end of a medium-term cycle in all three of the major broad stock market indices (DOW, S&P 500 and NASDAQ). What this means is that a normal corrective bottom is due in all three indices now or over the next several weeks from which new cycles and new rallies will start. New cycles usually rally strongly for at least two weeks (longer if the market's trend is strongly bullish) so we try to buy as close as possible to the bottom of an old cycle/start of a new one. Today all three indices dropped sharply, made new monthly lows and then snapped back up and recovered nearly half of their losses. This is a bullish signal and could be the sign of an imminent reversal especially since the timing is right for the start of a new cycle. Another bullish sign is that the S&P 500 has taken out its low of Aug. 24 (the start of the cycle) but the DOW has not (yet) taken out its Aug. 24 low (it came very close today). This gives us a case of bullish intermarket divergence and supports the idea of a reversal now.

In a normal market the above analysis would make a good case for going long now in equities for at least a short-term rally; however, this is not a normal market. Its sharp plunge over the last two weeks has been unusually strong and, indeed, directional momentum for all three indices is now 100% bearish. Buying here may be like standing in front of a freight train or trying to catch a bowling ball dropped from the roof of a tall building - not a good idea. If this market drops lower over the next day or two and the DOW breaks below its Aug. 24 low (at 15,370), we could see more downside into the first two weeks of February before the final cycle bottoms are in. We especially don't want to see a strong break and close below 1800 in the S&P 500 as this would mean big trouble for equities and could be the start of a major crash. (The S&P got down to 1812 today but fortunately snapped back up and closed at 1859.)

We need a cautious approach in our trading now because of this market's high volatility and strong downward momentum. If today's lows hold, and the market starts to rally over the next two days, we will consider a long position and will watch for the DOW to exceed and close above 16,100. This would be a sign that a new cycle has started and a rally could get up into a range between 16,600 and 17,200 in the first half of February. If market momentum starts to turn bullish, the rally could go even higher, but right now it looks more likely that such a rally towards 17,000 would soon turn down again, and we would probably be looking to sell short the peak of any surge into the second week of February.

The bottom line here is that we will be watching for the start of a new cycle in the broad stock market over the next few days and an opportunity to ride a significant rally up into the first two weeks of February (and possibly longer). If instead the DOW breaks and closes below 15,370 (and especially if the S&P 500 closes below 1800) we will abandon the idea of a rally and will instead focus on short selling strategies as the market will likely fall much lower.

Still on the sidelines of this market.

Trading Blog Wednesday, January 20, 2016

1/20/2016

CRUDE OIL and GOLD TRADE ALERTS (2:00 PM EST)

Crude oil prices opened this morning (in the U.S. market) slightly below $28 which was below our stop loss at $28.30. Most traders should have been stopped out with a small loss. Any traders still in should get out before today's market close. In Monday's blog on crude I wrote that:
"...there is a possibility of prices dropping lower into the first or second week of February which is another reversal zone and is the deadline for a normal cycle bottom in crude. So this cycle's bottom could be forming now or will form then."
It is looking more like that bottom could form in February as prices are dropping lower today. The final bottom to this current cycle could be around $25, but we are getting close to that level now so it may even go lower. The recent lifting of sanctions in Iran and the prospect of oil from that country flooding an already oversupplied market is one reason crude prices are continuing their downward trek. A bottom and reversal is still possible this week or early next so we will watch this carefully. If that doesn't happen we will look for the final bottom in the first two weeks of February. We were stopped out of our long position in crude and are out of this market for now.

Gold prices today are surging up to a resistance area at the recent highs we saw earlier in the month in the $1100 - $1110 area, and there are some short-term bearish signals now suggesting a pause or correction in this rally. For this reason I am going to take profits and sell my long position in gold today. These profits should make up for any losses we took from our brief trade in crude. We could still see prices rise into our target area of $1120 - $1150, but we need to keep in mind that the overall trend right now in precious metals is still bearish so we could see this new gold cycle peak early and start to fall to new lows over the next several months. If we get a small correction now, we may go long again for a continued rally into early February to that target area. Taking profits and selling my long position in gold today.

Silver's rally has not been as strong as gold's, and this is one reason to be cautious about any precious metal rally right now. It is unclear whether or not silver has started its new medium-term cycle yet (unlike gold which likely began its new cycle on Dec.2) so silver could still crash through its early December low over the next three or four weeks and make a cycle bottom. We will continue to stay on the sidelines of silver until the cycle pattern is more clearly defined.

I will post some comments on the broad stock market later today. We are still on the sidelines of this market.

Trading Blog Tuesday (night), January 19, 2016

1/19/2016

BROAD STOCK MARKET and CRUDE OIL UPDATE (11:15 pm EST)

On the first day of this trading week (yesterday was a holiday in the U.S. and the markets were closed) the broad stock market started out with a strong gain but then lost most of that profit as the day wore on. The DOW closed the day with a modest 27 point gain and the the S&P 500 closed with only a 1 point gain. All three market indices (DOW, S&P 500, NASDAQ) remained above their lows from Friday which means those lows could be the medium-term cycle bottom as they happened within last week's reversal zone. We are now technically out of that reversal zone so if these indices start to move below those Friday lows then we may see that medium-term bottom form in the first half of February instead. We still don't have a strong technical signal to buy so I'm remaining on the sidelines for now. Things look pretty bearish at the moment, but markets can suddenly reverse at bearish (and bullish) extremes.

Our entry point for crude oil this morning was around $29.20. Prices dropped further today, but the U.S. market closed above our $28.30 stop loss point so we are still long. Crude is very oversold and there is still a good chance of prices reversing here. Nevertheless, we will want to bail out of this trade if tomorrow's price continues to fall and closes below our stop loss. Traders on the overnight market may already be stopped out. If prices continue to move lower we may have to wait until February for the final cycle bottom. Holding my long position in crude oil for now.

Trading Blog Tuesday (early AM), January 19, 2016

1/18/2016

CRUDE OIL TRADE ALERT (12:15 am EST)

After looking over the crude oil charts some more, I have decided to enter a long position in crude for today's market open. Cycle analysis and timing factors are strongly suggesting an imminent short-term rally.
The target for this rally is around $34 which would be a gain of about 10% from the current price. We can place a stop loss for this trade on a close below last Friday's low around $28.30. This will likely be a short-term trade. I may even take profits, reverse my position and sell short should we achieve the target price by mid-February to ride another correction down to still lower prices. Some traders may just want to wait for that short sell. Entering a long position in crude oil early this morning (Jan. 19).

Trading Blog Monday (night), January 18, 2016

1/18/2016

MARKETS UPDATE (10:00 pm EST)

Today was a holiday in the U.S. (Martin Luther King Jr. Day) and stock markets were closed. They will reopen tomorrow.

After rallying a bit early last week, the broad stock market plummeted into Friday with all three major indices (DOW, S&P 500, NASDAQ) making new monthly lows. Significantly, the S&P 500 on Friday broke briefly below its 2015 low (1,867 from Aug. 24) while the DOW and NASDAQ remained above their Aug. 24 lows. This could be a case of intermarket bullish divergence (as long as the DOW and NASDAQ don't crash their lows). Last week's lows were made in a strong reversal zone (which could extend into early this week), and a medium-term cycle bottom is due. Under normal circumstances this would be a good spot to go long. Markets are very nervous right now, however, and last week's plunge might be the start of a panic selloff. All three indices are breaking important support levels and are significantly below our original target areas for a "normal" correction. Furthermore, the DOW's chart turned significantly bearish on Friday, and directional momentum for all three indices is now 100% bearish. Is it possible to reconcile these conflicting bullish and bearish signals? After looking at all the chart patterns and cycle structures and reviewing the conclusions of several financial analysts that I follow, it appears that a likely scenario now could be a brief but possibly sharp relief rally (perhaps into the 1950-2000 range in the S&P 500) followed by another turn down to even deeper lows. If we do get a rally now, it could peak around the first or second week of February, and as long as that peak stays under 2100 in the S&P 500 and directional momentum remains bearish, we will be looking to sell short this market into a deeper low. For now, though, we will wait for a strong buy signal for that short-term rally which could come over the next day or two. If we don't get this and the market continues to fall this week, we will look for a bottom in early February instead of a top. Still on the sidelines of the broad stock market.

Gold continues to hold above $1070 (our stop loss price) and still looks poised for at least a short-term rally, possibly into the $1120 - $1150 range. Silver doesn't look quite as bullish as gold at the moment, perhaps because, unlike gold, silver can be seen as an industrial metal, and the plummeting stock market may be holding down its price. Silver may also still be in the process of completing its medium-term cycle bottom which is why we have avoided going long in this metal (while buying gold). If gold starts to rally, we could see prices into our target range over the next several weeks. If the price of silver drops below its December low while gold prices hold above $1070, we could see a strong rally follow in both metals. We will watch for this. Holding my long position in gold but still out of silver.

Crude oil is nearing the end of its current medium-term cycle and may have even made its cycle bottom on Sunday when the nearby contract price dipped to $ 28.36. We are still not seeing any technical buy signals or any bullish change in momentum in oil charts, however, and there is a possibility of prices dropping lower into the first or second week of February which is another reversal zone and is the deadline for a normal cycle bottom in crude. So this cycle's bottom could be forming now or will form then. I would like to see how crude prices move after today's market holiday before making any trade decisions here. Note that because of crude's very low value now, a small price movement can create a large loss very quickly so we need to be especially cautious trading this market. Out of crude for now.

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