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Trading Blog Tuesday, January 30, 2018

1/30/2018

BRIEF COMMENT ON TODAY'S SEVERE DROP IN THE BROAD STOCK MARKET (3:00 pm EST)

The recent fairly steady and regular rise in the broad stock market was punctuated today by a sharp selloff with the DOW dropping nearly 400 points at the time of this writing. One reason being given for this drop is the recent selloff in the bond market. Of course this could be a trigger, but as we know, equity markets are way overdue for a correction. Is it starting now? Maybe, but all three market indices (DOW, S&P 500, NASDAQ) were not able to make a new weekly high yesterday or today so we do not have any intermarket bearish divergence, a signal we like to see before a significant correction. We are also not in a reversal zone, but we enter a new one on Friday (February 2 -12). If the market can recover from today's plunge, there is still time for it to make new highs into next week's reversal zone (perhaps with a bearish divergence signal) and give us more confidence in selling short. Interestingly, President Trump gives his State of the Union address tonight. His last address before a joint session of Congress in March 2017 seemed to have an uplifting effect on equities. Can Trump "talk up" the markets again or has "Trumphoria" run its course? We will have to wait until tomorrow to see.

If equity markets are starting a significant correction now, we could see a very rapid plunge into next week's reversal zone for a possible final bottom to the current medium-term cycle. As I mentioned in Sunday's blog, this correction could take the DOW down to 25,000 or lower. If this happens, we will abandon any plans to short sell and just wait to buy at the cycle bottom.

Trading Blog Sunday (night), January 28, 2018

1/28/2018

IMPORTANT UPDATES ON THE DOLLAR, GOLD, SILVER, AND THE BROAD STOCK MARKET (10:30 pm EST)

As I noted in Friday's blog, last week's breakdown of the U.S. Dollar Index below the support line of 90 is a potentially serious development. It could be signaling the start of a much deeper correction that could take the greenback as far down as 80 over the next few years. Two stops along the way are likely to be around 88 and 86, but a break below 86 would pretty much "green light" a plunge towards 80. For such a plunge to be averted, the dollar needs to break back above that former support area of 90 - 91 (which is now resistance). The chances of this happening are slim as the dollar chart looks quite grim with directional momentum nearly 100% bearish. Perhaps after realizing it was not a good idea to impose destructive trade tariffs and push the U.S. dollar off a cliff, President Trump attempted to "talk up" the dollar later in the week, and this may have contributed to the greenback's bounce up from 89 on Thursday. Can Trump get the dollar back above 91? I don't think so, but then again "Trumphoria" seems to be pushing the broad stock market beyond it's normal boundaries so I wouldn't rule out that possibility. A more likely scenario would see the dollar taking a "relief" rally back up to test that 90 - 91 band before resuming its descent. Such a top and reversal could happen in our next reversal zone in the first week of February so we will watch for it then.

If the dollar does rally now, it could easily push gold and silver prices back down and give us a good spot to buy. As I discussed in Friday's blog, this breakdown in the dollar is coinciding with an extremely bullish picture manifesting in the charts of both gold and silver (and also in the charts of many gold and silver mining company stocks). Gold and silver are both in the final stages of completing massive inverted "head and shoulders" chart formations that have been building since 2013. (I apologize for not including charts to illustrate this, but curious readers can Google "head and shoulders bottom" to see what this pattern looks like and compare it to the long-term charts of gold and silver.) This is a very bullish signal that is unlikely to abort as it is very near completion (especially in gold). Short-term, however, both metals now seem poised for a corrective dip. A good target price for gold would be close to $1300 (or even a bit below there). A good target for silver would be around $16.80, but it could possibly go as low as $16.00. It is very possible we could see these corrections into our next reversal zone in the first week of February.
Bottom line: we are waiting to go long in the precious metals soon as the potential breakdown of the dollar and the bullish chart formations in gold and silver are suggesting a very strong rally is imminent.

We are also getting a bit impatient to sell short the broad stock market as the current medium-term cycles in the DOW and S&P 500 are overdue for a top and correction to their final cycle bottoms. This correction should be substantial enough to be worth trading (with the DOW at least back to 25,000 - probably lower), but I don't think it will be the "crash" that some nervous analysts are expecting (although I would not completely rule that out in this current volatile market environment). In fact, the longer-term cycle structure in equities is pointing to new highs well into the second half of this year. We will therefore be looking to buy the broad stock market after this next corrective dip which could happen any time now. There is still the strong possibility of a much more serious correction in equities from a top later in the year. For now, we continue to watch for a short-term top and sell signal in this unusually bullish market. Still on the sidelines of the broad stock market.

Trading Blog Friday, January 26, 2018

1/26/2018

MARKETS UPDATE and IMPORTANT COMMENT ON THE U.S. DOLLAR (3:00 pm EST)

This week's break of the U.S. Dollar Index below the critical support of 90 - 91 is a very serious development that could have ramifications for all financial markets. It looks like the devaluing of the dollar was triggered intentionally by the Trump administration's imposition of destructive trade tariffs to make U.S. exports more competitive. I seriously doubt that Mr. Trump or any of his advisers read or analyzed any financial charts before making this decision. If they had, they would have realized that the dollar was perched precariously on a dangerous ledge of support and was ready to tumble off if pushed hard enough. One can observe on a long-term chart of the U.S. Dollar Index that after breaking below 90, there is some weak support at 88 and then 86. If 86 is breached, there is really no support all the way down to 80 where there is again a major support line. Could the dollar fall close to 80? Yes, it could. We are now in the middle of a longer-term 5.5 year cycle in the dollar that is due to bottom sometime in 2020 (possibly 2019), and the projected target for that bottom is around 81 - 82.

The consequences of a dollar breakdown would be most significant in the precious metals market. A breakdown would cause the price of gold and silver to rise, possibly dramatically (assuming prices are not manipulated), especially as foreign investors could no longer regard the U.S. dollar as a "safe haven" investment (or at least the "least rotten apple" in the world basket of currencies). Precious metals would become the safe harbor investment of choice. Needless to say, it is no coincidence that the technical charts of both gold and silver are looking very bullish right now. I will write a bit more about this sometime over the weekend, but the bottom line here is that we should now be focusing heavily on going long in these metals. Short-term, both gold and silver seem to be correcting down from yesterday's high and could give us a good entry point shortly, perhaps next week. On the sidelines of gold and silver for now.

For many reasons, a collapsing U.S. dollar is not good for equity markets, and this gives us yet another reason to be wary of the current rally in the broad stock market. Nevertheless, this seemingly unstoppable "irrationally exuberant" market keeps chugging along as both the DOW and S&P 500 again make new all-time highs today. As I've mentioned in my recent blogs, we will watch next week for intermarket bearish divergence between the DOW, S&P 500, and NASDAQ (one or two, but not all three indices making new weekly highs) as a signal to go short. We are also keeping our eye on Feb. 2 -12 which is our next reversal zone (it starts next Friday) for a possible top in this market. Still on the sidelines of the broad stock market.

Crude oil prices continue to edge up this week and are now testing resistance at $66 - $67. We are still waiting for a corrective dip down low enough to qualify as a legitimate sub-cycle correction. If crude doesn't drop too far, we will be looking to go long as directional momentum is still nearly 100% bullish in this market. On the sidelines of crude oil.

Trading Blog Wednesday, January 24, 2018

1/24/2018

UPDATE ON PRECIOUS METALS, THE U.S. DOLLAR, AND CRUDE OIL (1:30 pm EST)

Gold and silver are behaving somewhat erratically this week. There was a possibility this week of a sharp rally from an isolated low in both metals from last week. Silver threw off this pattern by plunging to a new weekly low yesterday ($16.78); however, gold did not plunge with silver which created a strong case of bullish divergence and put the rally back on track. We can't be sure how high this rally will go, but technical signals show that it should peak by next Tuesday (and could top out any time between now and then) and be followed by a correction. We are still looking to get long in both metals and may do so at the bottom of that correction if it happens. On the sidelines of gold and silver for now.

Today's surge in precious metal prices was triggered by a steep drop in the U.S. Dollar Index. The dollar has finally broken below what was a critical support level at 90 - 91 and it looks like it will close the day just a bit above 89. As I've mentioned in previous blogs, the breach of this support could be bad news for the dollar. If the dollar can't break back above that 90 - 91 area soon, the greenback could be headed a lot lower very quickly. Such a scenario would propel a strong rally in the precious metals.

Crude oil prices have rallied to a new high this week, most likely following the bullishness of the broad stock market. Last week's dip was not low enough to be a sub-cycle correction so we will wait for a deeper correction off this new high or any higher high between now and the next reversal zone (the first week of February). That reversal zone could coincide with the bottom of a correction, and if so, we will buy then. There is some resistance for crude around $66 - $67 so that may contain the current rally. Still on the sidelines of crude.

Trading Blog Monday, January 22, 2018

1/22/2018

MARKETS UPDATE (4:00 pm EST)

It looks like the U.S. Congress is advancing measures today to end the government shutdown with Democrats agreeing to grant a three week extension of government funding in exchange for Republican party promises that a larger immigration bill will be taken up by Feb. 8. Not surprisingly, the broad stock market is responding positively to this news, and an equity rally is pushing the DOW, S&P 500, and NASDAQ all to new weekly highs. Our hopes for an intermarket bearish divergence signal this week have been dashed again. We will still watch for other signs of a top this week as a reversal is possible any time now, but we are also looking towards the next reversal zone which starts late next week (Feb. 2 - 12) for a possible top to the current medium-term cycle in the DOW and S&P 500. (Notice that the next "deadline" to keep the government funded is Feb. 8 - right in the center of this reversal zone.) The current rally and the current medium-term cycle are both getting very "long in the tooth" so any correction now could be sharp and steep. Still on the sidelines of the broad stock market.

Gold and silver prices remained relatively flat today, but short-term technical signals are looking a little more bearish than bullish. If gold can break below last week's low of $1325 then we could see it move towards our desired target in the $1280 - $1300 range. Silver could rally a bit from last week's possibly significant bottom of $16.91, but if the rally doesn't get above $17.45, prices will likely turn down again and break below that low. We are still waiting for an ideal spot to buy. Remaining on the sidelines of gold and silver.

The U.S. Dollar Index is staying above its Jan. 16 low of 90.11 which could have been a turning point for the dollar as it was made in a reversal zone (and 90 is a critical support level). Some short-term technical signals are suggesting that the dollar could rally a bit more from here. If it does, it will help push gold and silver prices lower.

It still looks like crude oil is taking its first sub-cycle correction from a high of $16.81 on Jan. 16 (Feb. contract chart).
Our target for this correction is still close to $60 which we could (should) see this week or next. We are looking to buy near that price as it is still early in the current medium-term cycle and the larger trend in crude still looks bullish. On the sidelines of crude for now.

Trading Blog Sunday (night), January 21, 2018

1/21/2018

BRIEF UPDATE ON THE BROAD STOCK MARKET AND PRECIOUS METALS (10:00 pm EST)

The S&P 500 and NASDAQ both ended last week with new all-time highs, and all three major indices (DOW, S&P 500, NASDAQ) closed on Friday in positive territory (although the DOW closed just a bit below its all-time high from Thursday). The threat of a government shutdown didn't seem to dampen last week's rally very much, but that shutdown is no longer a threat and is now reality and could easily continue well into this week (or longer). These markets could still slip into a fearful sell-off. As I've been pointing out in recent blogs, cycle timing and other technical patterns show that we are due or even overdue for a top and significant correction in equities. This government shutdown could be the trigger for such a correction so traders should be ready to sell short soon - possibly this week. We will watch for intermarket bearish divergence between the three market indices early next week (one or two, but not all three indices making new weekly highs). If it happens, it could be our signal to sell short. On the sidelines of the broad stock market for now.

The gold and silver market is giving us mixed short-term signals right now. Gold's price dip last week was not very deep and technically would not qualify as a sub-cycle correction. Silver's dip, however, does qualify as a sub-cycle correction from which a significant rally could start. After looking over the charts carefully, I am going to postpone buying either metal for now as there I think there is a good chance prices could still move lower (gold to $1300 or lower and silver below $17). If prices rally strongly next week, the rally will likely be short-lived, and we will wait for the next corrective dip to buy as the overall picture for precious metals is still quite bullish. On the sidelines of gold and silver.

Trading Blog Thursday, January 18, 2018

1/18/2018

MARKETS UPDATE (4:30 pm EST)

The broad stock market continues to push higher and make record highs this week. The DOW made a new high early today, but the S&P 500 and NASDAQ are staying below their highs from Tuesday so it's possible that this rally is running out of steam. Fear of a government shutdown is now weighing heavily on Wall Street, and the U.S. Congress has until midnight on Friday to keep this from happening. Could a government shutdown trigger a market sell-off? Well, we are very late in the medium-term cycles of the DOW and S&P 500 so a top is overdue, and most analysts agree that this market is extremely overbought. At this point, just about anything could trigger a sell-off. On the other hand, if a government shutdown is averted, equities could soar higher next week. As I mentioned in my last blog, the next reversal zone for this market is Feb. 2 - 12. It's possible (even likely) that equities will top out then, but we are so late in the cycle that we could see a top at any time now. We will watch for an intermarket bearish divergence signal next week (assuming markets don't plunge tomorrow) and a possible opportunity to sell short. On the sidelines of the broad stock market.

This week gold and silver are taking a corrective dip, but silver's erratic behavior on Tuesday (prices plunging then surging) demonstrates some nervousness in this market right now. Silver has dropped into a support area around $17, but it looks like it could go lower. Gold is still a good distance away from our target of $1300 to buy. Let's see if prices drop lower tomorrow when we may consider going long in both metals. Still on the sidelines here.

Nervousness in the precious metals market may be due to the fact that the U.S. Dollar Index is now testing a critical support level around 90. If the dollar makes a significant break below that level, it could lead to a major breakdown, and that would almost surely send gold and silver prices flying upwards. The dollar touched 90.11 on Tuesday (technically within a reversal zone) so it's also possible for the dollar to now rally from this support and send the precious metals lower. We need to watch this situation carefully. Even if the dollar rallies now, it may not get very far before turning down again and challenging that support at 90. Overall, the chart for the dollar looks quite bearish while the charts for gold and silver are quite bullish.

Crude oil made a high on Monday at $64.81 (at the end of a reversal zone) and has been falling so it is likely making its first sub-cycle correction now. I would like to see this correction get close to $60, but there is a support level around $62 that could offer resistance to this. We are still looking to buy around $60 (Feb. contract chart) as this market continues to look bullish. On the sidelines of crude for now.

Trading Blog Monday, January 15, 2018

1/15/2018

MARKETS UPDATE (7:00 pm EST)

In Friday's blog post I wrote:

"The DOW and S&P 500 are also now touching projected ideal target levels for the tops to their cycles, and, of course, in terms of timing these tops are due or even overdue. Let's see if we get a case of intermarket bearish divergence early next week."

The broad stock market rocketed out of the gate today with a very strong rally. All three major indices (DOW, S&P 500 and NASDAQ) made new highs and dashed our hopes of an intermarket bearish divergence signal this week. It looks like "Trumphoria" and irrational exuberance are still strong forces in this market as they continue to distort normal technical and cycle patterns. Notice I said distort, not eliminate. The top to the current medium-term cycle is being delayed, but it will come at some point and a corrective dip will follow. Because these indices are now exceeding their normal upside targets, we can consider this cycle to be in a "blow-off" phase. Sometimes a "blow-off' leads to a parabolic acceleration where the market rises steeply in a very short period of time, but several analysts I follow are pointing out that this pattern does not seem to be forming here. Instead, they see what is called a "three-arc fan ascent" (curious readers can google this term to see what the pattern looks like) which is bearish and could mean that a top is near and we will not see a parabolic rise. Our reversal zone for this market (and others) ends tomorrow. Yes, it's still possible for equities to turn down here even without a bearish divergence signal, but that is less likely now, especially if these indices push higher past Tuesday. Our next reversal zone is Feb. 2 - 12. A top is probably most likely then, but because this cycle is so overextended, we could see a top and reversal at any time now. We will continue to watch for short-term technical signals (like bearish divergence) that could signal an end to the rally. I know it is tempting to jump on to this bullish rally so as not to miss out on the ride up, but from a technical and cycle point of view this would be dangerous so close to a top formation. (Of course, if the market moves into a parabolic acceleration we could miss out on a lot, but a blow-off top, the peak of which is nearly impossible to call, is usually followed by an even steeper crash, and if long we could lose a lot as well!). Impatient bulls may be comforted by the fact that after a corrective dip we will likely be going long for another rally into Spring/Summer.
Staying on the sidelines of the broad stock market for now.

As with the broad stock market, we are also at the end of our reversal zone for gold and silver. Both metals are making new monthly highs, but gold is soaring above its October high while silver remains below its $17.46 high from Oct. 16 so we still have a case bearish divergence in this market. There are several other short-term signals that suggest a turn down in these metals this week. Let's wait and see if we get a corrective dip to buy. In gold that would be back down closer to $1300, and in silver near $17. Still on the sidelines of the precious metals.

Crude oil prices are pushing a bit higher today as they reached $64.89 (Feb. contract chart) before closing a bit below that high (around $64.80). We are at the end of a reversal zone in crude (it ends tomorrow) so we may be seeing a sub-cycle top here, but as I stated in Friday's blog, I am not comfortable selling short right now without a stronger reversal signal. Prices are above a normal target for this rally, and they are just above a support line for crude around $62. Let's wait to see if we get a corrective dip to buy, say in the $60 - $62 area. The overall picture for crude continues to look bullish. On the sidelines of crude for now but looking to buy.

Trading Blog Friday, January 12, 2018

1/12/2018

MARKETS UPDATE (3:00 pm EST)

In Monday's blog post on the broad stock market I wrote:

"We are seeing an unusual medium-term cycle manifesting in the broad stock market right now. This cycle is unusually bullish and is most likely expanding (distorting) beyond its normal length. It looks like the DOW and S&P 500 are rallying now from a sub-cycle corrective low from Dec. 29. This means it's possible we may not see the final cycle top in these two indices for several more weeks."

This week's steep rise in equities seems to be supporting the idea of a top later this month or in the first week of February (the next reversal zone for this market), but there is still the possibility of the market topping out now. That reversal zone in February is a very weak one so it would make more sense for a cycle top to be happening in the current reversal zone (which ends next Tuesday) which is stronger. The DOW and S&P 500 are also now touching projected ideal target levels for the tops to their cycles, and, of course, in terms of timing these tops are due or even overdue. Let's see if we get a case of intermarket bearish divergence early next week (one or two, but not all three, of the three market indices -DOW, S&P 500, NASDAQ- making new highs) and a signal to sell short. On the sidelines of the broad stock market.

In Monday's blog on gold and silver I wrote:

"...we could be falling into a sub-cycle low now. Ideal targets for that low would be around $1290 in gold and $16.60 in silver. If instead these metals start pushing higher to challenge or exceed last week's high(s) then we will watch for a top this week as we are still in this reversal zone through Friday."

Well, on Monday and Tuesday gold and silver did fall lower (and silver a bit lower on Wednesday), but gold only got to $1309 and silver to $16.91. Prices are now rallying from those lows. This corrective dip was too shallow for a normal sub-cycle bottom (although that is possible in a strongly bullish market). As with the broad stock market, I am going to extend the current reversal zone for this market into next Tuesday. We should note here that today gold is making a new monthly high while silver is well below its high for the month. This is a strong bearish divergence signal and could be signaling a top. That signal will be negated if silver makes a new high next week (above $17.37). Staying on the sidelines of gold and silver for now.

On Tuesday I posted an update on the crude oil market and wrote:

"There is currently a resistance line for crude prices from $60 - $63. Today's price surge was testing the upper level of that range. We are now in the dead center of a reversal zone specifically for crude (Jan. 3 - 15), and it is a good time for a sub-cycle corrective dip after a strong four week rally. The charts and cycle timing are telling us we should sell short now for a short-term correction, perhaps down to the $59 area, but increased price volatility from the Iranian rebellion is making this risky. It may be safer to just wait for a correction and then buy. As Iranian tension builds, I am much more comfortable with a long position than a short one."

All of this still applies, although I notice that there has been no major news on the Iranian rebellion since the Ayatollah's "threat" delivered on Tuesday. It is a bit disconcerting how we seem to be on the verge of a major war every other week or so (North Korea, Syria, Russia, now Iran) but then the "danger" passes and is forgotten. The rally in crude may have reached its peak yesterday when prices topped out at $64.77 (Feb. contract chart). Because we are at the end of a reversal zone, that may be it, and we could see prices start to fall now. Prices are closing the week above a line of resistance so I am not comfortable selling short here. Let's wait and see if crude can push higher next week. If we observe a strong technical reversal signal, I may consider selling short next week, but as I pointed out in Tuesday's update, our main strategy now is to wait for a modest sub-cycle correction to buy. On the sidelines of crude oil for now.

Trading Blog Tuesday, January 9, 2017

1/9/2018

CRUDE OIL UPDATE and COMMENT ON IRAN (6:00 pm EST)

Crude oil is presenting an interesting picture right now. In terms of cycles, crude most likely started a new medium-term cycle with its low on Dec. 7, 2017 at $55.88 (Feb. contract chart). This is bullish because the early part of any cycle is usually bullish. It is also very early in crude's longer-term cycles (9 and 18 year cycles) that likely started with crude's low around $38 in early 2016 (Feb. contract chart ; this would be around $26 in the continuous contract chart). This further supports a bullish argument for crude. On top of this, an inverted "head and shoulders" chart pattern (a very bullish sign) had been forming in crude since early 2015 and was completed in late 2017 with crude prices surging up from the completed formation.

The bottom line here is that the medium and long-term picture for crude looks quite bullish with an initial price target projection to around $75 which could be attained this year. We are thus looking to buy any significant correction that holds above $55.88 (the start of the current medium-term cycle). What makes this a little tricky right now is the "wild card" factor that often affects the crude oil market, i.e. trouble in the Middle East. The Iranian people's rebellion against their theocratic regime has heated up recently, and this has most certainly contributed to the steep rise in crude oil prices over the last several weeks. In the news today Iran's supreme leader Ayatollah Ali Kahmenei lashed out at President Trump and Great Britain, accusing them of supporting the people's rebellion and attempting to overthrow the Islamic Republic. The Ayatollah also vowed to "respond" to U.S. interference in his country's affairs. Not surprisingly, crude oil prices shot up today to a high of $63.24 before closing around $62.88. Of course, all of this rhetoric from Trump and the Ayatollah could just be saber rattling, but it does make financial and commodity markets nervous.

There is currently a resistance line for crude prices from $60 - $63. Today's price surge was testing the upper level of that range. We are now in the dead center of a reversal zone specifically for crude (Jan. 3 - 15), and it is a good time for a sub-cycle corrective dip after a strong four week rally. The charts and cycle timing are telling us we should sell short now for a short-term correction, perhaps down to the $59 area, but increased price volatility from the Iranian rebellion is making this risky. It may be safer to just wait for a correction and then buy. As Iranian tension builds, I am much more comfortable with a long position than a short one. Staying on the sidelines of crude for now.

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