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Trading Blog Thursday, January 31, 2019

1/31/2019

UPDATE ON THE BROAD STOCK MARKET (5:30 pm EST)

Economic analysts are expressing mixed opinions today about yesterday's "about-face" turn of the Federal Reserve from hawkish to dovish in their stance on interest rate hikes. Some are complaining that this abrupt change shows that the Fed is caving in to market pressure (and perhaps even to criticism from President Trump) and erodes the Fed's credibility. Others are saying that the "data-dependent" stance of the Fed is appropriate given today's highly volatile economic environment. One particular analyst expressed the concern that if this bad news about the economy is good news for the stock markets then we are just "kicking the can" down the road and may be postponing a correction in equities that is now overdue. That correction could be more severe if delayed. I tend to agree with this last point, but it's still a little too early to judge the full impact of yesterday's dovish cooing on equity markets.

After yesterday's 400 plus point gain, the DOW dropped 150 points this morning but then crept back up to close the day with just a 15 point loss. Significantly, its close at 24,999 did not break the 25,000 "psychological resistance" level and was also still below our stop loss point of 25,100. The S&P 500, however, did break our 2,700 stop loss line (closing at 2,704) so some traders may have already covered their short positions. This is fine as we are now at a high risk for a strong market rally propelled by yesterday's dovish rhetoric from the Fed. Nevertheless, we are still in a reversal zone (although a weak one), resistance in the DOW seems to be holding, and tomorrow is Friday. I am going to wait and see if the week can close below our stop loss (resistance) lines. If not, I will probably cover my short position in the broad stock market. Holding my short position for now.

Trading Blog Wednesday (evening), January 30, 2019

1/30/2019

MARKETS UPDATE (9:30 pm EST)

In its typical roller coaster fashion, the broad stock market dropped significantly on Monday and Tuesday but shot back up today with a significant rally (the DOW closed up 434 points). Today's rally was driven by an anticipated "dovish" tone from today's Fed meeting wrap up and policy statement. The Fed did not disappoint as it left interest rates unchanged and stated that it will be "patient" now with any further rate hikes. This was music to the ears of Wall Street which has not been appreciative of the Fed's recent aggressive attitude in rate hiking.

Monday's drop did not reach our target areas (23,600 - 24,000 in the DOW and 2,500 - 2,600 in the S&P 500) and was not deep enough to qualify as a normal sub-cycle correction. This means that the cycle is either going to bypass a correction now or we are still forming a top in the current (weak) reversal zone (Jan. 29 - Feb. 6) that will reverse down any day (now through next Wednesday) to touch or break below our targets. Today all three indices (DOW, S&P 500 and NASDAQ) made new weekly highs so last week's bearish divergence signal is now negated. We still have not exceeded our stop loss points for our short position (25,100 in the DOW and 2,700 in the S&P 500). There is some resistance at those levels so there's a reasonable chance they will hold. It all depends on whether or not today's dovish cooing from the Fed has the power to sustain and propel a rally from here. I am going to hold my short position for now with a close eye on those stop loss points.

It looks like last week's lows in the precious metals ($1277 in gold and $15.12 in silver) were probably significant sub-cycle corrections. Because they were well above our target prices for buying, we did not go long. What this means is that both metals are now in the process of rallying to their final peaks before they correct down to their final medium-term cycle bottoms. Gold might get to the $1340 area and silver as high as $17.20. Does this mean we should look to buy now? Probably not. We would be chasing a rally already well in progress (we like to buy closer to a bottom), and there is no guarantee prices will get to those levels just mentioned. Furthermore, short-term technical studies show that this week could be a turning point for gold, and early next week could see a strong sell-off in silver.

Our main trading strategy now will be to wait for the final medium-term cycle bottom in both metals to buy, but even before that we might try to sell short at the the final cycle top (perhaps near those targets mentioned above) as the final corrective move down could be substantial. As long as the final cycle bottom doesn't go too low, this market looks quite bullish. If gold prices can start breaking above $1375, we could see gold possibly as high as $1500 this year. This is my bullish view at the moment; however, a failure to exceed $1375 by July could mean these markets are turning bearish (especially if gold prices break below $1100 - see GOLD Update 8/22/18 on the home page). But I am getting way ahead of myself. For now, we will try to sell short the tops of the current medium-term cycles (which are imminent) and then buy at the the final corrective bottoms. On the sidelines of both gold and silver.

Today's dovish comments from the Fed sent the value of the U.S. dollar down, but as with the broad stock market, we will have to wait and see if those comments have any lasting impact beyond this week (or even today). The U.S. Dollar Index is approaching 95, an area where there is significant support. Also, the current cycle pattern for the greenback looks quite bullish so it doesn't seem likely the dollar is going to tank here. There is room now for the dollar to edge lower into support and encourage the precious metals to rally some more before potentially hitting a a top and reversing (as described in the gold and silver discussion above).

The price of crude oil is taking its cues from the broad stock market, and today it rallied to make a new high for the month at $54.69 (March contract chart). As I've pointed out recently, it is highly likely crude oil started a new medium-term cycle on Dec. 24 at its low of $42.67. It's also possible that was the start of a new longer-term 3 year cycle which, if correct, means this market is quite bullish and prices could be pointed up for the rest of the year. According to cycle projections, we could eventually see prices back up near $100 within the next 3 years. For these reasons, we are looking to go long in this market as soon as possible. As with the other markets, we have been waiting for a sub-cycle correction to buy (in the $48 - $50 area) but bullish forces seem to be delaying (or preventing) a normal correction. Today's new high is happening in a mild (weak) reversal zone so we could still see a price dip start over the next several days. If prices edge higher past next Wednesday, however, we may have to wait another week or two for a corrective dip to buy. Still on the sidelines of crude oil but looking to buy any time now.

Trading Blog Sunday, January 27, 2019

1/27/2019

BRIEF UPDATE ON THE BROAD STOCK MARKET (6:00 pm EST)

I am still favoring a bullish scenario in the broad stock market right now; that is, we are assuming that the DOW and S&P 500 both started new medium-term cycles from their lows on Dec. 26 and will be pointed up for at least several more months. In this scenario, a top and modest sub-cycle corrective dip are now due and should give us a good spot to go long. Last week ended with a new weekly high in the DOW but not the S&P 500 or NASDAQ - i.e. intermarket bearish divergence. This means equities could correct down now. I am going to raise my target areas for a correction to 23,600 - 24,000 in the DOW and 2,500 - 2,600 in the S&P 500. The upper ranges of these targets are close to our entry point for our current short position so we should be able to cover those positions with no loss and then go long. If these indices push higher early next week and negate our bearish divergence signal, we may have to wait a bit longer for a top and a corrective dip to buy. Holding my short position in the broad stock market for now.

Trading Blog Friday, January 25, 2019

1/25/2019

MARKETS UPDATE (3:30 pm EST)

The broad stock market continues its buoyancy as we come to the end of the current strong reversal zone for equities (it ends Monday). The DOW edged up to a new monthly high today, but (at the time of this writing) the S&P 500 and NASDAQ are still below last week's highs so we have a case of intermarket bearish divergence. It looks like this reversal zone is going to correlate with a high (unless we see a bullish "breakout" next week which occasionally happens in a reversal zone). We still have not exceeded our stop loss points for our short position (25,100 in the DOW and 2,700 in the S&P 500) so I am remaining short for now.

Gold and silver prices shot up today in response to a sharp drop in the U.S. Dollar Index. We may have a case of bearish divergence in this market too as gold made a new monthly high today and silver did not. Neither gold nor silver has corrected down to our ideal target price ($1245 in gold and $14.50 in silver). Is today's rally signaling that the short-term correction is over without reaching our targets? It's possible, but if this bearish divergence holds into next week, prices could retreat back down again. Despite today's drop in the dollar, the cycle picture for the greenback looks quite bullish right now so we could see it recover and continue its rally next week which could bring the price of gold and silver back down. On the sidelines of gold and silver and still waiting for a spot to buy.

Crude oil prices have been relatively flat this week. Crude did make a new high on Tuesday at $54.51 (March contract chart) which was near the center of the current reversal zone in crude that ends today. This is suggesting that prices could move lower now from that top (especially since the next major reversal zone for crude is in early March). Let's wait and see if prices can back down into the $48 - $50 range where we will consider going long. A break below $44 might change this bullish view. Still on the sidelines of crude oil.

Trading Blog Tuesday, January 22, 2019

1/22/2019

MARKETS UPDATE (3:30 pm EST)

In last Friday's blog I re-posted the two likely scenarios I think the broad stock market could take from here. One has the DOW, S&P 500 and NASDAQ starting new medium-term cycles from their lows on Oct. 29. That scenario is bearish with these indices pointed down for at least four more weeks as they move to their final cycle bottoms. The second scenario has these three indices starting new medium-term cycles from their Dec. 26 lows (21,712 in the DOW and 2,346 in the S&P 500). This scenario is bullish and could see equities rally for several more months and easily make new highs. On Friday I was favoring the first (bearish) scenario, but after looking over the charts and reviewing the cycles, I am now favoring the second (bullish) scenario. Regardless of which is correct, this market is due to make a top and some sort of correction in our current reversal zone (Jan. 16 - 28), and that may be starting now as all three indices are down strongly today from Friday's highs. In our favored bullish scenario, this correction should be modest and not break below those Dec. 26 lows. In that case, a good target for the correction would be around 23,100 - 23,400 in the DOW and around 2,500 in the S&P 500. We will watch for these areas to cover our current short position and possibly go long. If these indices break significantly below those targets, however, we will either stay short or stand aside as the bearish scenario could still unfold. Holding my short position for now.

Please note that even in the bullish scenario described above, which could see a very strong rally (possibly a "blow-off") for several months, the final top to that new cycle will most likely be followed by a very severe correction (possibly 50% or more) so equity markets are not "out of the woods" yet. I will discuss more on this longer-term picture soon.

A strong short-term bearish signal appeared in the charts of both gold and silver yesterday suggesting that the significant correction we've been waiting for in these metals is in progress. A good target for this correction would be around $1245 in gold and $14.50 in silver. We will watch for these targets to go long. Currently on the sidelines of gold and silver.

Crude oil prices seem to be edging down from a high of $54.17 on Sunday (Feb. contract chart). That was pretty much in the center of the current reversal zone for crude (Jan. 14 - 25), but the reversal extends through this Friday so prices could still push higher before turning down. It still looks like crude started a new medium-term cycle and possibly a new longer-term 3 year cycle with its low of $42.36 on Dec. 24. If so, this market could be very bullish and pointed up for at least the rest of this year. We are therefore looking for a good buy spot now. A corrective dip to the $48 - $50 area might give us a good opportunity to buy. On the sidelines of crude oil for now.

Trading Blog Friday, January 18, 2019

1/17/2019

COMMENT ON THE BROAD STOCK MARKET (3:00 pm EST)

For most of this week the broad stock market (and other financial markets) seemed stagnant and reluctant to make any definitive directional moves. This was likely mirroring investor uncertainty about the standoff between President Trump and the Democrats over the funding of the border wall and the resulting government shutdown, now in its 28th day - the longest on record. Despite investor's worries about the shutdown, however, the recent soft (dovish) tone from the Fed seems to be giving a buoyancy to equity markets and holding off a strong downturn. Another worry on Wall Street for most of this week was the unresolved "trade war" standoff between Trump and China. That changed dramatically yesterday when news of U.S. officials considering the lifting of some tariffs on Chinese products caused an abrupt 250 point spike in the DOW around 2:45 pm EST. The market fell back down within minutes, but the DOW still closed the day with a 163 point gain.

Today China extended an "olive branch" back to the U.S. by offering to significantly boost its purchase of U.S. goods over a six-year period in an effort to re-balance trade between the two superpowers. Could this be the end of "trade wars" with China? We shall have to wait and see. Wall Street, however, is not waiting to express its enthusiasm for this potential easing of trade wars. The DOW gained over 300 points this morning. This, of course, is not good news for our short position which we entered yesterday, but it would be premature to bail out of this trade on today's rally. Our stop loss for this trade was tentatively 25,100 in the DOW and 2,700 in the S&P 500 and we have not exceeded those levels yet. The fact that equities are rallying so strongly to news of a possible lifting of tariffs and a possible end to trade wars shows just how volatile this market is, and volatility works in both directions. In other words, we are still in a reversal zone for this market (through next Friday), and the market could still top out and reverse back down. If instead the rally continues (especially past our stop loss points), we may have to switch to the idea that new medium-term cycles started with the market's lows on Dec. 26. In that case, we would need to bail out of our shorts with a small loss and look to go long for what would likely be a strong rally for many more weeks or even months. To refresh the readers memory on the two basic scenarios still possible in the broad stock market, I am copying an excerpt from my blog on Jan. 1 below which is still valid:

1) Our preferred scenario [ is ] the DOW and S&P 500 starting new medium-term cycles from their Oct. 29 lows. In this scenario, both indices have turned bearish because they have broken below the Oct. 29 lows that started their cycles. This means that they will likely continue lower over the next 6 - 14 weeks to their final bottoms, and we should be looking to sell short at the top of any short-term rallies (such as the one we are having now).

2) Because of the strength of last week's steep rally on Thursday and Friday, it's possible that last Wednesday's [ Dec. 26 ] deep bottom (21,712 in the DOW and 2,346 in the S&P 500) was the start of new medium-term cycles in these two indices. In other words, the current medium-term cycle could have started then and not on Oct. 29 as described above. This scenario would be bullish, and the rally that started last week could continue for several more months (with corrective dips along the way). Such a rally could easily make new all-time highs in one or both indices, and our trading strategy now would be to look to go long on any short-term dips.

So how will we know which scenario is playing out? Well, if Scenario 1 is valid, then the current sub-cycle rally would be short-term and could get to the 24,500 level and possibly as high as 25,600 in the DOW before turning down.. If we get to those levels in a strong reversal zone and the market seems to be stalling, that may be a good spot to sell short. On the other hand, any break above the Nov. 28 high of 26,277 would suggest that Scenario 2 is playing out.

Note that our current stop loss level for the DOW (25,100) is considerably below the 26,277 level mentioned above.

Holding my short position in the broad stock market for now.

A brief note on precious metals and crude oil:

Gold and silver finally seem to be pushing lower towards the sub-cycle correction we have been waiting for. We are still looking to buy the bottom of that correction soon.

Crude oil is edging higher this week and is likely taking its cues from the broad stock market's rally, but it too is in a strong reversal zone so any new high could easily be the top of another correction. We are also looking to go long in this market soon.

Trading Blog Wednesday, January 16, 2019

1/16/2019

BROAD STOCK MARKET TRADE ALERT (5:00 pm EST)

The broad stock market indices (DOW, S&P 500, NASDAQ) are now all edging up against strong areas of resistance and stalling as we near the end of a strong reversal zone for this market (Jan. 9 - 17) so it looks like a good time to consider selling this market short. I am hesitating a bit here because yesterday a frequently "hawkish" Kansas City Fed President, Esther George, gave a public statement declaring that it might be a good time for a pause in interest-rate hiking. This surprisingly dovish comment from a central bank official may have given a bullish lift to the broad stock market today, and in fact some short-term technical indicators are looking more bullish. Although tomorrow technically ends the current strong reversal zone, it could extend into next week as there is a weaker reversal zone that overlaps the current one and runs through Jan. 28. My point here is that there's a chance equity markets could push higher into next week and still be in a reversal zone for a top.

So what should we do? At the end of today's trading the DOW was up 141 points but down from today's high and closed in the middle of today's range. Both the S&P 500 and the NASDAQ closed well below today's highs and in the lower end of their day's range. This is a bearish sign and we could be seeing a top here. I am going to sell this market short now and enter a short position for tomorrow's market open. If the market falls steeply tomorrow (without first exceeding today's highs) then we can use today's highs as a stop loss for our short trade. If equities instead rally some more, I will determine an upper stop loss point based on the behavior of the market. For now that stop loss would be 25,150 in the DOW and 2,700 in the S&P 500, but I may lower these levels depending on how the market moves into the end of the week.

Trading Blog Sunday (night), January 13, 2019

1/13/2019

MARKETS UPDATE (10:45 pm EST)

In last Wednesday's blog on the broad stock market I wrote:

"Although it's possible the DOW and S&P 500 started new medium-term cycles from their lows on Dec. 26, I am still favoring the alternative view that they are both in the middle of older cycles that started on Oct. 29 and are bearish and heading lower to their final cycle bottoms over the next 4 -13 weeks. In this bearish scenario, the current sub-cycle rally should end shortly. Our general target for the rally is around 24,500 in the DOW and 2,650 in the S&P 500. Let's see if we can get closer to those levels this week or next before attempting to sell short."

Well, we got a little closer on Friday as the DOW closed just a bit below 24,000 and the S&P 500 closed slightly below 2,600, but we're still below those targets. Next week there is resistance in the DOW around 24,300 and in the S&P 500 around 2,628. We are currently at the center of a strong reversal zone so a top can happen any time now, but this reversal zone is wide and can extend through this Friday. There is also a short-term technical signal on Monday that could correspond to a top. If we can edge up at least to those resistance levels early next week (maybe tomorrow), we will look to sell this market short. Our stop loss for any short position will be based on how high these indices go by the end of the week. We don't want to see the DOW above 25,150 or the S&P 500 above 2,700. On the sidelines but looking to sell short early next week.

We are also now at the center of a reversal zone for gold and silver. A double top to the $1298 high in gold on Jan. 3 may have happened with last Wednesday's high of $1297, but prices still have time to push higher this week. Silver also made a new high ($15.85) on Jan. 3. That may have been the sub-cycle top, but like gold, silver could also push higher this week. We are still waiting for a correction in both metals and a low to buy soon. We are going with the idea that new medium-term cycles started in both metals in mid-November. If so, good target areas for a correction to buy would be around $1245 in gold and $14.50 in silver. Still on the sidelines of gold and silver.

It is looking more and more like crude oil made a medium-term cycle bottom on Dec. 24 at $42.36 (Feb. contract chart). It is also very likely that was a longer-term 3 year cycle low. If it was, that means the crude cycle is bullish and is just starting a long-term rally that could be pointed up for at least the rest of this year (with corrective dips along the way). The new 3 year cycle could eventually see prices back to $90 or even higher. We should now be looking for a good buy spot in crude. While we could still see prices drop to form a double bottom near that $42.36 low, that may not happen. Let's try and go long in the $48 - $49 area if offered this week. IF THAT $42.36 LOW HOLDS, WE MAY NOW BE CLOSE TO AN EXCELLENT ENTRY POINT FOR LONGER-TERM INVESTORS IN CRUDE OIL. If prices push higher into the center of this week's reversal zone specifically for crude (around Friday) then we may have to wait a little longer for a corrective dip to buy. On the sidelines of crude oil but looking to go long soon.

Trading Blog Wednesday, January 9, 2019

1/9/2019

MARKETS UPDATE (3:00 pm EST)

We are now entering the strong reversal zone for equities that runs from Jan. 9 - 17, and the broad stock market continues to rise. Although it's possible the DOW and S&P 500 started new medium-term cycles from their lows on Dec. 26, I am still favoring the alternative view that they are both in the middle of older cycles that started on Oct. 29 and are bearish and heading lower to their final cycle bottoms over the next 4 -13 weeks. In this bearish scenario, the current sub-cycle rally should end shortly. Our general target for the rally is around 24,500 in the DOW and 2,650 in the S&P 500. Let's see if we can get closer to those levels this week or next before attempting to sell short. If the DOW gets above 25,150, however, we may have to abandon our bearish view and switch to the bullish scenario of new cycles starting Dec. 26. I should point out here that even in our bearish scenario, once the medium-term cycle lows are in, we could see another strong multi-month rally possibly to new all-time highs before another very severe reversal that could rival or even exceed the 50% correction of 2008-2009. I will comment more on this longer-term cycle once our medium-term cycles become more clearly defined. Still on the sidelines of this market.

We are also now entering a reversal zone specifically for gold and silver (Jan. 9 - 17, same as for the broad stock market). As with equity markets, we have two possible scenarios for gold: a new medium-term cycle starting on Nov. 13 or an older cycle that started way back on Aug. 16. If it is an older cycle then that cycle is nearly complete and is ready to take a final steep plunge to its bottom. If it is a younger cycle starting on Nov. 13 then it is also ready to take a correction, but that correction will be a shallower sub-cycle "dip". Either way, we want to buy the bottom of the correction. Silver most likely started a new medium-term cycle on Nov. 14 and is also now due for a sub-cycle correction which could be substantial. If gold and silver prices continue to fall into this new reversal zone, we may get a good buy spot in both metals this week or next. If prices edge higher and exceed last week's highs (in one or both metals), we may instead get a top in this reversal zone and have to wait a little longer for a corrective bottom to buy. On the sidelines of precious metals for now but looking to buy soon.

In November the U.S. Dollar Index seemed to be on the verge of "breaking out" and soaring to new highs, but recent "dovish" comments from the Federal Reserve along with a possible growing lack of faith in the U.S. dollar's ability to maintain its status as the world's global reserve currency seems to be taking a toll on the greenback. If the U.S. Dollar Index can't get back above 96.5 quickly, it could start to break down. The medium-term cycle in the dollar also looks like it has turned bearish and could be pointed down now for many more weeks (maybe months). Does this mean gold and silver are ready to turn up right now? Maybe, but we note that today's new low in the dollar is happening in a reversal zone specifically for currencies (Jan. 8 - 16) so we could see a bottom and reversal back up sometime this week or next. Considering the bearish factors weighing on the dollar now, however, such a rally may not get very far before turning back down again. Ideally, a short-term dollar rally now could bring about the correction (and buy spot) we want to see in gold and silver prices, and a resumption of the dollar's fall could then drive a strong rally in these metals. We will watch for this.

Crude oil seems to want to rally into the current reversal zone for equities (Jan. 9 - 17). This reversal zone may influence crude, but there is a stronger reversal zone specifically for crude coming up next week (Jan. 14 - 25). What we could see here is crude making a high and then falling into next week's reversal zone to make a new low or perhaps a double bottom to the $42.36 low of Dec. 24. That Dec. low may have already been the final medium-term (and even longer-term) cycle low. If it was, any correction now should not fall below $42.36. Let's look to buy the bottom of any correction into next week's reversal zone. On the sidelines of crude for now.

Trading Blog Friday, January 4, 2019

1/4/2019

MARKETS UPDATE (1:00 pm EST)

The broad stock market continues its roller coaster ride up and down with a huge nearly 700 point surge in the DOW today (at the time of this writing) following yesterday's 660 point drop. A better than expected jobs report for December and some dovish comments from Federal Reserve Chairman Jerome Powell seems to be responsible for today's rally.

These jittery vacillations in equity markets are not making it easy for us to call a directional trade (which is why we are still on the sidelines), but we should be seeing a top to sell short or bottom to buy soon. We're now in the center of our first reversal zone in January (Jan. 1 - 9), but this one overlaps with a stronger one next week (Jan. 9 -17). If this market can continue a rally into next week (especially past Wednesday) and we see the DOW get to 24,500 or above (but not above 26,277) then we may have an ideal spot to sell short. On the other hand, if the market falls next week back to or below last week's low (21,712) then we will likely want to buy. Stay tuned for trade alerts.

It looks like we may be finally getting the top and reversal down in gold and silver prices that we have been waiting for, and it is happening in the center of our current reversal zone (Jan. 4). This looks like the first significant sub-cycle correction in new medium-term cycles for both metals that began in mid-November. We will now watch for the bottom of this sub-cycle "dip" to buy as these new cycles could now be quite bullish. A good time for that bottom would be the next reversal zone specifically for gold and silver coming up next week (Jan. 9 - 17, same as for the broad stock market). We will watch for it. On the sidelines for now.

Crude oil may have made its final medium-term and longer-term (3 year) bottom on Dec. 24 at $42.36 (Feb. contract chart), but it hasn't rallied that much from there which has me suspecting it could fall lower. We are coming up to a major reversal zone specifically for crude Jan. 14 - 25. It would be a much better fit for the medium-term and longer-term cycles to bottom in that time frame. We are looking to buy the bottom of these cycles, but let's wait a bit longer and see if prices can push lower into that reversal zone. Still on the sidelines of crude oil..

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