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Trading Blog Wednesday, January 29, 2020

1/29/2020

COMMENT ON THIS WEEK'S FED MEETING and THE BROAD STOCK MARKET (6:00 pm EST)

The U.S. Federal Reserve left its benchmark short-term interest rate unchanged today and expressed a generally positive view of the economy. As always, the Fed's rhetoric leaves open the possibility of having to intervene with rate changes if the economic data justifies it in the future, but for now it seems like there are no rate cuts planned for this year.

It looks like Fed Chairman Jerome Powell may be reverting back to his hawkish persona after his unexpectedly dovish spree in 2019 when he cut interest rates three times. But last year's rate hikes were done to keep the economy and stock market buoyant during the Trump Administration's "trade wars" with China which had a strong negative impact on Wall Street. Interestingly, today's Fed statement made no mention of this year's corona virus epidemic which is also having a negative impact on global economies, but Mr. Powell did mention it as an economic risk in his press conference following the release of the Fed's statement. Jerome Powell has been criticized severely by President Trump for not being more dovish and accommodating with monetary policy, but Powell has also been criticized by others for "caving in" to Trump with last year's rate cuts. Trump is sure to put more pressure on Powell for rate cuts this year as a buoyant stock market will surely help him get reelected. But will Powell "cave" to Trump's wishes this time?

Besides the manipulation of interest rates to stabilize the economy, the Fed since last October has started a temporary program of Treasury bill purchasing which some analysts are calling a "new QE (quantitative easing)" (even though the Fed says it is not). This program is supposed to be temporary, but many analysts see Powell and the Fed extending it to maintain economic stability and a buoyant stock market.

The broad stock market rallied strongly today but then lost most of that gain by the closing bell. Investors were not expecting any rate cut today, but they may have been hoping the Fed's statement would suggest the possibility of some rate cut(s) this year, which it did not. We are still holding our short position in this market.

Trading Blog Tuesday, January 28, 2020

1/28/2020

MARKETS UPDATE (3:00 pm EST)

After yesterday's dramatic plunge, equity markets are having a "relief rally" today fueled by traders attempting to "buy the dip" on the assumption that this market is still very bullish and will soon shrug off the panic over China's alarming coronavirus epidemic. This market may still be bullish, but I'm not so sure the "dip" is over. As I discussed in yesterday's blog, there's a good chance we are seeing the final corrective drop in the medium-term cycles of all three stock indices (DOW, S&P 500, NASDAQ). This drop would normally last 2 - 5 weeks. This is week 2 for the DOW and only week 1 for the S&P 500 and NASDAQ so they could (should) drop some more before hitting a bottom. Furthermore, we haven't yet reached any of the normal bottom target prices for the DOW that I mentioned in yesterday's blog. Of course, markets don't always behave the way we want them to, and if this one is in a "blow-off" mode it is possible to see more rallying from here. But today's rally looks suspiciously like a "dead cat bounce". For now, I am going with the idea that equities are headed lower, most likely into the first two weeks of February. We already have a large gain in our short position from yesterday's drop so I think we can afford to ride out this rally (as long as it doesn't go too high). Holding my short position in the broad stock market for now.

The price of crude oil has also been dropping towards its final medium-term cycle bottom which, like the stock market, is also due anytime over the next several weeks. We are in a reversal zone now (it ends Wednesday) and yesterday crude made a new low at $52.13 (March contract chart). That could be the final cycle bottom, but that low is very close to the $50.18 low that began this cycle on Oct. 3, 2019. That means this market could be turning bearish. If crude goes down with the broad stock market, the final cycle low in crude could end up well below that Oct. 3 mark. Let's stay on the sidelines of crude for now

Gold and silver prices have been edging up over the last two weeks and seemed to be on the verge of "breaking out" over their recent Jan. 8 highs. They may still do that, but today gold and especially silver were sharply down. We are in a reversal zone so a correction from a top can be expected. The overall picture for these metals still looks quite bullish, but we may see some short-term price fluctuations before any major rally takes off. COT (Commitment of Traders) charts still look quite bearish for both gold and silver which makes me less than enthusiastic to buy at the moment. If we get any significant correction in gold and /or silver, it might give us a good buying opportunity, but let's stay on the sidelines for now.

One reason for the precious metals backing down today is because the U.S. Dollar Index seems to be breaking out of a downtrend channel it has been in since October 2019. A rally in the dollar now could push gold and silver prices lower, but in mid-February we come into a reversal zone specifically for currencies. That could put a cap on the greenback's rally and send it down again. Maybe that will also correspond to a low to buy in the precious metals. We shall have to wait and see if the dollar can sustain a rally over the next three weeks.

The longer-term picture for the U.S. Dollar depends a lot on whether or not the greenback can exceed its 14 year high of 103.82 from January 2, 2017. Right now, that seems unlikely (but not impossible). If that 103.82 high holds, the dollar should roll over soon and continue a steady decline into 2024 - 2025. On the other hand, if the dollar can exceed that 103.82 high, it could become very bullish and rally as high as 120 before declining into a 2024 - 2025 bottom. Right now, the U.S. Dollar Index is up to 98. We will keep an eye to any rally with special attention on that 103.82 mark. I should note that normally a dollar rally as I've described here (up to 120) would tank the gold and silver markets. That could happen, but the world's economic and financial landscape these days is far from normal. Under certain conditions, the U.S. Dollar and the precious metals can rise together. In other words, a "super rally" in the dollar will not necessarily spell doom for the precious metals. "Gold bugs" can take some comfort in this.

Trading Blog Monday (late night), January 27, 2020

1/27/2020

BROAD STOCK MARKET UPDATE (11:30 pm EST)

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

"We are also now in our new reversal zone (Jan. 22 - 29) so there is a good chance the broad stock market is going to turn down here....One bearish force on the markets over the last few days has also been from China - the news of a mysterious and deadly new corona virus that seems to be spreading rapidly in that country and has now been detected in the U.S. This alarming news story could linger and give the jitters to an already nervous and overbought stock market."

It looks like this is happening as news of the spreading coronavirus rattles Wall Street and the DOW takes a 454 point plunge today. Holding on to our short position in the NASDAQ is now paying off, and it looks like the steep correction we had been anticipating is in progress. This correction should be the final correction of the current medium-term cycle in all three market indices (DOW, S&P 500, and NASDAQ). As such, it could be steep and deep (assuming bullish forces don't truncate a "normal" correction). In the DOW, we should get at least down to 28,000, but it may drop a lot more. An 8% correction is a strong possibility which would bring the DOW down to the 27,000 area. There is even the possibility of testing the start of the cycle which was 25,743 on October 3.

A normal corrective drop to the final cycle low would take around 2 - 5 weeks (a bit longer if the market is really turning bearish), and this is the second week in the drop (from the Jan. 17 all-time high of 29,373). That means the correction could be over by the end of this week. We'll consider covering our short position this week and taking profits if a bottom appears to be forming, especially near one of the DOW targets mentioned above. But I think there's a good chance the correction may bottom in our next reversal zone coming up in the first two weeks of February. If it does, that's where we'll take our profit and most likely switch to a long position (as long as the correction stays above that 25,743 October low). For now, we will hold our short position in the broad stock market.

Trading Blog Thursday, January 23, 2020

1/23/2020

UPDATE ON THE BROAD STOCK MARKET (5:00 pm EST)

This week the S&P 500 and NASDAQ are making new highs, but the DOW is not (so far) which is giving us an intermarket bearish divergence signal. We are also now in our new reversal zone (Jan. 22 - 29) so there is a good chance the broad stock market is going to turn down here. This is encouraging as we are still holding our short position in the NASDAQ or other broad stock market index. Nevertheless, we shouldn't underestimate the amazing buoyancy of equities right now. President Trump (and Wall Street) appear to be shrugging off the impeachment trial, and investors seem pleased with the first phase of the U.S./China trade deal - all of which lend a bullish thrust to equity markets. One bearish force on the markets over the last few days has also been from China - the news of a mysterious and deadly new corona virus that seems to be spreading rapidly in that country and has now been detected in the U.S. This alarming news story could linger and give the jitters to an already nervous and overbought stock market.

We will continue to keep a sharp eye on this market. If the DOW does manage to make a new high tomorrow, we still have the possibility of a bearish divergence signal early next week within our reversal zone. As I've mentioned in earlier blogs, a top and significant correction in the broad stock market is now due (overdue). Let's stay short in this market for now with a stop loss based on the DOW making a new high, especially if it happens next week.

Trading Blog Wednesday, January 22, 2020

1/22/2020

CRUDE OIL TRADE ALERT (3:00 pm EST)

After rallying last week from Wednesday's low of $57.42 (March contract chart), crude oil prices are falling today and have broken below that low. In Wednesday's blog on crude I suggested entering a long position the next morning (Thursday) with a stop loss at the low of the week. It looks like we are closing below that low ($57.42) so I am going to sell my long position now. We are taking a small loss here, but we may jump back in if crude bottoms later this week or early next and shows signs of reversing back up. Selling my long position in crude today.

Trading Blog Sunday (evening), January 19, 2020

1/17/2020

BRIEF UPDATE ON BROAD STOCK MARKET and CRUDE OIL (9:30 om EST)

Wall Street responded positively to last Wednesday's official signing of "phase one" of the U.S./China trade deal. Equities rallied strongly on Thursday and even edged to new all-time highs on Friday. Our strong reversal zone ended Thursday, but I am going to allow an extension on this one, especially as Monday is a holiday (Martin Luther King Jr. Day) and we segue into another (weaker) reversal zone next week (Jan. 21 -29). This market may be showing signs of rolling over so I'm going to hold my short position for now. Once the news of the trade deal subsides, we could easily see the market turn down. If we see intermarket bearish divergence early next week (one or two but not all three stock indices - DOW, S&P 500, NASDAQ - making new highs) then it will be a strong sign of a reversal. On the other hand, any strong rallying and new highs in all three indices would be reason to cover our short position, so stay tuned for updates. If this market is "breaking out" it may skip a corrective dip for now, but it is late in the current medium-term cycle, and a top is due (overdue) to be followed by a significant correction (perhaps 7%). Holding my short position in the NASDAQ (or broad stock market) for now.

Crude oil prices also rallied in the second half of last week. Our long position in this market therefore had some gain to offset slight losses (so far) from our short position in the NASDAQ. Ideally, next week we want to see crude continue its rallying and equities turn down so we can do more than just "break even". Holding my long position in crude.

Trading Blog #2 Wednesday (evening), January 15, 2020

1/15/2020

MARKETS UPDATE and CRUDE OIL TRADE ALERT (8:00 pm EST)

Today "phase one" of the new U.S./China trade deal was officially signed. The full text of the trade deal was released late in the afternoon. While Wall Street rallied enthusiastically early in the day, it lost it's enthusiasm in the afternoon with the NASDAQ losing nearly all of its earlier gains (the DOW lost about half of its early gains). It's very possible equity markets were not impressed with this new deal (especially the delay in lifting many tariffs on China) and/or we are seeing a "sell on the news" effect with the market having already factored in the new deal with its recent rally. For these reasons (and the fact that we are near the end - Thursday - of a strong reversal zone), I decided to enter a short position in the NASDAQ earlier today. It looks like the NASDAQ could roll over now, but if it pushes higher into Friday (past our reversal zone), we will likely have to cover this short trade as the market could be "breaking out" instead of reversing. We will watch this carefully and are prepared to be nimble in our trading.

Crude oil made a new low today at $57.36 (Feb. contract chart). A sub-cycle low in crude is due by the end of this week, and prices are now in a good range for that low. There is a good chance today's low was it, or it could push a bit lower into tomorrow (the last day of our reversal zone). It looks like a good time to go long in crude. Let's enter a long position in crude now for tomorrow's market open. We will set a temporary stop loss for this trade on a close below $56. If prices push lower tomorrow and hold that level, we will move the stop loss up to that new low. If prices rally, we will set the low at $57.36. Note that crude oil prices and the broad stock market generally (but not always) move in the same direction. Our long position in crude may therefore be a good hedge against our current short position in the broad stock market. In other words, if crude AND the NASDAQ both rally, the loss in our short NASDAQ position will be offset by the gains in crude. Of course, ideally we want to see the NASDAQ down and crude up (very possible), but should they move in tandem (up or down), they will at least hedge each other.

Gold and silver markets are very tricky right now. We've been waiting for a low to buy, but prices haven't quite made it to our target areas. Another concern is the fact that COT (Commitment of Traders) charts for both metals continue to be strongly bearish. For these reasons we will remain on the sidelines of the precious metals for now.

Trading Blog Wednesday, January 15, 2020

1/15/2020

BROAD STOCK MARKET TRADE ALERT (3:15 pm EST)

The broad stock market appears to be peaking and ready to reverse down in our current reversal zone (which ends tomorrow). The NASDAQ looks especially bearish now so short selling a NASDAQ ETF would be appropriate here. Let's enter a short position in this market now. Our stop loss for now will be any new high in the NASDAQ after Thursday.

Trading Blog Tuesday, January 14, 2020

1/14/2020

BRIEF MARKETS UPDATE (9:30 pm EST)

Today all three broad stock market indices (DOW, S&P 500, NASDAQ) made new all-time highs which means we are not going to get an intermarket bearish divergence (sell) signal in the current reversal zone (which ends Thursday). Could this market still top out and reverse down now? Yes, it could. In fact, today's indices closed in the lower half of their day's ranges which is a bearish sign. This market has been bullish in anticipation of "phase one" of a new U.S./China trade deal to be signed tomorrow (Wednesday). Today's market closed low due to a news release announcing that the phase one deal would not include a rolling back of tariffs on China. It is being reported that tariffs on Chinese goods will not be lifted until "phase two" of the deal, which is not expected until after the November presidential election. Wall Street was disappointed, but it may get over it if tomorrow's official signing of the deal presents an optimistic picture of "phase one". If investors really like this new deal, equities could "break out" instead of reversing down. Then again, we may see a case of "buy the rumor (talk of the new trade deal)" and "sell the news (actual signing of the deal)" play out and give us the reversal we've been waiting for. We will stay on the sidelines of all markets until we see how this plays out over the next few days, but be prepared to buy or sell short on quick notice.

Trading Blog Sunday (evening), January 12, 2020

1/12/2020

MARKETS UPDATE (8:00 pm EST)

All three major market indices (DOW, S&P 500, NASDAQ) made new all-time highs by the end of last week so we lost our bearish divergence signal from earlier in the week. We will watch for another one early this week as we are now in the center of our reversal zone.(Jan. 7 - 16). If we get it (one or two but not all three indices making new highs), we will consider selling short the broad stock market.

We are still waiting for a deeper correction in both gold and silver to go long. Gold could still get down to the $1500 area, but if it doesn't and starts rallying strongly, we may try and jump in anyway, especially if prices break above last week's high of $1609. It looks like silver has turned especially bullish and we have to relabel silver's medium-term cycle as having started on Dec. 9 at $16.52. That means we could see a sub-cycle dip near $17.20 soon which could turn out to be a good buy spot. If last week's high at $18.72 holds, we might see that sub-cycle low this week. Let's stay on the sidelines of gold and silver for now.

Crude oil may also be close to a sub-cycle low now. Today (Sunday) crude prices continue to dip lower. If prices don't break below $55 early next week, we will consider entering a long position. Any heating up of tensions between the U.S. and Iran will obviously have the potential to trigger a rally in crude prices. On the sidelines of crude oil for now.

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