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Trading Blog Thursday, March 31, 2016

3/31/2016

MARKETS UPDATE (9:30 pm EDT)

In Tuesday's blog this week I wrote:
"...The broad stock market is looking very much like it wants to roll over and take some sort of correction. Based on medium-term cycle patterns, the DOW is especially vulnerable right now to a steep (but short-term) drop. Can Yellen's dovish overtures override any corrective forces and kick the markets higher? Maybe, but note... COT charts show that Commercial traders (the "smart" money) liquidated all their long positions in the S&P 500 last week so we shouldn't bet on a strong rally here. Perhaps the Fed (Yellen) realizes that a correction is due and is just trying to minimize it. If all three market indices (DOW, S&P 500, and NASDAQ) break above last week's highs this week then this market could rally for another three or four weeks. On the other hand, if only one or two indices make(s) a new high (but not all three) then we may have a case of intermarket bearish divergence and a strong signal to sell short for at least a short-term (but possibly steep) correction."

Yellen's comments have been kicking equity markets higher, and all three market indices (DOW, S&P 500, and NASDAQ) are making new weekly highs so we have no intermarket bearish divergence this week. The next strong reversal zone for this market falls in the last two weeks of April. If the upward momentum triggered by Yellen's comments continues, we may see this rally push higher into that time frame before any significant correction. All three indices are breaking above strong resistance levels this week. If they close the week above these levels it would be a strong support for more bullish rallying into the end of April. On the bearish side, however, COT (Commitments of Traders) charts still show that the Commercial traders (smart money) have unloaded nearly all of their long positions from last week. It is unwise to bet against the Commercials as they have a long history of being right most of the time. Also, the S&P 500 is now approaching the underside of a giant symmetrical "dome top" that has been forming since 2012 which is an ominous bearish sign (the dome line is currently around 2,075-2,080). Some traders have also noticed the famous "death cross" appearing in the chart of the S&P 500 since early January. This is when the 50-day moving average crosses and stays below the 200-day moving average for an extended period of time. It can also be a sign of bearishness ahead.

So what are we to make of this market? Directional momentum in all three indices is currently mixed bullish and bearish so a clear trend has yet to establish itself. Cycles, timing, and other technical data seem to favor some sort of correction now or within the next several weeks, but central banks (especially the Fed) seem intent on pushing equity markets higher. It could be that Ms.Yellen's speech this week was intended to give a lift to stock markets just before the end of the first quarter (to boost Wall Street profits and bonuses) with the realization that a correction will follow. The Commercial traders' sudden liquidation of their long positions seems to support this idea. Let's see if the markets close up or down tomorrow. If the DOW closes the week back below 17,600, this market may turn bearish. Otherwise, we could see more rallying into late April. Still on the sidelines of the broad stock market.

Crude oil prices made a new low today which means that Tuesday's low at $37.91 was not the subcycle bottom. That bottom is due any time by the end of next week so we could still see prices go lower. Our original target for this correction was around $36 so if we get there over the next six trading days, we could see prices start to rise again. They may not rise very far, however, because directional momentum in crude charts turned 100% bearish today which suggests that the current medium-term cycle may be turning down, and prices could go a lot lower into the summer. If this happens, our trading strategy will be to sell short the top of any short-term rallies. We sold our short position in crude on Tuesday for a good profit and are now on the sidelines of this market.

The surge in gold and silver prices triggered by Yellen's comments on Tuesday does not seem significant (so far), but we are keeping a close eye on it in case this rally starts to gain some legs. Sunday and Monday's lows in gold and silver seem a little too early for the medium-term cycle bottom, and neither metal got into what would be the normal target range for that bottom. The next major reversal zone for gold and silver will be in the last two weeks of April so unless these cycles bottomed earlier this week, we should see prices continue to fall into that time frame. Holding my short positions in gold and silver.

Yellen's dovish comments gave the U.S. dollar a severe beating and this has pushed the U.S. Dollar Index down to strong support at 94.50. If it can recover from here, we could see the precious metals resume their downward correction. Note that support for the dollar extends down to 93, but if that critical level is breached we could see the U.S. dollar start to seriously break down. In my opinion, it is unlikely that will happen right now - I think the dollar can recover and rally some more.

Trading Blog (part 2) Tuesday, March 29, 2016

3/29/2016

MARKETS UPDATE - THE DOVE (YELLEN) COOS AND THE MARKETS REACT (2:30 pm EDT)

During a speech today at The Economic Club in New York, Federal Reserve Chairwoman Janet Yellen stated that the central bank would now have a cautious approach to raising interest rates based on the current uncertainty of global markets. She also revealed that the Fed could rely on bond purchases (more QE?) if the economy stumbles. These comments are reinforcing the recent dovish decision by the Fed to raise interest rates only two times this year instead of four and show the Fed's strong determination to keep equity markets buoyant. Markets are responding strongly to Ms. Yellen's speech, but it is too early to tell if these are serious moves or just knee-jerk reactions to her dovish coos. Not surprisingly, Yellen's dovish tone sent stock markets up and the U.S. dollar down. The precious metals and crude oil (we just unloaded our short position in crude - see below) are also up in reaction to the falling dollar. I was expecting a bounce in gold and silver this week, but not a serious one. These surges may just be a "flash in the pan". We will have to wait and see. Holding my short positions in gold and silver for now.

The broad stock market is looking very much like it wants to roll over and take some sort of correction. Based on medium-term cycle patterns, the DOW is especially vulnerable right now to a steep (but short-term) drop. Can Yellen's dovish overtures override any corrective forces and kick the markets higher? Maybe, but note (as I mentioned in yesterday's blog) that COT charts show that Commercial traders (the "smart" money) liquidated all their long positions in the S&P 500 last week so we shouldn't bet on a strong rally here. Perhaps the Fed (Yellen) realizes that a correction is due and is just trying to minimize it. If all three market indices (DOW, S&P 500, and NASDAQ) break above last week's highs this week then this market could rally for another three or four weeks. On the other hand, if only one or two indices make(s) a new high (but not all three) then we may have a case of intermarket bearish divergence and a strong signal to sell short for at least a short-term (but possibly steep) correction. Still on the sidelines of the broad stock market.

Trading Blog Tuesday, March 29, 2016

3/29/2016

CRUDE OIL TRADE ALERT (12:30 pm EDT)

Crude oil prices are falling today and are now at a strong support area at $38 (May contract chart). Cycle studies and timing factors are suggesting this is a subcycle bottom so I am going to take profits in my short position in crude oil today. We entered this position on March 22 and have seen a decent gain of 7% in seven days. It is still too early to tell if the medium-term cycle trend of crude is bullish or bearish. Prices could drop lower into next week to a deeper low for the current subcycle. If it gets to the $35 area, I may consider going long for another short-term rally.
Covering (unloading) short positions in crude oil now.

Trading Blog Sunday (night), March 27, 2016

3/27/2016

MARKETS UPDATE (11:30 pm EDT)

An unusual development has come to my attention this weekend in an important market indicator that could change our current strategy for trading the broad stock market. Readers may recall that in a recent blog I had mentioned that COT (Commitments of Traders) charts for the S&P 500 had been showing very high Commercial long positions. That was significant because the Commercial traders (smart money) are rarely (if ever) wrong, and it would be unwise to bet against them. This has recently been tempering my enthusiasm for selling short the broad stock market even though strong technical and cycle data have been pointing to an imminent significant correction (and possibly even a market meltdown). Over the last several weeks it seemed like the accommodative moves by the European Central Bank (lower interest rates and more QE) and the Federal Reserve (deciding to raise interest rates only twice instead of four times this year) were attempts by governments and "big money" to prop up the markets and avert a possible stock market crash before the U.S. presidential election later this year. The recent strong Commercial long position in the S&P 500 seemed to support this idea. The unusual development right now is that last week these Commercial traders liquidated nearly all of their long positions in the S&P 500. This could mean that "big money" is aware of the technical and cycle factors pointing to a significant correction now and that they don't feel they can push the market to "breakout" just yet and are thus backing off their long positions. Perhaps they want to allow a severely overbought market to unwind a bit and will attempt to push it higher later in the year. Whatever the reason was for abandoning their bullish stance, we can now be more confident in any short position we might want to establish over the next several weeks. Still on the sidelines of the broad stock market.

Speaking of COT charts, the Commercial trader positions for gold and silver are still very bearish so the corrections that started last week in these metals may have a ways to go before bottoming. We may get a short-term bounce this week because of last week's steep price drops, but such a bounce may not get very far. Cycle studies (and COT charts) are suggesting a longer and deeper correction. Holding my short positions in gold and silver.

Crude oil prices also dropped steeply last week which was good for our short position in this commodity. An ideal target for this correction would be around $35 (May contract chart), but prices may not get that far. I would at least like to see crude get closer to $36 before taking profits in this trade. Once this subcycle correction bottoms (this week or next), we will watch how high the next rally gets to determine whether or not the medium-term cycle in crude is turning bullish. If the next rally cannot exceed the recent high of $42.49, the cycle will stay bearish and prices would likely start to move under $30. A break above that high, however, would project higher prices into the summer. It is too early to tell which way it will go. Holding my short position in crude for now.

Trading Blog Thursday, March 24, 2016

3/24/2016

MARKETS UPDATE (10:30 pm EDT)

"Bingo!" on our decision to short gold and silver at the beginning of this week. Anyone reading this blog over the last few weeks will know that I had been anticipating a top and a significant correction in the precious metals. That is finally happening as gold and especially silver prices plunged dramatically yesterday. It looks like we are on our way to the bottom of the current medium-term cycle in both gold and silver. That could come as early as next week, but it could also be as late as mid-April. We will watch this correction carefully for signs of a bottom now. Gold could get down to the $1150 area and silver to $14.70 or even lower. Holding short positions in both gold and silver.

Crude oil prices also dropped significantly after we entered our short position on Monday. The high of March 18 in crude oil ($42.49 in the May contract now) seems to be a subcycle top so we could see a correction to the $36 area or possibly lower. This correction, unlike the one in gold and silver, could be brief (3-8 days), and we need to watch carefully for a bottom now. Holding my short position in crude for now.

The broad stock market appears to be rolling over after the DOW and S&P 500 made new weekly highs on Tuesday, but I'm starting to feel a little apprehensive about shorting this market right now. As I discussed in last Sunday's blog, central banks seem intent on keeping equity markets propped up, possibly into the U.S. presidential election later this year. We could therefore start to see normal market corrections truncated or even averted as bullish manipulations occur. This week's reversal zone could extend into early next week so there is still time for another equity surge to a new high into next Monday-Wednesday. If one or two (but not all three) of the major market indices (DOW, S&P 500, NASDAQ) make(s) a new high next week, we may get an intermarket bearish divergence signal to sell short. If this week's highs were it then markets will likely keep falling, but the correction may not get that far before turning back up. In that situation we would want to look for a bottom to buy as the market would likely be turning bullish into the summer. How the market moves next week should tell us what trading strategy we will take. Still on the sidelines of the broad stock market.

Trading Blog Monday (night), March 21, 2016

3/22/2016

COMMENT ON TODAY'S TRADES IN SILVER AND CRUDE OIL (11:30 pm EDt)

Silver prices edged up today to $15.91 and then backed off a bit. I decided to enter a short position in silver near the end of the day (see trade alert below) as there is resistance at $16, we are near the middle of a reversal zone, there is intermarket bearish divergence with gold (which we shorted on Sunday), gold seems to be breaking down, a cycle low is due, and COT charts for these metals are very bearish. Depending on risk aversion, traders can set a stop loss for this trade on a close above $16 or on a break above last Friday's high of $16.145 (especially if gold breaks above $1282). We will try and hold these short precious metal positions through the week as long as gold can stay under its March 11 high of $1282. Holding short positions now in both gold and silver.

Crude oil prices also rose a bit today and touched $40.30 before falling back and closing at $39.91 (April contract). We are already past the center of a reversal zone for crude so I decided to enter a short position in late afternoon trading. There is a good chance that last week's high at $41.20 was the subcycle top, but if prices push higher, that top should be in no later than Friday and should not close above the 200 day moving average (now at $42.73 and falling). There is also resistance at the $40 mark which could contain any rally. A good stop loss point here would be a close above last week's high ($41.20) or a weekly close above the 200 day moving average depending on one's risk tolerance. Now holding a short position in crude oil.

Trading Blog Monday, March 21, 2016

3/21/2016

CRUDE OIL and SILVER TRADE ALERT (3:30 pm EDT)

I am entering short positions in Crude Oil and Silver today as per discussion in Sunday's blog.
I will comment more on these trades later this evening.
NOTE: we are already short in gold from yesterday's trade (this was erroneously listed as a long "current position" yesterday but has now been changed - traders should not be long in gold right now.)

Trading Blog Sunday (night), March 20, 2013

3/20/2016

IMPORTANT UPDATE ON ALL MARKETS and GOLD TRADE ALERT (11:45 pm EDT)

Last week the Federal Reserve did not raise interest rates and announced that it would only be raising them two times this year (a pull back from their previous plan of four rate hikes in 2016). This followed the announcement from Mario Draghi the week before that the European Central Bank will drop their interest rates further into negative territory and implement another QE bond buying program (although Mr. Draghi emphasized that this will be the final stimulus measure from the ECB). These accommodative monetary policies seem to be injecting new life into U.S. and global equity markets just when they need it. Technical analysis and cycle studies had recently suggested that these markets were about to roll over and make a major correction, but it looks like that correction may be delayed (or minimized) now that governments are again intervening in the "free market" process. As I've mentioned before on this website, market manipulation of this sort can distort cycle patterns and technical parameters, but it does not eliminate them. We just need to incorporate this "wildcard" factor into our trading strategies when it has a strong influence on the markets, as it seems to be having now. Once again central banks seem intent on keeping stock markets propped up, even at the expense of more inflation. In addition to influencing stock markets through central bank policies, people in high positions have likely manipulated gold prices (more covertly) within the last several years to keep equity markets stable. A strong rally in gold tends to scare Wall Street as it can be seen as a potential harbinger of a severe market sell off (i.e. frightened investors fleeing the stock market for the safe haven of gold). For this reason gold prices could also be manipulated (suppressed) to discourage panic selling in the stock market. It is interesting that recently gold (and silver) have been very bullish yet prices seem reluctant (so far) to break above a longer-term downtrend in these metals that has been in place since 2013.

Speaking of gold and silver, it is looking like a good time to short both. Yes, I know we were "whipsawed" out of our silver short position last week, but Friday's high in silver ($16.145) looks like the cycle top. That was a new weekly high in silver as gold remained below its high from the previous week which is another case of intermarket bearish divergence. Furthermore, as I've mentioned in recent blogs, COT charts are now extremely bearish for both metals, and this suggests a significant correction is imminent. Let's enter a short position in gold now (for tomorrow's opening) with a stop loss on a clear break over the recent cycle high at $1282 (spot price) if silver also breaks its high at $16.145. Some short-term technical signals in the silver charts are suggesting its price might edge up a bit more so we will hold off shorting silver now but may do so early next week (even tomorrow).

The damage done to the U.S. Dollar Index after the Fed's relatively "dovish" policy statement last week may be over as the dollar's plunge seems to have halted at strong support just above 94. Last week was also a strong reversal zone for currencies, so the dollar could bounce here and begin another upward trek. We will have to wait and see if any rally can gain significant momentum, but even a modest rally now could push precious metal prices down into the corrective cycle bottom we are hoping for.

Crude oil could have made a short-term subcycle top on Friday at $41.20 (April contract), but we are still in a strong reversal zone for crude which extends into Friday so prices could push higher. The likely target for any correction now would be around $33. We will try to sell short this week, especially if prices edge higher into Wednesday. Out of crude for now.

Notwithstanding my bullish argument for the broad stock market above, next week is another strong reversal zone for equities, and a subcycle correction is due in all three market indices (DOW, S&P 500, NASDAQ). For this reason we should be looking for a spot to sell short next week for what will likely be a short-term trade but could nevertheless be significant. (The DOW could fall to the 16,600 area and the S&P 500 towards 1,950). Longer-term traders may wish to bypass this trade and wait to buy the bottom of any correction as it looks like the current medium-term cycle is turning bullish and could rally into the end of April or possibly longer. Out of the broad stock market for now.

Trading Blog Thursday, March 17, 2016

3/17/2016

SILVER TRADE ALERT and BROAD STOCK MARKET UPDATE (2:45 pm EDT)

The strong impact of yesterday's Fed statement on financial markets is continuing into today's market as the dollar plunges some more and the precious metals surge higher. Our stop loss at $15.80 for our short position in silver has been broken so we are now stopped out of this trade. We are still in a strong reversal period for gold and silver that could easily extend into next week so it is possible we are being "whipsawed" out of a good short trade (which is the risk we take with tight stop losses in a volatile market). In last Sunday's blog I wrote:
"Gold and silver are both due (overdue) for a significant corrective dip as they are near the end of their current medium-term cycles, but their current bullishness could push prices higher over the next week or two before dropping."
As short-term traders we will still watch for a strong signal to go short as the medium-term cycles in both metals are due to bottom soon. Longer-term traders may wish to stay on the sidelines and wait for these cycles to bottom and then buy. The depth of this correction will determine how bullish the precious metals market will be over the next several months. We are now out of both gold and silver.

The broad stock market also continues to rally, but remains within a strong reversal zone through next week. We will therefore also be watching this market for a top and reversal into what may be a modest correction but one that could turn serious if markets start to panic (possible if the effect of the Fed's slightly dovish policy statement starts to wear off next week). Still on the sidelines here.

Trading Blog Wednesday, March 16, 2016

3/16/2016

COMMENT ON TODAY'S FED STATEMENT (4:15 pm EDT)

The Fed decided to leave interest rates unchanged (i.e. at 0.25 - 0.5 %) for now and indicated that it will lift them more slowly this year than it had originally planned due to worries over a weak global economy and a volatile stock market. This somewhat dovish tone from the Fed lifted the broad stock market but plunged the U.S. Dollar Index showing that the Fed is willing to tolerate more inflation (no "hawkish surprise" from Ms. Yellen).

Not surprisingly the dollar plunge triggered a surge in precious metal prices. It is too early to tell if these volatile movements are just a short-term knee-jerk reaction to the Fed statements, but our stop loss at $15.80 for our short silver position has not yet been breached so we are still holding a short position in this metal. Yesterday's lows in gold and silver were not deep enough to be cycle bottoms so prices could reverse back down to make a lower corrective bottom to the medium-term cycle over the next few weeks (a cycle bottom in gold is due by then).

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