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Trading Blog Thursday (night), April 28, 2016

4/28/2016

MARKETS UPDATE (10:45 pm EDT)

Gold and silver prices surged up today because of the Bank of Japan's surprisingly hawkish decision to leave its monetary policy unchanged. Many analysts had been expecting a hefty dose of stimulus from the central bank which could have weakened the Japanese yen and strengthened the U.S. dollar. Instead the dollar plunged, and this gave a strong boost to precious metal prices.

It is starting to look like gold and silver both started new cycles in late March/early April, and if so they could be turning very bullish. The rally today pushed both metals close to their April 21 highs. If prices exceed these levels now we could see the rally continue into May 10 (which could be another turning point for a reversal) before any significant correction. On the other hand, if today's surge was just a temporary "knee-jerk" reaction to the BOJ's announcement then we could still see gold and silver prices turn down now (especially if one exceeds its April 21 high but the other does not - intermarket bearish divergence). Everything depends on the U.S. dollar.

The U.S. Dollar Index is now close to critical support in the 93 area. If that support breaks, we could see the dollar start to melt down and precious metal prices soar. If 93 holds and the dollar starts to rally again we will likely see a significant correction in gold and silver either now, in May or early in the summer. It is best to be on the sidelines until the cycle pattern becomes more clear. Out of both gold and silver for now.

The Bank of Japan's hawkish tone may have spooked equity markets today as the broad stock market tanked with the DOW losing 210 points. This was good news for our short position. This may be the start of the significant correction that we've been waiting for. If April 20 was the medium-term cycle high for both the DOW and S&P 500 then we could now see a sharp correction down over the next several weeks (possibly longer) to the cycle bottom. It is too early, however, to say for sure if the correction is starting. If today's plunge was just a temporary reaction to the BOJ news, we might see equities creep back up. Holding my short position in the broad stock market for now.

Trading Blog Thursday, April 28, 2016

4/28/2016

GOLD TRADE ALERT (3:30 pm EDT)

The Bank of Japan surprised everyone today by leaving its monetary policy steady (most analysts had been expecting an aggressive loosening of policy) and this caused the U.S. dollar to take a plunge. Note that the U.S. Dollar Index is now near critical support around 93. If this drop is just a temporary knee-jerk reaction to the BOJ's announcement today, it may bounce from here, but if the dollar starts breaking below 93 it could be in big trouble.

The dollar's plunge triggered a surge in gold and silver prices. The stop loss in our gold short position has been triggered so we are covering (getting out) of that trade today with a small loss. It is still possible for gold to turn down now, but the possibility of gold breaking to the upside (especially if the dollar breaks down) is now much higher so it is probably best to be out for now. Covering all short positions in gold today and still out of silver.

I will comment a little more on the precious metals later this evening.

Trading Blog Wednesday, April 27, 2016

4/27/2016

COMMENT ON FED STATEMENT (8:00 pm EDT)

As expected, the Fed left interest rates unchanged today (they are currently at 0.25 - 0.5 %). The Fed's statement (released without a subsequent press conference) was carefully worded and did not give investors any hints as to when the next rate hike will occur (some analysts are expecting one in June). Last month's FOMC statement expressed significant concern about current global economic instability, but today the Fed toned down its rhetoric a bit on this issue (perhaps to calm equity markets) and simply said that the global economic situation was being monitored.

All markets fluctuated somewhat around the time of the Fed's statement (released at 2 pm EDT), but most were stable by the end of the day. The DOW and S&P 500 were up a bit, but the NASDAQ closed with a loss. (The NASDAQ has been much more bearish than the DOW and S&P 500 over the last month or so, and this discrepancy may be pointing to an imminent correction.) The U.S. Dollar Index surged briefly around 2pm but then settled back down. It remains above 94. Gold and silver prices also fluctuated but closed the day unchanged.

The Bank of Japan also meets this week and may announce an aggressive loosening of their monetary policy. This could weaken the Yen and give a boost to the U.S. dollar which is now sitting at an important support level (93 -94 in the U.S. Dollar Index). We will watch this carefully as it could be the trigger that pushes precious metal prices back down.

Trading Blog Tuesday, April 26, 2016

4/26/2016

GOLD TRADE ALERT and BROAD STOCK MARKET UPDATE (3:15 pm EDT)

The Federal Reserve is meeting today and will release their policy statement tomorrow (Wednesday) afternoon at 2:00 pm EDT. This could have an effect on all markets. The Fed is expected to keep interest rates unchanged, but investors will be looking for clues as to when the next rate hike will come and whether or not the Fed will stick to their plan of only two hikes this year. There is no press conference scheduled for Wednesday so analysts will only have the Fed's statement to scrutinize. The Fed is in a very difficult position right now. If they are too hawkish in their tone they risk tanking an overbought and nervous stock market, but if they are too accommodating and dovish in their policy statements, they will further weaken the U.S. dollar which is already testing a critical support area (93 - 94 in the U.S. Dollar Index).

It looks like last week's high of $1,270 in gold was probably a subcycle peak as it was in the dead center of a reversal zone for gold and prices fell back steeply from it. It is therefore likely that a correction has started that could take gold as low as $1,140 (although prices may not fall that far). COT (Commitment of Traders) charts still show Commercial traders (smart money) to be strongly bearish on the precious metals, and this is supporting the idea of a correction now. Gold is rallying a bit this week so I am going to use this as an opportunity to enter a short position in this metal today. We can place a close stop loss for this trade on a close above a resistance line at $1,260. As I mentioned in Sunday's blog, I am going to avoid trading silver for now because of its high volatility and the possibility that both gold and silver could break to the upside if they are starting new cycles (which is still unconfirmed).

As with the precious metals, COT charts for the broad stock market also now show Commercial traders to be very bearish. This supports our current short position in this market. Equity markets have been calm so far this week as investors are probably waiting for tomorrow's Fed statement. If Wall Street interprets the statement as dovish, it is possible we could see some more rallying into the first week of May. If this happens, we will follow the stop loss parameters I outlined in Sunday's blog : "...a tight stop loss based on both the DOW and S&P 500 breaking above their highs from last week (18,168 in the DOW and 2,111 in the S&P 500). It is OK if only one makes a new weekly high as that would be another case of bearish divergence, but if the S&P 500 exceeds 2,116 we may still want to cover our positions even if the DOW stays under 18,168."
Holding my short position in the broad stock market.

Trading Blog Sunday (night), April 24, 2016

4/24/2016

BROAD STOCK MARKET TRADE ALERT and PRECIOUS METALS UPDATE (10:45 pm EDT)

It looks like Draghi's somewhat dovish comments last Thursday (i.e. hinting that the ECB could drop interest rates further) did have a negative impact on the euro as that currency was down significantly on Friday. The U.S. dollar benefited from this as the U.S. Dollar Index rallied back up and closed just above the 95 level that it attempted to break the previous week. If this rally gains strength now, it will put negative pressure on gold and silver prices.

Both gold and silver surged up strongly last Thursday (especially silver) but then both backed down and closed the day with little or no gain. This was a strong bearish signal suggesting that prices are about to turn down. Silver made a new yearly high last week but gold did not (it has to exceed $1,282) so we still have a case of intermarket bearish divergence, and we are now in the dead center of a strong reversal zone for the precious metals. For these reasons (and others stated in my recent blogs) it looks like a good time to short the precious metals; however, the cycle patterns in both gold and silver charts are still ambiguous. Silver appears to have started a new medium-term cycle on April 1 (although this isn't confirmed yet), but gold may still be completing an older cycle (also not confirmed). The difference between an old cycle and new cycle is important here because if prices are about to fall, an old cycle's correction would be much deeper than a correction in a new cycle. Because silver seems to be in a new cycle, we may want to avoid selling it short for now and just focus on gold. (Silver is also more volatile than gold and therefore a riskier trade.) Gold's correction might only get to the $1,200 level, but it's possible it could get as far as $1,140. The current spot price is around $1,230, and there is some support at $1,210 - $1,220. Let's try to sell short early this week, especially if prices bounce from this support level but remain under the yearly high of $1,282. Out of both metals for now but looking to enter a short position in gold this week.

We got a short-term sell signal in equity indices on Friday (DOW, S&P 500, and NASDAQ), and we are also at the center of a strong reversal zone for the broad stock market. The DOW exceeded the high of its previous medium-term cycle last week, but the S&P 500 did not (it has to break 2,116 but it only got to 2,111) so here too we have a case of intermarket bearish divergence in a reversal zone. As with the precious metals market, this looks like a good point to sell short. We could get a significant correction now, but we have to be careful on the short side as it seems central banks and especially the Fed would like to keep equity markets buoyant into the U.S. presidential election. Let's enter a short position in the broad stock market now with a tight stop loss based on both the DOW and S&P 500 breaking above their highs from last week (18,168 in the DOW and 2,111 in the S&P 500). It is OK if only one makes a new weekly high as that would be another case of bearish divergence, but if the S&P 500 exceeds 2,116 we may still want to cover our positions even if the DOW stays under 18,168.

Trading Blog Thursday, April 21, 2016

4/21/2016

UPDATE ON DRAGHI STATEMENT and PRECIOUS METALS (10:15 pm EDT)

European Central Bank President Mario Draghi spoke early this morning (U.S. time) after the ECB announced it would leave interest rates unchanged. Mr. Draghi defended his bank's recent accommodative economic policies including negative interest rates. When asked if rates could be pushed lower (they are now at negative 0.4%) he responded: “If there is going to be an unwanted tightening of financing conditions….the Governing Council stands ready to act with all available instruments...”. This sounds like a further interest rate drop is not out of the question. Most markets seem to have been unaffected by the ECB's policy statement and Draghi's comments, but it is still early in the day. At the time of this writing (10:00 am EDT) the euro is flat but the U.S. dollar is rising a bit after dropping briefly to the 94 support line earlier this morning. Gold and silver prices are rallying strongly as gold approaches last week's high of $1,262. I am going to hold off selling these metals short this morning until we see how far this rally will go. As I stated in yesterday's blog, if gold makes a new yearly high (i.e. moves above $1,283) we may need to abandon our bearish strategy and stay on the sidelines.

Trading Blog Wednesday (night), April 20, 2016

4/19/2016

IMPORTANT MARKETS UPDATE (10:30 pm EDT)

We are now approaching the center (April 22) of a strong reversal zone for gold and silver (and other markets) and both metals (especially silver !) are rising into it. Silvers's strong surge yesterday and today supports the idea that silver began a new medium-term cycle on April 1. The start of a new cycle is always bullish (as this one is), but this cycle could also peak early and prices could start to fall again. Supporting this idea is the fact that prices are rising into a strong reversal zone and silver is making a new yearly high while gold's rally has not yet even exceeded it's high from last week. This is a strong case of intermarket bearish divergence in a reversal zone which suggests an imminent reversal. COT (Commitment of Traders) charts also continue to show Commercial traders (smart money) to be very bearish on the precious metals which does not bode well for prices (at least short-term).

More evidence for a reversal in these metals now is coming from the chart of the U.S. Dollar Index. The dollar has backed down this week and is again testing strong support at 93 - 94. We are now in the dead center of a reversal zone for currencies so we could see the dollar start to rally back up again from this strong support. What could trigger such a reversal and rally? Tomorrow morning (Eastern U.S. time) European Central Bank President Mario Draghi will give a press conference and will comment on current ECB policy. In his last press conference, Draghi enthusiastically announced a generous stimulus package for the eurozone economy which included more QE (quantitative easing) and further interest rate cuts into negative territory. The euro fell dramatically on that news but then shot back up when Mr. Draghi added that this would be the last rate cut from the ECB. Some analysts feel that Draghi may have changed his mind about this and could hint at more rate cuts during tomorrow's press conference. If he does, the euro could fall again and push the dollar higher as well as send precious metal prices back down.

Based on all of the above we will try and go short tomorrow in both gold and silver for what could be a significant correction in both metals. Draghi is expected to speak at 8:30 am EDT (an hour before markets open here in the U.S.) so we should wait to see the effect this has on precious metal prices before trading. We may go short early in the morning so stay tuned. We will have to abandon our bearish strategy if gold makes a new yearly high (i.e. moves above $1,283) as this would negate the intermarket bearish divergence with silver. On the sidelines of gold and silver but now looking to short both metals.

If Draghi does hint at more rate cuts from the ECB tomorrow morning this could have a bullish effect on the broad stock market and kick the current equity rally higher. This market is already being lifted by recent accommodating money policy statements from both the ECB and the Federal Reserve, but the rally is now moving into the center of a strong reversal zone that could trigger at least a short-term correction. It seems like the Fed wants to keep equity markets strong at least into the upcoming U.S. presidential election, and it would probably be unwise to bet against them. This is why I am reluctant to get too bearish on the broad stock market even though one could make a good argument for a strong correction now. The current medium-term cycles of the DOW, S&P 500 and NASDAQ could be peaking in this strong reversal zone and getting ready to move down to their final cycle bottoms, but that corrective fall may not be very severe if the Fed gets its way. Nevertheless, we are market timers, and because we are looking at a potential medium-term cycle correction from its peak, it could be significant and worth trading. We are still looking for a top this week or next to sell short. This week the DOW is breaking above 18,000 and is exceeding the peak of its last medium-term cycle, and this is very bullish, but the S&P 500 and NASDAQ are still below their previous medium-term cycles so we are getting an intermarket bearish divergence signal here as well. If the S&P 500 can get above 2,117 (it is close) it will weaken this bearish indicator. Directional momentum is still nearly 100% bullish in all three indices so I would like to see a few more bearish signals this week or next before selling this market short. Still on the sidelines of the broad stock market.

In Monday's blog on crude oil I wrote:
"Directional momentum in this market is currently mixed bullish and bearish. If prices can snap back up and exceed that double top area (around $42.50 - May contract), it can turn bullish."
This week crude prices did snap back up. They closed today at $46.63 so this market has turned bullish for the first time since July 2015. This means our trading strategy in crude should now be to buy any corrective declines. We may get one soon as the current high could lead to a subcycle peak in the current reversal zone this week or next. On the sidelines of crude oil for now.

Trading Blog Monday, April 18, 2016

4/18/2016

MARKETS UPDATE (4:30 pm EDT)

This week and next is a major reversal zone for many financial markets so we should be watching for significant highs or lows that could be turning points for these markets. April 22 (Friday) is the center point of this reversal zone. The likelihood of a reversal is highest near that day.

The broad stock market continues to edge higher so we should be watching for a top to sell short this week or next. The medium-term cycles of the DOW, S&P 500 and NASDAQ may all be peaking now, and if so we should expect a significant multi week correction to follow that will take us to the final cycle bottoms (and start of the next cycle). The depth of that correction will tell us if the overall trend of this market will remain bullish (directional momentum is currently 100% bullish in all three indices). For the current trend to turn strongly bearish, these indices would have to break below the start of their current medium-term cycles (that would be 15,450 for the DOW and 1,810 in the S&P 500). I don't think that's going to happen (although it's possible, especially since the markets are nervous and susceptible to panic selling). We will now watch for signs of a top, ideally later in the week. Still on the sidelines but looking to sell short this week or next.

We will also watch for a turning point in gold and silver this week. Both metals have been rising, but prices could take a dip into this week's reversal zone. If they do that, we will look to buy what could turn out to be a final cycle bottom in gold and maybe even one in silver (although it looks like silver's cycle ended- and a new one began- on April 1). It's still possible for gold to get down to our original target area around $1170 - $1180. If silver's new cycle began on April 1, any silver correction will likely stay above $15. If precious metal prices don't fall but instead rise into the end of the week, we will look to sell short. This is possible because directional momentum is strongly bullish in both gold and silver. We need to keep in mind, however, that COT charts still show Commercial traders (smart money) to be bearish on these metals which is suggestive of an imminent correction. On the sidelines of both gold and silver for now.

The direction of the precious metals this week may be determined by the U.S. dollar. The U.S. Dollar Index surged up early last week from a support line at 94 but is now backing down again. If the dollar moves back to its support at $94 and then reverses back up this week, we could see gold and silver rise and fall as described above. Note that $93 is very important support for the dollar. If that breaks, the greenback could be in trouble and precious metal prices could soar.

Last Wednesday crude oil made a double top to its high from March 18 (both near $42.50 in the May contract chart). Prices then fell steeply (on Sunday reaching $36.61) but are up a bit today. Directional momentum in this market is currently mixed bullish and bearish. If prices can snap back up and exceed that double top area, it can turn bullish. On the other hand, if crude starts closing below the 45 day moving average (currently around $38.73 and rising) then the market could turn bearish and prices could be headed down below $30 again. We will remain on the sidelines of crude until the directional trend becomes clear.

Trading Blog Wednesday, April 13, 2016

4/13/2016

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

Gold prices have backed down a bit and are almost exactly at the price where we entered our short position several weeks ago so I am going to be cautious here and cover this position today with no loss. (We already covered our silver shorts at a break even level on Monday.) Gold and silver are very tricky to call right now. Silver has almost certainly started a new medium-term cycle with its $14.85 low on April 1. Gold's new cycle may have started with the $1,208 low of March 27 or that bottom may be yet to come at a lower level over the next week or two. We probably want to buy close to these cycle bottoms, and we are now moving into a time period over the next week or two when there could be a strong reversal in price movements. This may give us an opportunity to buy both metals at a lower price (especially if gold hasn't hit its cycle bottom). COT (Commitment of Traders) charts still show Commercial positions to be bearish on both gold and silver so this supports the idea of a reversal soon despite the fact that the overall trend of the precious metals appears to be turning bullish. Covering (unloading) my short position in gold today. Now on the sidelines of both gold and silver.

The U.S. Dollar Index is now rallying from strong support around 94. If this rally can gain legs it would also support the idea of precious metal prices turning back down soon.

The broad stock market is rallying some more today and the DOW, S&P 500 and NASDAQ are all making new monthly highs. This means there will be no intermarket bearish divergence signal this week, but we could get this next week when we move into a strong reversal zone. Stay tuned. Still on the sidelines of this market.

Trading Blog Tuesday, April 12, 2016

4/12/2016

MARKETS UPDATE (5:00 pm EDT)

We covered our silver short position yesterday at our entry price and got out with no (or very little) loss. This was a good move as silver prices surged again today, this time breaking the $16 level and making a new monthly high (intraday) at $16.16. This confirms the idea of silver starting a new medium-term cycle from its $14.85 low on April 1.
New cycles are always initially bullish, but this current rally may encounter strong resistance beginning later this week and continuing into the last two weeks of this month which is a strong reversal zone for many markets including the precious metals. While silver made a new monthly high today, gold did not and remained below its March 11 high of $1,282. We thus have a case of intermarket bearish divergence until gold breaks that high. Gold prices also briefly poked above our stop loss point at $1,260 for our short position but closed below that level. I am going to hold my short position in gold a bit longer on the chance that it will dip down closer to $1,200 or below. Gold's March 27 low at $1208 might be the medium-term cycle bottom, but there is also a good chance gold could make this bottom below $1,208 sometime over the next week or two (even as early as late this week). Any traders that were stopped out of their short position in gold should remain on the sidelines as the cycle bottom could already be in. Holding my short position in gold but out of silver.

The U.S. Dollar Index has broken below 94.5 but now seems to be finding support around 94. The dollar has strong support down to 93, but this is a critical support zone. If the U.S. Dollar Index breaks and closes below 93, it could mean big trouble for the greenback. Recent policy statements from central banks and the Federal Reserve have smacked the dollar down, but if this index can stay above 93, the U.S. dollar could stage a comeback rally soon. A strong reversal zone for currencies is coming up next week so that might be the turning point. A sudden rally in the dollar would likely push precious metal prices back down. On the other hand, a breakdown in the dollar (i.e. the U.S. Dollar Index falling below 93) would cause gold and silver prices to soar. We will watch the dollar carefully now to help us gauge the direction of the precious metals.

In last Sunday's blog I wrote:

"the broad stock market is very ambiguous right now and is giving us many mixed signals. Even though last week's correction was modest, it may have been enough to temporarily unwind the overbought market, and we could see a rally now.'"

Equity markets rose strongly today so we might be getting that rally. What we should watch for now is a case of intermarket bearish divergence where one or two (but not all three) of the major market indices (DOW, S&P 500, NASDAQ) make(s) (a) new monthly high(s), especially if this happens into next week's strong reversal zone. All three indices are close to doing this. This is the last week for filing tax returns in the U.S. so many investors could be making last minute contributions to the mutual funds in their retirement accounts which could help drive an equity rally into Friday. We will remain on the sidelines of the broad stock market until we see how it moves into next week's reversal zone.

We unfortunately missed a good buy spot in crude oil last week when prices made a subcycle bottom at $35.24 on Tuesday (April 5). In Thursday's blog I wrote:

"It is not clear at the moment on whether the current cycle in crude is bullish or bearish. If it is bullish, the rally starting now could exceed last month's high of $42.49. If bearish, however, this rally could be brief and could start turning back down well below last month's high. If we were more certain of a bullish cycle, we would buy now, but if this cycle is turning bearish, it would be better to sell short the top of any rally. If prices back down over the next several trading days and hold above Tuesday's low, I may consider going long."

Well, prices didn't back down so we didn't buy, and crude surged to $42.25 today, challenging the $42.49 high from last month. This surge triggered a major bullish momentum signal so directional momentum in this market is now mixed bullish and bearish (it had been 100% bearish). A clear break above $42.49 would suggest the trend is turning bullish. If that happens, our trading strategy will be to buy any short-term dips as the target for a bullish rally could be as high as $51. The strong reversal zone coming up next week may put a temporary damper on any strong rally and give us an opportunity to buy. On the sidelines of crude oil for now.

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