The broad stock market has been relatively calm (and flat) over the last three months, but that may be changing soon as several cycle and technical patterns are indicating that a significant correction could be looming on the horizon. We need to remember, however, to always temper any bearish technical data these days with the reasonable assumption that these markets are being constantly manipulated, and right now that manipulation is designed to prevent stock markets from crashing. The technical correction I am expecting soon should not be of "crash" proportions (perhaps only 10% - 15 %), but we should keep in mind that the broad stock market is quite overbought (it has been rising continuously since March 2009 with no major corrections) and there is a lot of fear and uncertainty in the markets right now. In this kind of environment any significant correction has the potential to trigger panic selling that could lead to a "crash"'. We can assume that the Federal Reserve's "plunge protection team" are working hard to keep this from happening. Since QE (quantitative easing) is now being tapered back, the Fed's assurance that interest rates will remain near zero seems to be the main thing propping up the stock market right now. If some unforeseen event necessitates the raising of interest rates, the stock market could be in trouble.
The second week of June is another potential turning point for many markets. Directional momentum in the DOW, S&P 500 and NASDAQ charts is still strongly bullish so I am favoring the idea of new highs in these indices into that time, but if the market starts to turn down this week we could instead see a significant correction bottoming into mid-June. The reluctance of the DOW to exceed its May 13 all-time high supports this latter bearish scenario, but the DOW closed very close to that high on Friday, so it seems likely it will follow the S&P 500 and break through it. If we do rally into the second week of June, I will be looking to sell short what could be a significant correction from a top forming then. Still on the sidelines of the broad stock market.
The precious metals market had also been quite calm and relatively flat for the first three weeks of May but last week made a decisive break downwards as both gold and silver breached several important support levels. Directional momentum in silver has turned nearly 100% bearish while gold remains mixed bullish and bearish. More significantly, though, the two main gold and silver mining company stock indices, XAU and HUI, are now both 100% bearish. Gold and silver mining company stocks often lead the price of the metals themselves so this is pointing to lower prices ahead. In addition, the chart of the gold ETF (exchange traded fund) GLD as well as the charts for GDX and GDXJ (two gold mining company ETFs) have all turned 100% bearish. All of this strongly suggests that the final bottom to the precious metals market is not yet in. While we could see it bottom by mid-June, there are some technical and cycle data suggesting that the final bottom could be pushed into July. There is also the possibility now of gold prices approaching the $1100 area. If silver breaks clearly below $18 it could fall to the $15 area. Timing, however, is more important here to our trading than price targets, and our strategy now will be to look for a very important bottom in both gold and silver to buy into some time before mid-August. Short-term, we may see an opportunity over the next few weeks to sell short these metals as there could be a brief rally before prices move to their final bottoms. Stay tuned. On the sidelines for now.
The cycle and chart patterns for crude oil continue to be ambiguous and confusing. Directional momentum remains strongly bullish, but prices last week seemed to have trouble getting beyond the $104 level, which is a bearish sign.
If this market is turning bearish it could drop very quickly below $100 within the next two weeks, perhaps into the second week of June. If that happens, it could set up a good buying opportunity. Staying on the sidelines of crude until the technical picture is more clear.