With the typical optimism that we usually find heading into holiday week-ends, the broad stock market mustered up a strong rally last Wednesday - Friday into this Memorial Day holiday in the U.S. All three of our market indices (DOW, S&P 500, and NASDAQ) broke to new weekly highs on Friday. This is supporting the idea that at least the DOW and S&P 500 may have started new medium-term cycles from their deep lows on May 20. But it still looks like the NASDAQ's medium-term cycle is older and began with it's March 14 low of 12,555. If this is correct, the NASDAQ's trend is bearish because it is now well below that starting point and it should be headed lower to the cycle's final bottom due 4-12 weeks from now. Despite its current sub-cycle rally, the NASDAQ should not make a new all-time high before turning down again to fall to that final bottom. In contrast, if the DOW and S&P 500 are starting new cycles as stated above, then they are both bullish and could challenge or exceed their all-time highs. If one or both of these indices make new all-time highs without the NASDAQ, we would have a very strong case of intermarket bearish divergence and that would more than likely be the FINAL top in this market's long-term cycle that we will want to sell short.
We note, however, that this current equity rally is now at the center of our current strong reversal zone (May 26 - June 3), so some sort of top may be imminent in all three indices by the end of this week. It is very unlikely any of these indices will get near their all-time highs in only 4 days (unless we see a parabolic "blow-off"). If the current rally is strong, it may bypass this reversal and just "break out" to higher levels after Friday. We will have to watch this carefully. Any top that forms in the NASDAQ may be an opportunity to sell short. We are on the sidelines of this market for now.
Not only are we at the center of a general reversal zone for all markets, but we have just entered a reversal zone specifically for the precious metals (May 27 - June 6). Both metals have been rallying weakly. If gold can rally close to $1900 by the end of the week (or maybe into next Monday), it seems likely it will form a top that could be a good shorting opportunity. Ditto for silver if it can get to $24. It still looks like both metals have turned bearish, but if we get a really strong rally this week, both gold and silver could turn bullish again. We will remain on the sidelines as we wait to see how high prices can go this week.
A final medium-term cycle low is now due in the U.S. Dollar Index. Today the dollar made a new low at 101.29. We are now in the center of our general reversal zone which ends this Friday, so the final bottom to this cycle could be any day now. It will likely coincide with a top in the precious metals, so we will watch this carefully this week.
As I've mentioned in previous blogs, once this current medium-term cycle bottoms, the next rally will be important. If it can exceed the 105 high of May 13, then the dollar could turn very bullish. This might happen if the broad stock market starts to tank and investors flee equity markets for safety in the U.S. dollar (as they did in the 2008-2009 "crash"). But if any rally can't get back above 105, it would mean the dollar is bearish and back on track for its final corrective drop to the end of a long-term 15-16 year cycle due in 2023 -2025 in the 55 - 50 range.
On Friday, crude oil prices closed above $115, and today they closed just above $117. This is a very bullish signal and confirms the May 19 low of $103.24 as the first sub-cycle low in a new medium-term cycle that began on April 11 at $92.14 (July contract chart). We should expect a strong rally now, but because we are at the center of our general reversal zone, we could also see a short-term top followed by a corrective dip. As I've stated in previous blogs, I am not anxious to chase this rally which seems to be at least partly driven by the ongoing Russia/Ukraine conflict. Nevertheless, any significant correction may entice me to buy as the overall cycle trend in crude is looking quite bullish. We will remain on the sidelines for now.