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Trading Blog Wednesday, July 27, 2016

7/27/2016

MARKETS UPDATE and COMMENT ON THE FED MEETING (6:30 pm EDT)

After its two day policy meeting that ended at 2 PM this afternoon, the FOMC announced that it would leave interest rates unchanged for August. This was not unexpected in the wake of the recent "Brexit" vote which threatens Europe's economic stability, but curiously there was no mention of global events in today's Fed statement even though Fed officials had recently expressed concern over geopolitical issues adversely affecting the U.S. economy.
Today's statement expressed optimism over recent economic data, and this is fueling speculation that at least one more interest rate hike is coming before the end of the year. We will have to wait and see if that happens. I still believe that the Fed will try to avoid any rate hikes before the U.S. presidential election in November.

The broad stock market rallied a bit in early morning trading but then lost those gains by 2 PM. After the Fed statement was released, the markets attempted another rally but then closed the day basically flat. The Fed's statement had no surprises and was neither hawkish nor too dovish so a tepid reaction from equity markets seemed appropriate. We will have to wait a few more days to see what direction this market takes from here. We are entering a reversal zone for equities tomorrow which will continue through most of next week. If this market continues down into this time, we could easily see a bottom soon and then another rally to new highs. If instead markets rise into next week, we could see that rally followed by another correction down. In either scenario I don't expect any correction to be that serious. Holding my long position in the broad stock market.

The U.S. Dollar Index reacted rather strongly to yet another delayed interest rate hike. It fell dramatically immediately following the release of the Fed's statement. The next several days should tell us if this will be just a knee-jerk reaction to the Fed or the start of a more serious correction for the dollar.

The steep drop in the dollar kicked gold and silver prices in the opposite direction. Gold prices surged back up to $1,340 and silver prices broke just above $20. All of the short-term bearish arguments I made for the precious metals in my last blog still apply, however, and we are now entering a reversal zone for gold and silver (tomorrow through all of next week). This rally, therefore, may not get very far before turning down again. We may want to look for a top to sell short in both metals if conditions look right as we move into next week. Cycle analysis still points to a final medium-term cycle bottom in silver over the next three weeks down to the the $18 level. (There was a brief intraday plunge on silver's spot price chart to $17.60 on July 17, but this is probably not a valid data point for the cycle structure. If the cycle has already bottomed, however, it will soon be obvious and we will switch to a bullish buying strategy.) Remaining on the sidelines of both gold and silver for now.

Crude oil prices also fell dramatically today and are now approaching the $42 level. We are still watching for an ideal buy spot in crude as we move into next week's reversal zone. On the sidelines of crude and looking to buy soon.

Trading Blog Monday, July 25, 2016

7/25/2016

MARKETS UPDATE (5:30 pm EDT)

The broad stock market may have reached a temporary peak with last Wednesday's high of 18,622 in the DOW and 2,176 in the S&P 500 and could now be taking a minor correction before resuming its rally. If so, a good time for a corrective bottom would be late this week into next week's reversal zone. There is strong support for the DOW around 18,000 and for the S&P 500 around 2,100. If we see those levels by the end of this week or into next week, there is a good chance of a reversal and a resumption of the rally. An alternative scenario could see a rally into next week and then a correction into mid-August. In either case I don't expect the correction to be serious as the current cycle analysis is pointing to new highs for at least several more weeks and possibly several months. What we don't want to see is the DOW move below 17,400 or the S&P 500 break below 2,040. That would call our bullish view into question. We can still use those levels as a general stop loss for our long positions in the broad stock market. Holding my long position here. Anyone who is not yet long can consider buying if we approach the 18,000 or 2,100 levels mentioned above, especially if that happens at the end of this week or next week.

In last Wednesday's blog on gold and silver I wrote:

"There is another reversal zone coming up in the first week of August so we could see prices continue down into that time (which would be ideal for a final bottom in silver's medium-term cycle). It is still possible for gold prices to stay above our stop loss level at $1,300 because, unlike silver, it is only taking a subcycle correction (its final cycle bottom isn't due for at least 8 weeks); however, gold is close to $1300 now and could easily go lower into the end of this month as it follows silver's lead."

Gold prices are holding above $1,300 so far, but both gold and silver still look vulnerable. The Commitment of Traders (COT) charts for both metals still show a record level of short positions in gold and silver from Commercial traders ("smart money"). It would be unwise to bet against the Commercials as they are nearly always right. (OK, it's possible for them to be wrong, but not likely). This was one major reason for selling our gold long positions last week.
Today several gold and silver mining company indices and ETFs are flashing bearish signals which is also not a good sign for these metals. Besides the first week of August, there is also another reversal zone for the precious metals in the third week of August. We could see a correction move prices down into either one of those time windows or we may get a brief rise into the first one and then a downward correction into the second one. Our main strategy here should be to wait and buy the corrective bottom which could be around $18 in silver and anywhere from $1,230 to $1,300 in gold. (Silver is the better reference point as it is due for its final medium-term cycle bottom.)
If we do get a minor rally into early or even mid-August, I may consider going short to ride a significant correction down, especially in silver. The precious metals market is a bit confusing right now and is giving us a lot of mixed signals. Please refer to my recent blog from July 18 for a brief discussion of gold and silver's longer-term direction. On the sidelines of both gold and silver for now.

Even though crude oil's medium-term cycle bottom is now due, I have been avoiding going long because technical signals have been pointing towards a final bottom in the lower part of our target range of $40 -$45. We seem to be getting there as prices broke briefly below $43 today before closing at $43.04 (September contract chart). That could be it, but we always prefer to see a cycle bottom in a reversal zone, and we have one coming up later this week into next week. Let's see if prices can go lower into that time frame for a good spot to buy. On the sidelines of crude but looking to buy soon.

Another Federal Reserve meeting is happening this week (Tuesday/Wednesday) and Janet Yellen is scheduled to give a press conference Wednesday afternoon to discuss the Fed's current economic policy. The issue of the recent "Brexit" vote and its potential effect on European economic stability will most likely be mentioned, and most analysts are expecting the Fed to leave interest rates unchanged in view of this latest geopolitical development. If they do, this should give a boost to equity markets and help propel them higher into the November presidential election (which is most likely what they want). We will watch carefully how all markets react to Wednesday's Fed statement.

Trading Blog Wednesday (late night), July 20, 2016

7/20/2016

GOLD TRADE ALERT (10:30 pm EDT)

We are now moving out of a reversal zone for gold and silver, and both metals dropped steeply today (most likely a reaction to news and speculation that the Fed will raise interest rates before the year is over). This suggests that instead of a reversal up, prices may be breaking down (this sometimes happens in a "reversal" zone). Silver is especially vulnerable here because its final medium-term cycle bottom is due at any time over the next few weeks. Today's sharp drop in silver suggests that this correction is in progress with a target price range of $17.50 -
$18.50. There is another reversal zone coming up in the first week of August so we could see prices continue down into that time (which would be ideal for a final bottom in silver's medium-term cycle). It is still possible for gold prices to stay above our stop loss level at $1,300 because, unlike silver, it is only taking a subcycle correction (its final cycle bottom isn't due for at least 8 weeks); however, gold is close to $1300 now and could easily go lower into the end of this month as it follows silver's lead. For these reasons I am going to sell my long position in gold now and stand aside both metals until the cycle directions are more clear. If these prices continue down now we will want to buy again if silver stabilizes around $18 over the next few weeks. Gold prices could find support anywhere from $1,230 - $1,300. Gold closed today about 1.5% below our entry point for our long position so we are taking a small loss here, but we are still above our original stop loss point. I am putting a sell order in tonight before tomorrow's market open.
Selling my long position in gold and remaining out of silver for now.

Trading Blog Monday, July 18, 2016

7/18/2016

BROAD STOCK MARKET UPDATE and IMPORTANT PRECIOUS METALS UPDATE (7:00 pm EDT)

With European and Asian economies crumbling, the recent shock of Britain leaving the European Union, the upcoming controversial U.S. presidential election, an alarming number of terrorist attacks on the news, and most equity markets way overdue for a serious correction, it is not surprising that all financial markets are on edge. We are now in an extremely volatile marketplace that is very challenging to trade.

Despite the fact that equity markets are overbought, the recent Brexit "crash" seemed to unwind a lot of market tension (or at least the psychological tension of investors), and as the Brexit vote becomes old news, the U.S. stock market seems to be mustering up a strong new rally due in part to global investors fleeing unstable European markets for the perceived safety of U.S. markets. Rising U.S. equity markets are also likely being propped up by powerful market manipulators who do not want to see a serious crash before the November presidential election.
The present cycle structures of the major stock market indices are also supporting the idea of more rallying into the end of the year. This is why we now have a long position in the broad stock market. We may still see a minor pullback this week, but we won't worry too much unless we see the DOW and S&P 500 break below our stop loss levels (17,400 in the DOW and 2,040 in the S&P 500 - let's not raise those levels just yet). Holding my long position in the broad stock market.

The precious metals market is quite complicated right now and is giving us a lot of mixed signals. The analysts that I follow are also somewhat divided in their opinions on the direction of gold and silver prices short-term, medium-term and long-term. The long-term direction of these metals will be determined by what happens to global economies over the next several years, and specifically whether economies move towards inflation (possibly hyperinflation) or deflation (possibly a deflationary implosion). The bottom line here is that inflation will likely boost gold and silver prices and deflation could depress them. (Note the arguments for inflation or deflation and how they affect precious metal prices is complex and beyond the scope of this blog. There are plenty of blogs and articles on the internet that explore this topic). We need to be prepared and alert to whatever scenario unfolds.

If deflation is imminent, gold prices may not get far above $1,400 (they may have already peaked recently at $1,376) before they start falling to well below $1,000. In an inflationary scenario, however, we could see gold above $1,500 before the end of this year. To further complicate things, the technical and timing cycles tell us that even if we are looking at longer-term inflation we might still see a medium-term correction in gold (perhaps to the $1,000 level) into the end of this year or early next year before a long-term rally can begin. So how do we trade this market now?
Let's focus on gold because it started a new medium-term cycle recently (May 31st) while silver's medium-term cycle is due to bottom (with a sharp correction) any time over the next several weeks. There is strong support for gold around $1,300 right now, and we are in the middle of a reversal zone for the precious metals. If this support level holds and gold rallies, we will watch to see if that rally can make a new high above $1,376 and especially if it can clear the $1,400 area. If it can do both, it would mean that the current trend is remaining bullish. If prices hesitate around $1,376 or $1,400 and start to fall, however, it could mean that the current cycle is turning bearish, and we could see gold and silver move much lower into the end of the year (especially if gold breaks below $1,200). We went long in gold last Friday with a close stop loss at the $1,300 level so we will now wait and see if prices can rally this week. Holding my long position in gold but out of silver for now.

Trading Blog Friday. July 15, 2016

7/15/2016

GOLD TRADE ALERT and MARKETS UPDATE (2:45 pm EDT)

We are now at the center of a strong reversal zone especially relevant to the precious metals, and gold and silver prices have been falling into it. Gold started a new medium-term cycle on May 31 so this likely represents a subcycle correction for the yellow metal, but silver is still completing an older cycle and is due to take a sharper correction over the next several weeks to the final cycle bottom. Gold is close to our target of $1,300, but silver is a good distance away from our $18 target (it is finding support at $20). Based on all of this I am going to enter a long position in gold with a close stop loss at $1,300 and remain out of silver for now. It is possible for both metals to turn up now and rally strongly, but silver's rally could be followed quickly by a sharp correction to its final cycle bottom so it is probably best to wait for that bottom to buy (possibly around $18). Entering a long position in gold today but remaining out of silver

The broad stock market has rallied strongly all week and is entitled to a small pullback which may be starting now.
This market still looks strongly bullish so I am going to remain long and try to ride out any corrections which should be minor. We can still use 17,400 in the DOW and 2,040 in the S&P 500 as stop loss points, but to preserve some of our profits I will probably raise these levels this week-end. Holding my long position in the broad stock market.

Crude oil prices seemed reluctant to fall below $44.50 this week and were probably being buoyed by the bullish broad stock market (or is it the other way around?). If the equity rally does take a breather now, we could see crude prices also move lower and deeper into our target range ($40 - $45) next week. If not, that $44.50 level may be the bottom of crude's medium-term cycle and the start of a new one. On the sidelines of crude for now.

Trading Blog Monday, July 11, 2016

7/11/2016

MARKETS UPDATE (6:00 pm EDT)

Our decision to go long in the broad stock market last Wednesday seems to have been a good one as this market is now rallying strongly with both the DOW and NASDAQ making new yearly highs today and the S&P 500 making a new all-time high. This is strong evidence that all three indices started new medium-term cycles on June 27 (the bottom of the "Brexit crash") and are now bullish. Further support for this view is the fact that directional momentum in the charts of these indices is now 100% bullish for all three. We may see a brief pullback this week or next, but the DOW will likely hold above 17,400 and the S&P 500 above 2,040. We can still use these levels as a general stop loss for our long positions. It is starting to look like several longer-term cycles in the broad stock market have also bottomed recently, and if so we could easily see this market rally for at least eight weeks (or even longer into the U.S. presidential election in November). Holding my long position in the broad stock market.

The price surge in gold and silver earlier this month has leveled off, and this week is a reversal zone for these precious metals (especially the second half of the week). The COT (Commitment of Traders) charts still show the "smart money" very bearish on both metals so a sharp correction could be imminent. This is especially relevant to silver because it has not yet made its medium-term cycle bottom. That bottom is due any time between now and mid-August (gold already made its cycle bottom on May 31 and is therefore a little more bullish than silver right now). Despite all of this, the medium and longer-term trend for gold and silver appears to be turning bullish so we want to be on the lookout to buy any short-term corrections. A good price level to do this would be around $1,300 in gold and $18 in silver. Let's wait and see how these metals move into Friday. If silver continues to rally (and especially if silver makes a new high and gold does not - or vice-versa) then I may go short for a short-term correction in silver. Once we see a correction in both gold and silver (ideally to the price levels stated above) we will be looking to go long in both metals. On the sidelines of gold and silver for now.

Crude oil prices continue to fall and are now entering the upper part of our original price target ($40 - $45) for a final medium-term cycle bottom (which is due this week or next). We should now be looking for a bottom to buy. Today prices got to $44.42 (August contract chart) but it looks like they could go lower. If the broad stock market pulls back this week, we could see crude fall lower and deeper into our target range. We will wait for a short-term buy signal sometime this week or next. On the sidelines of crude but waiting to go long now.

Trading Blog Wednesday, July 6, 2016

7/6/2016

BROAD STOCK MARKET TRADE ALERT (2:30 pm EDT)

It looks like we are getting the pullback in equity markets that I described in "Scenario 1" from my last blog so I am going to cover my short position now and go long in the broad stock market. A good stop loss point for this long position would be the "gap up" points from last week around 17,400 in the DOW and 2,040 in the S&P 500. If these indices move down and close those gaps there is a chance we could see "Scenario 3" unfold, but I think that is very unlikely now. Covering all short positions in the broad stock market and going long today.

Trading Blog Monday (late night), July 4, 2016

7/4/2016

BROAD STOCK MARKET and GOLD and SILVER UPDATE (10:30 pm EDT)

After mulling over the charts of equity markets this week-end and reading the interpretations of several analysts, it seems to me that there are three scenarios that could play out now which I outline below. They are presented in order of probability with 1 or 2 being the most likely and 3 being the least likely.

Scenario 1 : This assumes that the DOW, S&P 500 and NASDAQ all completed a medium-term cycle with last week's lows on June 27 following the "Brexit crash" and are now starting new cycles. If this is the correct cycle interpretation then the broad stock market is now bullish and will likely rally for at least eight weeks and make new all-time highs. Because these indices are rising sharply into a strong reversal zone (now and most of this week), however, we may see a pullback this week from the current rally that will stay above last Monday's lows. This could give us a good opportunity to go long in the broad stock market.

Scenario 2 : Essentially the same as Scenario 1 but without a pullback this week. Occasionally a "reversal" zone can be a point in time when a market breaks out (or breaks down) dramatically instead of reversing. This is not common but can happen when markets are unstable and volatile (as they are now). If this scenario plays out, we will see the DOW, S&P 500 and NASDAQ continue their rallies this week and beyond on their way to making new all-time highs soon.

Scenario 3 : This assumes that the S&P 500, NASDAQ, and possibly the DOW did not yet make medium-term cycle bottoms and will do so soon at levels beneath last week's "crash" lows. I have been favoring this scenario and it has been my main reason for holding a short position in the broad stock market. Last week's strong rally, however, suggests that these indices bottomed last week and are starting new cycles.

I am currently favoring Scenario 1 with Scenario 2 a close second and Scenario 3 being the least likely (but still possible). Some conservative traders may have already covered their short position in the broad stock market based on suggestions in my recent blogs, but if you are still short (as I am) you may want to cover this position now.
Based on the likelihood of a pullback this week, however, it may be best to hold short positions (with a stop loss based on the S&P 500 closing above 2,130) and wait for a better exit point. (That 2,130 level is just slightly above our entry point for our short position and would produce a minor loss if triggered.) We need to be very alert and nimble this week as we could be covering short positions and going long around the same time. Stay tuned.
Holding my short position in the broad stock market for now (with a stop loss based on the S&P 500 closing above 2,130) but looking to cover and reverse to the long side soon.

In last Thursday's blog on gold and silver I wrote:

"...gold and silver's medium-term (and maybe long-term) cycles seem to be turning very bullish. This means we should be looking for opportunities to buy. Right at the moment, though, gold and silver are rising into a very strong reversal zone so it is likely that some sort of correction is imminent. This is especially true for silver because silver's medium-term cycle has not bottomed yet (it is due soon) so it's correction may be steep. (Gold's cycle probably bottomed - and a new one started- on May 31.) "

On Sunday silver prices rallied to $21 but then started to fall. Today (Monday) prices were down a bit further (to $19.82), but U.S. markets were closed because of the holiday (4th of July). This could be the start of a significant correction. Let's see how prices move when U.S markets open tomorrow. I may go short in silver early in the day if the technical data supports it. If we miss the opportunity to go short in silver, we will just wait for the cycle bottom and then look to go long in both gold silver. Good target prices to buy would be around $1,300 in gold and $18 in silver. On the sidelines of gold and silver for now.

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