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Trading Blog Wednesday (night), October 28, 2015

10/29/2015

BROAD STOCK MARKET/PRECIOUS METALS UPDATE and COMMENT ON FED MEETING (11:30 pm EDT)

Today the U.S. Federal Reserve decided to delay an interest rate hike yet again but delivered comments hinting that the first hike may be coming in December. The Fed's statement downplayed the influence of foreign markets on their decision and emphasized that the condition of the U.S. economy was the main factor influencing their policy strategy. Most investors had been expecting another hike delay so that was not a surprise, but Fed rhetoric referencing a possible December hike cast a hawkish shadow over the FOMC statement and may have caused some investors to panic. This would explain the abrupt 150 point plunge in the DOW immediately after the release of the Fed's statement (following a 130 point rise earlier in the day). The panic, however, was short-lived, and the DOW quickly recovered and closed the day with a 198 point gain. Although this snap back was very bullish, such high volatility demonstrates just how nervous the markets are right now. Even though we are still in a reversal zone (ending early next week) for the broad stock market, our short positions (based on the S&P 500) now have a small loss, and some traders may wish to cover these positions as there is the possibility of the market "breaking out" and continuing the rally from here. I am personally going to remain short a bit longer as I feel there is still a good chance the market will turn down within the next several days. Directional momentum is still mixed bullish and bearish for all three major stock indices (DOW, S&P 500, and NASDAQ), the S&P 500 is approaching very strong resistance underneath the bottom of a gigantic "dome top" as well as completing a large "head and shoulders top" formation in its chart, and we are still in a reversal zone for equities. I am going to set the final stop loss for this short position on a clear break and weekly close above 2135 in the S&P 500 accompanied by a bullish change in directional momentum. Maintaining my short position in the broad stock market for now.

The slightly hawkish tone of the Fed's statement also had a strong effect on the U.S. dollar. The U.S. Dollar Index soared after the statement was released at 2:00 PM. This caused gold and silver prices (which had been rising strongly into early afternoon) to collapse. This left an especially strong short-term bearish signal in silver charts. As I stated in my last blog, both metals may now move a bit lower and find some support (gold around $1145 - $1150 and silver around $15) before rallying again. If this happens, we will want to watch for the peak of that rally (which may not get very far) to sell short for a strong correction into the end of the year. If the European Central Bank's president Mario Draghi follows through with his pledge of "easy money" (QE) for Europe's failing economies, this could strengthen the U.S. dollar into the end of the year and coincide with a significant price correction in the precious metals. On the sidelines of gold and silver for now.

Trading Blog Monday, October 26, 2015

10/26/2015

UPDATE on the BROAD STOCK MARKET and PRECIOUS METALS (3:45 pm EDT)

With the important October Fed meeting taking place this week, I thought it would be a good time to present a brief overview of the broad stock market and precious metals and our current trading strategies.

In an important markets update on Oct.13, I suggested that it was likely the broad stock market's general trend was shifting from bearish to bullish and that the August 24 market lows were a significant bottom even though the correction from the all-time high in the DOW was only a little over 16% (I had been expecting 17% or higher). This bullish scenario appears to be playing out as equity markets have been rallying strongly over the last two weeks. However, even if this is a new and bullish rally from a long-term cycle bottom on Aug. 24, cycle patterns and timing suggest that a short-term correction is now due, and we are still in a reversal zone for the broad stock market this week. Under normal circumstances, the target for this correction would be towards 16,950 in the DOW and around 1970 in the S&P 500; however, there are some global economic events unfolding now that could deliver an extra bullish thrust to these markets and possibly diminish any correction. Last Thursday European Central Bank President Mario Draghi suggested new stimulus measures such as quantitative easing (QE) to help ailing European economies, and, as if on cue, the next day the People's Bank of China lowered its interest rates in an attempt to revive its sluggish economy. This double dose of "easy money" in two foreign markets that U.S. investors had recently been worried about triggered a wave of Wall Street buying at the end of the week, and the DOW closed at a new weekly high of 17,646 last Friday.

So what do we do now? This week's Fed meeting on Tuesday and Wednesday could easily be an important turning point for the markets as investors and analysts will learn whether the first interest hike will be this year or in 2016.
As I mentioned in my last blog, many investors seem to feel that the Fed will postpone the hike, and much of the broad stock market's recent rally may be in anticipation of this. If so, we could get a "buy on the rumor, sell on the news" effect with the market selling off right after the meeting. An even more dramatic selloff could happen if the Fed surprises investors and decides to raise rates this year. Many of the analysts that I follow seem to feel that some sort of correction is imminent this week. Based on all of this, I am going to try and hold on to my short position in the broad stock market at least through Wednesday in anticipation of a correction that will allow us to cover our position at a better price and start to look for a place to go long as the market could be turning bullish for the rest of the year. Traders that are already out of the broad stock market may want to wait and see how equities react to the Fed meeting. Note that directional momentum in the DOW, S&P 500 and NASDAQ is still mixed bullish and bearish so any strong movement now could be up or down.
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Draghi's "dovish" economic policy announcement last week may have been good for equity markets (at least short-term), but it wasn't good for the euro. Not surprisingly the EU's currency plummeted. This, however, was very good for the U.S. dollar. A little over a week ago the U.S. Dollar Index corrected down to 93.90 but then rallied from there and last week got as high as 97.20. That 93 area represents major support for the dollar. If Draghi is serious about more monetary accommodation in Europe, we could now be seeing the start of a major rally in the U.S. dollar that could continue into the end of the year.

Of course, a rising dollar would not be good for gold and silver prices, and there are some signs now that the precious metals could be turning bearish again soon. Gold is nearing the end of its current medium-term cycle. Gold's high of $1191 on Oct. 15 may already be the peak to this cycle, but there is still time for it to go higher. Once that peak is in, gold prices will take a significant correction which could possibly go as low as the $1100 area (maybe lower). We should be looking to sell short this cycle peak. Right now it appears that gold prices could find support in the $1145 - $1150 area and start to rally, but that rally may not get beyond $1200 before gold starts its significant correction. We will keep all of this in mind as we move towards the Fed's interest rate announcement on Wednesday which could be a turning point for many markets. Silver could also find support over the next week or two around $15 and, like gold, may then rally a bit before turning down and completing its current cycle with a significant correction. If we do see silver prices near $15, it may be a good buy spot for a short but strong rally, but then we would look to sell short at the peak of that rally for a strong correction down. I know this is all a bit confusing, but I will make these short-term strategies clear if and when the markets direct us to use them. At the moment we are still on the sidelines of both gold and silver.

Trading Blog Thursday, October 22, 2015

10/22/2015

MARKETS UPDATE (5:15 pm EDT)

The broad stock market got a boost today from some positive U.S. economic data but also from a statement by European Central Bank President Mario Draghi who said that the door is open to more quantitative easing to combat sluggish growth in European economies. Investors had been worried about the failing economies of Europe so this promise of more QE from the ECB triggered a wave of buying on Wall Street. Of course, printing more money to prop up debt-ridden collapsing economies is not really a good long-term solution to things, but hey, U.S. equity markets rallied to our own home spun QE program for over five years so why not rally to Europe's?

In my last blog I stated that "...a majority of economists are now expecting the Fed to begin raising U.S.interest rates this year...", but after perusing the internet today I am finding that investors (in contrast to economists) may be leaning more in the direction of the Fed postponing a rate hike yet again. If this is true, we may see buying ahead of next week's Fed meeting and perhaps a selloff ("sell on the news") if they do postpone the hike. If instead the Fed does decide to raise rates, markets could panic and a selloff would also likely follow. My point here is that despite today's strong rally, there are good reasons to think the broad stock market will turn down soon, and next week's FOMC meeting (scheduled on Tuesday and Wednesday) is still within our reversal zone for a directional change in the broad stock market. Other bearish signs right now include the formation of a giant "head and shoulders" pattern in the chart of the S&P 500 and the approach of the S&P 500 to very strong resistance in the 2050 - 2060 area. (Note that for the "head and shoulder" pattern to abort, the S&P 500 would have to break through the "neckline" around 2075.)

Based on all of the above, I am going to hold my short position in the broad stock market into next week and attempt to "ride out" any more rallying towards the Fed meeting. We entered a short position on 8/13 and on 8/27. Using the S&P 500 index as our reference, we still have a profit on our 8/13 trade but we have a small loss on our 8/27 trade. Any traders that are uncomfortable with this market's current volatility could cover any short positions now at an almost "break even" level and wait for the Fed's decision next Wednesday; however, the market could turn down anytime before the Fed meeting, and even if it doesn't, one could miss out if the market drops quickly late next Wednesday and/or Thursday. I am going to maintain my short position in the broad stock market for now.

Perhaps equity investors are not concerned about the short-term fix of QE to cure Europe's economic woes, but currency investors probably are. The U.S. Dollar Index soared today as currency traders fled the euro for the perceived sanctuary of the U.S. dollar (after all, our fiscally responsible Fed is getting ready to raise interest rates, right?). The dollar blasted up from 95 to 96.3 and closed the day at the top of that range. Despite this strong move, no bullish momentum signal was triggered, and directional momentum in the U.S. Dollar Index remains mixed bullish and bearish. We will have to wait and see if this is the start of a breakout or just a temporary glitch in a volatile market.

Considering today's dollar surge, gold and silver prices were remarkably stable (silver even rose a bit). It could be that some investors fleeing the euro also sought out the precious metals as a sanctuary. Silver and gold have been edging down this week, and short-term technical signals are suggesting more downside, perhaps into next week.
I would like to see gold prices closer to $1150 before considering a long position. Silver still has the potential to drop quickly towards $15. If this happens, it could be an ideal spot to buy. Still on the sidelines of gold and silver.

Crude oil prices are entering the upper range of our target area to buy ($40 - $45), but short-term technical signals are suggesting prices could go lower. A short-term buy signal tomorrow or anytime next week within our target price range would likely be a good spot to go long. Out of this market for now.

Trading Blog Tuesday, October 20, 2015

10/20/2015

MARKETS UPDATE (3:30 pm EDT)

The broad stock market indices (DOW, S&P 500, and NASDAQ), though edging higher, appear to be leveling off and may be "rounding over" to form a top. We are still in a reversal zone (which could extend into next week) so I am expecting some sort of correction to begin any day now. Because the current cycle appears to be turning bullish, that correction may only be towards 16,700 in the DOW and 1960 in the S&P 500, but it would give us a good opportunity to cover our short position and possibly go long. Next week's FOMC meeting may be a major factor in determining how the markets behave over the next two weeks. Despite weak economic data, a majority of economists are now expecting the Fed to begin raising U.S.interest rates this year. Any talk of a rate hike usually spooks equity markets so this may be the trigger for a correction. Holding my short position in the broad stock market for now.

Precious metal investors may also be cautiously eyeing next week's Fed meeting. The Fed may decide to begin hiking interest rates to help boost the U.S. dollar. The dollar's strong rally early this year was partly the result of global investors fleeing failing European and Asian economies for the sanctuary of a U.S. dollar which seemed strong due to the Fed "talking up" an imminent hike in interest rates. Of course, that hike has been continuously postponed, and the dollar has been faltering a bit over the last two months. If the Fed does decide to raise rates this year, the dollar could surge, and this would likely push down the price of gold and silver. We are currently on the sidelines of both metals. Cycle studies point to a possible brief but significant drop in silver prices this week or next which may give us a good spot to buy, especially if gold prices hold above $1164. Any trading I do in the precious metals will be short-term until cycle patterns are a little more clear in this market. Out of both gold and silver for now.

Last Thursday crude oil prices appeared to make a bottom at $45.23 and then rallied a bit into Friday. Prices are down again this week, however, and may go lower than last week, especially if the broad stock market starts to turn down. Crude's cycle pattern shows that a drop into the $40 - $45 range is possible this week or next. If that happens, it may be a good place to buy for a strong short-term rally. Out of crude oil for now.

Trading Blog Sunday (night), October 18, 2015

10/18/2015

PRECIOUS METALS UPDATE and SILVER TRADE ALERT (11:30 pm EDT)

In my many years of trading I have rarely seen financial markets as nervous, unstable, and as volatile as they are now, and yes, this makes them harder to call. Fortunately, cycle studies, timing signals and technical analysis gives us tools to adjust our trading strategies when necessary so we are never lost, even when the markets throw us curve balls. The precious metals are especially tricky to call right now as gold and silver have suddenly shifted their directional trend (from bearish to bullish) over the last few weeks. It is important to note that this may be a short-term shift as the final bottom in the long-term cycles of these two metals may still be coming later this year or early next year. Last week gold and silver broke through important resistance levels which means that both of their medium-term cycles are now pointing up (i.e. bullish trend with a potential for new highs). Nevertheless, gold's medium-term cycle is nearing completion so we need to be watching for a final high in prices and then a sharp correction to the cycle bottom. After analyzing the precious metal charts this weekend, I can see that there is the potential for both a short-term bullish as well as a bearish scenario:

BULLISH: Last week I mentioned the importance of the $1232 resistance level in gold. If gold prices can stay above $1164 this week then there is a good chance they will rally and break through that resistance. This is the scenario I favored after gold's surge last week, but I am not so certain now that it will pan out.

BEARISH: Gold prices peaked at $1191.70 last week and turned down within a strong reversal zone. This means prices could continue falling this week. If they break below $1164 they could continue down for at least two more weeks. In this scenario gold could find support around $1150 and rally back up, but prices would not likely exceed $1232 (maybe not even $1191) before turning back down again.

I may have been premature in buying silver last Thursday. Even though silver's cycle is pointed up, last week's reversal zone could first push prices down into a brief but significant correction before rallying to new highs. We have a tight stop loss on our long position at $16 which should be triggered if prices open under $16 tomorrow. Any traders who did not apply a stop loss may want to place a sell order for tomorrow's market opening. Prices closed on Friday close to our buy spot so we should be able to pull out with minimal loss. I apologize for such a short-term trade which is not a normal strategy for me (I am not a day trader), but I think it would be prudent here to avoid a possible steep correction in this highly volatile market. Selling my long position in silver tomorrow (Monday) morning.

Trading Blog Friday, October 16, 2015

10/16/2015

MARKETS UPDATE (2:30 pm EDT)

From a high on Tuesday at 17,172 the DOW pulled back briefly on Wednesday to 16,887 but is rising again and now challenging resistance at 17,200. Wednesday's dip was not a significant reversal, and we are still in the center of a strong reversal zone with this market making new highs so another reversal is still possible, even likely. Though edging higher, the broad stock market is looking "toppy" here so I am going to hold my short position in anticipation of a stronger "dip" which would give us a better spot to cover our short trades and possibly go long. Holding my short position in the broad stock market.

Gold prices surged to a high of $1191 yesterday but are backing down a bit today. If they edge lower into early next week but remain above $1170 I will consider going long. We are already long in silver with a tight stop loss on a close below $16. Prices are testing this level now which could act as support for a strong rally. I want to point out that even though this rally could be strong, it may be short-term as we are still not certain if the longer term cycle bottoms in these metals are in. We are now long in silver but still out of gold.

A strong bear signal appeared in the chart of the U.S. Dollar Index this week as the dollar plunged on Wednesday and dipped slightly below 94. If the dollar continues lower it will help boost a rally in the precious metals. The 93 level is very important support for the dollar right now, and any clear break below there would not be good news (for the dollar, that is. Precious metals would likely soar).

Trading Blog Thursday (early AM), October 15, 2015

10/15/2015

PRECIOUS METALS UPDATE and SILVER TRADE ALERT (12:30 am EDT)

The precious metals market had been giving us mixed signals over the last few weeks. On my Sept. 28 blog I wrote:
"Gold and silver seem to be at a crossroads right now and have the potential to turn either very bearish (short-term) or very bullish...As long as gold stays below $1170 and silver stays below $15.90 (spot prices) I will maintain my bearish view."
Then on Oct. 7 I wrote: "Silver rallied strongly yesterday and exceeded its August high while gold prices did not. This could be a case of bearish intermarket divergence (until gold makes a new high), but it could also mean that the precious metals are starting to turn bullish because the cycle pattern in silver charts is now pointing up."

Today gold made a second new high (after clearing its Sept. 24 high) and dramatically broke and closed well above its Aug. 24 high of $1170.10. This means that the current cycles of both gold and silver are now pointing up which is at least short-term very bullish. Directional momentum in both these metals has shifted to 100% bullish. I mentioned recently that reversal zones can occasionally accelerate a directional trend and lead to a "breakout" (or "breakdown") in prices instead of a turnaround. This could be happening here, but the current reversal zone could extend into the end of next week so we could still see prices turn down. Nevertheless, the potential now for a major rally in both gold and silver is strong, and this prompted me to bail out of my short position in gold today. It is possible for gold to now rally to $1200 or higher. Any rally that breaks above $1232 would be a very bullish signal for the precious metals. If gold prices back down a bit over the next few days but stay above $1170, I will consider going long. Silver prices did not rally as strongly as gold today, but they are starting to rise in the overnight market, and it looks like silver is following suit with gold and "breaking out". Because the price is still close to $16, I am going to enter a long position in silver tonight for tomorrow's market open and place a tight stop loss on a close below $16 (and/or if gold falls back below $1170).

Trading Blog Wednesday, October 14, 2015

10/14/2015

GOLD TRADE ALERT (3:30 pm EDT)

Gold prices are "breaking out" dramatically today as the spot price has clearly surpassed and is closing above the August 24 high of $1170.10. There are technical signals now flashing signs of the precious metals turning bullish so we need to bail out of our long position in gold. Even if prices reverse over the next few days, we will be looking to buy as the potential for a strong rally is now great. Covering (unloading) my short position in gold today.

I will comment more on this trend shift in the precious metals later tonight.

Trading Blog Tuesday, October 13 , 2015

10/13/2015

IMPORTANT MARKETS UPDATE (3:15 pm EDT)

Last week there were several technical signals suggesting that the broad stock market could be turning bullish. If this is happening it is possible that the August 24 market lows were a significant cycle bottom in all three major market indices (DOW, S&P 500, and NASDAQ) and that the correction of around 16% may be it for now (i.e. at least 6 more weeks). After examining the charts of these indices during the weekend, I am thinking this bullish view is highly probable. I am therefore abandoning the idea of these markets making new short-term lows (below their August lows). It appears the cycle structure of the broad stock market is shifting, and we need to shift our trading strategy as well.

Despite all of this, we are still at the center of a strong reversal period in many markets this week (it may extend into early next week), and the strong rally in equities from last week seems to be leveling off. There is therefore still a high probability of some sort of reversal now which we can use as an opportunity to take profits in our short broad stock market positions. If the cycles have turned bullish then a pullback in the DOW right now may only get to the 16,700 area before rallying again. We will watch for this to happen this week or possibly into next week. An equivalent pullback in the S&P 500 would be to the 1960 area. Holding my short position in the broad stock market but looking to take profits soon.

We are now also at the center of a reversal period for gold and silver and prices in both metals are rising into it. Because silver exceeded its August high last week and gold didn't, we still have a strong case of intermarket bearish divergence. We are also seeing bearish divergence this week as yesterday silver exceeded its high from last week, but gold did not. All of this points to some kind of pullback now. If gold stays below its August 24 high ($1170.10) it suggests that the cycle trend is still bearish, and a major correction could be forthcoming. If prices break above $1170.10 this week or next, we could still see a reversal, but the correction would likely not be as severe. Either way, a price reversal seems imminent so I am holding on to my short gold position for now. Unlike gold, silver's trend seems to have turned bullish so it may be wise to wait for a correction in both metals and then look for an opportunity to buy. Holding my gold short position and still out of silver.

Crude oil made a top last Friday at $50.92 and prices made a low of $46.80 intraday today. I had been expecting such a correction but from a higher price (closer to $55). The lower top, as well as last week's shift in directional momentum from bearish to mixed bullish and bearish suggests that prices could still go higher. If prices fall to the $44 - $45 area this week or next, I may consider buying for another rally to $55 or higher. Out of crude oil for now.

Trading Blog Thursday, October 8, 2015

10/8/2015

BRIEF BROAD STOCK MARKET UPDATE (3:45 pm EDT)

The DOW broke 17,000 around 3:00 pm EDT and may close the day above it. While this is our general stop loss area, I am going to stay with my short position in the broad stock market for now as we are in the dead center of a strong reversal zone and we still have a case of bearish intermarket divergence (the S&P 500 and NASDAQ have still not broken through their mid-September highs). Also, we need to allow a wider margin of error around support and resistance lines right now because the markets are so volatile.

Holding my short position in the broad stock market.

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