Thanksgiving may be over, but Christmas is not far away, and the holiday spirit may be lingering on Wall Street as the DOW, S&P 500 and NASDAQ are all making new highs this week. Thus we will not see any bearish divergence this week as we enter a new reversal zone for the broad stock market (Nov. 28 - Dec. 6). It is getting quite late in the medium-term cycle of this market so a top is due to be followed by a significant correction soon. There is a good chance that top will happen in this new reversal zone. Equity markets are overbought and ripe for a correction so we may see a correction into the Christmas holiday. If the broad stock market doesn't start a downward correction this week, we will look for a bearish divergence signal early next week (i.e. one or two- but not all three- stock market indices making a new high).
One thing that has me concerned is the possibility of the "holiday spirit" and "irrational exuberance" joining forces now to drive a traditional "Santa Claus rally" into the end of December. Such a rally could develop if the U.S. Congress passes a new tax reform bill before Christmas. If this bill is passed quickly, it could help drive a strong holiday rally into the last week of December where we find yet another reversal zone (a very strong one). That could turn out to be the final top to this cycle (with a correction starting after New Year's Day). It looks like we could see a vote by Thursday this week; however, this is a controversial bill that has no support from Democrats as well as the disapproval of some Republicans. Since the U.S. Congress is famous for gridlock, we can't count on this bill being passed. Until it is passed, let's keep our eyes open for an earlier top (perhaps early next week) and another opportunity to sell short.
On the sidelines of the broad stock market but looking to sell short soon.
Gold prices made new highs on Monday near the $1,300 mark while silver did not make a new weekly high on Monday and is falling steeply today. We thus have an intermarket bearish divergence signal which could mean lower prices into this week's reversal zone for precious metals (Nov. 28 - Dec. 6 - same as the broad stock market). If that happens, and especially if one or both metals drop below their Oct. 6 lows ($1,262 in gold and $16.38 in silver), we will look to go long. If those Oct. 6 lows are breached, it means we are likely seeing the final bottom of an older medium-term cycle which would be an excellent spot to buy. On the sidelines of gold and silver and looking to go long soon.
The U.S. Dollar Index is rallying this week, but directional momentum in this market recently turned nearly 100% bearish so this rally may not get that far before turning down again. In terms of our precious metal strategy, this may suit us fine as we only want to see gold and silver move lower into late this week or early next week to form a bottom to buy. After that, we want those metals to rally, and another downturn in the dollar could kick start such a rally.
Crude oil prices topped out at $58.99 (Jan. contract chart) last Friday and are down a bit yesterday and today. This week's reversal zone (Nov. 28 - Dec. 6) is also relevant to crude. Prices could push higher and form a top here (possibly as high as $62), but if they continue down steeply we could instead see a final medium-term cycle bottom form by next Wednesday (somewhere below $55). If that happens, it would be a good buy spot. If crude does push higher into the end of the week or early next week, we will look to sell short what will likely be a steep correction from that high to the final cycle bottom sometime later in December. It is late in the medium-term cycle of crude so we should be seeing a correction soon. Still on the sidelines of crude oil.