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Trading Blog Tuesday, January 1, 2019

12/31/2018

UPDATE on the BROAD STOCK MARKET and PRECIOUS METALS (3:00 pm EST)

After looking over the charts of the broad stock market over the last few days, I can see two likely scenarios that could unfold going forward (one bearish and one bullish):

1) Our preferred scenario of the DOW and S&P 500 starting new medium-term cycles from their Oct. 29 lows. In this scenario, both indices have turned bearish because they have broken below the Oct. 29 lows that started their cycles. This means that they will likely continue lower over the next 6 - 14 weeks to their final bottoms, and we should be looking to sell short at the top of any short-term rallies (such as the one we are having now).

2) Because of the strength of last week's steep rally on Thursday and Friday, it's possible that last Wednesday's deep bottom (21,712 in the DOW and 2,346 in the S&P 500) was the start of new medium-term cycles in these two indices. In other words, the current medium-term cycle could have started then and not on Oct. 29 as described above. This scenario would be bullish, and the rally that started last week could continue for several more months (with corrective dips along the way). Such a rally could easily make new all-time highs in one or both indices, and our trading strategy now would be to look to go long on any short-term dips.

So how will we know which scenario is playing out? Well, if Scenario 1 is valid, then the current sub-cycle rally would be short-term and could get to the 24,500 level and possibly as high as 25,600 in the DOW before turning down.. If we get to those levels in a strong reversal zone and the market seems to be stalling, that may be a good spot to sell short. On the other hand, any break above the Nov. 28 high of 26,277 would suggest that Scenario 2 is playing out.

We are about to enter a very strong and long reversal period for equities that runs from Jan. 1 - 17 (and maybe even into Jan. 28). Likely turning points in this reversal zone would be Jan. 4, Jan. 14, and Jan. 23. If equities turn down now and move lower into the end of this week then that would be an argument for Scenario 1. But if they continue higher into any of these new reversal points then Scenario 1 or 2 is possible (and very likely Scenario 2 if the DOW can get above 26,277). I realize this is all a bit confusing, but I will post trade alerts when any trading opportunity arises. For now, let's plan on selling short if we see the market rise and stall somewhere in that 24,500 - 25,600 range (or maybe lower) with a stop loss based on a break above 26,277. On the sidelines of this market for now.

In last Thursday's blog on precious metals I wrote:

"...gold and silver are rallying strongly this week which is forcing me to reconsider the idea that gold started a new medium-term cycle on Nov. 13 (at $1197). If that is true then the cycle is still young and bullish and not moving to a final cycle bottom in a couple of weeks as I speculated in my last blog on these metals. Silver is breaking above its Nov. 2 high of $14.90 which may mean that, like gold, it too could have started a new medium-term cycle in mid -November (with the low of $13.89 on Nov. 14). Even if both metals are starting new (bullish) cycles, they are due for at least a sub-cycle correction right now. Let's wait and see if we get one and how low it will go."

All of this still applies as both metals edged even higher today. That Jan. 4 reversal date for equities might also be a turning point for a high in these metals. If not, a strong reversal zone specifically for gold and silver is coming up Jan. 9 - 17. Let's wait for a correction and a bottom to buy. If gold started a new cycle on Nov. 13, prices could move down to the $1243 area. But if gold is still completing an older cycle, it could go lower, say to the $1220 area. Both areas would be buy spots. Silver could drop back as low as $14.20. On the sidelines of gold and silver for now.

A belated MERRY CHRISTMAS and HAPPY NEW YEAR to all readers of the blog!

Trading Blog Thursday, December 27, 2018

12/27/2018

MARKETS UPDATE (6:30 pm EST)

The severe roller coaster ride in equities this week is making me glad to be on the sidelines of the broad stock market for now. The DOW and S&P 500 both made new lows yesterday (the NASDAQ made a low on Tuesday) and tomorrow ends the minor reversal zone we have been in since last week. These lows could be a significant turning point (especially since yesterday's rally- over 1000 points in the DOW- was so strong), and if so, we could see more rallying into next week. We are about to enter a very long and very strong reversal zone (January 1 - 17) with likely turning points centered around Jan. 4 and Jan. 12. If we do rally into next week (or the following week), we could see a good set-up for selling short in this market, especially if that rally stalls around 23,500 in the DOW and 2,550 in the S&P 500. This is our preferred scenario at the moment and, as I discussed in my last blog, it is based on the idea that both these indices started new medium-term cycles On Oct. 29 and have turned bearish as they head down to their final bottoms 6 - 15 weeks from now.

But, of course, there is always an alternative scenario. If this market continues to fall into the first half of January then we could see a significant bottom in that time period, and that bottom might be the end of older medium-term cycles in the DOW and S&P 500 (meaning new cycles did not start on Oct. 29). I think this scenario is less likely than the first one, but if it plays out, we would be looking to buy that bottom (the start of new cycles) as a strong rally could follow.
Let's stay on the sidelines for now.

Gold and silver are rallying strongly this week which is forcing me to reconsider the idea that gold started a new medium-term cycle on Nov. 13 (at $1197). If that is true then the cycle is still young and bullish and not moving to a final cycle bottom in a couple of weeks as I speculated in my last blog on these metals. Silver is breaking above its Nov. 2 high of $14.90 which may mean that, like gold, it too could have started a new medium-term cycle in mid -November (with the low of $13.89 on Nov. 14). Even if both metals are starting new (bullish) cycles, they are due for at least a sub-cycle correction right now. Let's wait and see if we get one and how low it will go. That will help us determine the correct cycle labeling in this market. We are still looking to go long in both metals soon. On the sidelines of gold and silver for now.

One reason gold and silver are suddenly looking so bullish is because the U.S. Dollar Index is starting to look weak. There are technical signals now pointing to a possible breakdown in the U.S. dollar. This is a surprising development as the dollar had been looking strong, and the Fed's recent rate hike was hawkish - something that usually supports the dollar. Perhaps investors are starting to realize that (for many reasons too numerous to go into here) the greenback's status as the world's reserve currency may be in jeopardy. If so, gold and silver may now be the preferred safety hedge in the event of a major crash in equity markets (unlike the 2008-2009 crash when investors initially bypassed the precious metals in favor of the perceived safety of the U.S. dollar). The fact that gold and silver prices have been holding up so well during recent plunges in the broad stock market is supporting the idea that investors will favor the precious metals over the greenback as a safe haven in an equity crash.

The price of crude oil seems to be taking its cues from the broad stock market. Because we are favoring a bearish view of equities right now, it seems like crude prices could also move lower. We are watching for a long-term (3 year) cycle bottom that is due any time now. The next major reversal zone for crude is coming up Jan. 13 - 25 so that may be a good time for the final 3 year cycle bottom and a buying opportunity. Let's wait and see if prices can push lower into that time frame. On the sidelines of crude oil for now.

Trading Blog Sunday, December 23, 2018

12/23/2018

BRIEF UPDATE ON THE BROAD STOCK MARKET (6:30 pm EST)

It looks like Wall Street was very unhappy with the Federal Reserve raising interest rates last week as equity markets plummeted steeply right after the hike (Wednesday afternoon) and into the closing bell on Friday. We are now at the center of a minor reversal zone (it ends this Friday) so we could see a small bounce or relief rally over the next few trading days. If that rally rises back to around 23,500 in the DOW and 2,550 in the S&P 500 (these were important support levels - now resistance - that broke down last week) then we may have an ideal spot to sell short. It looks like new medium-term cycles started in both these indices on Oct. 29 and have turned bearish so both indices could be headed lower for another 6 - 15 more weeks.

We can't, however, completely rule out the idea that these indices are still completing older medium-term cycles. If that is the case, we could see a final bottom over the next few weeks (probably the second week of January) and a good place to go long for another strong rally into early 2019. I am favoring the former (bearish) scenario for now.

This week is Christmas (Tuesday) so trading may be light even into early the following week (New Year's day). Stay tuned as a good shorting (or maybe buying) opportunity may be imminent in this market. Still on the sidelines of the broad stock market.

Trading Blog Wednesday (night), December 19, 2018

12/19/2018

MARKETS UPDATE (10;30 pm EST)

Ignoring President Trump's warnings to not hike interest rates, the Fed today raised benchmark interest rates by one quarter percent. A slightly dovish tone was struck, however, as the FOMC's projection for future hikes indicated only two rate hikes for next year rather than a previous projection for three. After rallying strongly earlier in the day, the DOW plunged on the Fed's announcement. Wall Street may have been expecting the Fed to encourage a "Santa Claus" rally by holding back a rate hike. The next few days will tell us how upset equity markets are with the hike. The dovish gesture of removing one hike from next year's plans may be enough to placate the markets into a seasonal rally into Christmas (next week). If that happens and the rally stays below 25,400 in the DOW, we will be looking for a top to sell short. If this market continues to plunge sharply, however, we may have to wait for a final bottom to buy sometime in January. Still on the sidelines of the broad stock market.

Not surprisingly, the rate hike had the opposite effect on the U.S. Dollar Index which was down early in the day but then shot up on the Fed's announcement. This in turn pushed gold and silver prices down in the afternoon after both metals made new highs earlier in the day. We could now see the precious metals move down to their final medium-term cycle lows over the next few weeks. Our intention is to buy at those lows. On the sidelines of gold and silver for now.

In my last blog on crude oil (Dec. 12) I wrote:

"...prices could go lower from here. If they don't, we will assume that the $49.41 low of Nov. 29 was a medium-term cycle bottom (and possibly a longer-term cycle bottom as well which, if true, means we are now in a good place to buy)."

Well, prices have broken below $49.41 (Jan contract chart) this week. Today they got to $45.93. This means that the longer-term (3 year) cycle is likely not over yet and wants to go lower. There is a possibility, however, that a new medium-term cycle started with that $49.41 low. If true, the cycle has already turned bearish (because it has broken below its starting point) and could continue down for many, many more weeks (as it is still young). In that scenario we might try and sell short the top of any short-term rally. A second possible scenario would abandon this idea of a new medium-term cycle and assume we are still in an older cycle. In that case, a final low would be due soon. The next reversal zone for crude is mid-January so that could turn out to be the final bottom and a good place to buy. We will stay on the sidelines for now until we have a little more clarity in these cycles. Our main goal now is to identify and buy that final 3 year cycle low.

Trading Blog Monday, December 17, 2018

12/17/2018

UPDATE ON THE "WILD AND CRAZY" BROAD STOCK MARKET (4:00 pm EST)

Last week both the DOW and S&P 500 broke their Oct. 29 lows while the NASDAQ held above its low from Nov. 20. This created a bullish divergence signal. That bullish signal is now being negated as today's dive in equities is pushing the NASDAQ below its Nov. 20 low. This is a very bearish sign as it suggests that the DOW and S&P 500 did indeed start new medium-term cycles on Oct. 29 but those cycles have now turned bearish and will continue lower for another 7 - 16 weeks. If this is the case, we should be looking to sell this market short at the top of any minor sub-cycle rally. We may see such a bounce soon if these indices find a stable support level this week or next (there is a minor reversal zone from Dec. 17 - Dec. 27 which could produce a turning point). We will watch for this. Note that the Federal Reserve will decide this week to raise or not raise interest rates. A decision to hold off a rate hike could boost equity markets.

An alternative scenario is the still viable (but now less likely) idea that the DOW and S&P 500 did not start new cycles on Oct. 29 but instead are completing their final moves down to the bottoms of older cycles that should be completed within the next three weeks. That would also be bearish, but for a much shorter period of time (1-3 weeks instead of 7-16 weeks); however, in that case the drop could be fast and steep.

OK, all these cycle possibilities may be a bit confusing, but our trading strategy is fairly straightforward. We will now watch for a short-term bounce and top to sell short (in a new cycle) for a possible long ride down into early 2019. If instead this market plunges quickly and steeply to the bottom of an older cycle over the next few weeks, we will look to go long at the end of that cycle (and the start of a new one) as a strong rally could follow. Once we see which scenario is going to play out, I will discuss what I anticipate longer-term for this market into next year. (Hint: I am anticipating a major correction in this market soon). Still on the sidelines of this crazy and volatile market.

Trading Blog Wednesday, December 12, 2018

12/12/2018

BRIEF UPDATE ON THE BROAD STOCK MARKET AND CRUDE OIL (2:00 pm EST)

The broad stock market has been rallying from Monday's low, but today could be a turning point for a reversal so we will wait to see if this market turns down again over the next day or two. Directional momentum in the DOW and S&P 500 has turned 100% bearish this week; however, the NASDAQ remains mixed bullish and bearish. This is interesting as it supports the idea of the NASDAQ starting a new medium-term cycle from its Nov. 20 low of 6,830 while the DOW and S&P 500 could be still completing the final lows of their older cycles. Those final lows may have been on Monday, but I still think there's a chance they could go lower. We will remain on the sidelines for now.

Crude oil is now moving out of a reversal zone specifically for crude (Dec. 3 - 11), but it has not made a new low or high this week. It appears that last week's high at $54.22 (Jan. contract chart) was the turning point for this reversal which means prices could go lower from here. If they don't, we will assume that the $49.41 low of Nov. 29 was a medium-term cycle bottom (and possibly a longer-term cycle bottom as well which, if true, means we are now in a good place to buy). On the sidelines of crude oil for now.

Trading Blog Monday, December 10, 2018

12/10/2018

MARKETS UPDATE (6:00 pm EST)

The broad stock market is giving us a lot of mixed signals right now and that is going to keep us on the sidelines today.

The DOW and S&P 500 today broke below their Oct. 29 lows. This is a bearish sign. If these indices did start new medium-term cycles on Oct. 29, it would mean that this market could continue down for at least 7 more weeks and possibly longer. On the other hand, if Oct. 29 was not the start of new cycles then both these indices could just be completing the final bottom to an older cycle which would also be bearish but for a much shorter period of time - they would likely find a final bottom within 2 weeks. One bullish sign now is that the NASDAQ has not (yet) broken the Nov. 20 low (6830) that may have started its new medium-term cycle. This gives us a bullish divergence signal until that low breaks. After diving early in the day, all three indices seem to be recovering and closing in positive territory. This is also bullish behavior.

What should we be watching for amidst all these mixed signals and possibilities? Well, if the NASDAQ breaks significantly below 6830, that would support the idea of a longer-term breakdown in this market. But if that low holds then it is possible for the DOW and S&P 500 to complete their cycle bottoms quickly (within 2 weeks) and then see a strong new rally start in all three indices. Tuesday-Wednesday this week could be a significant turning point for this market. If we see the DOW and S&P 500 edge lower over the next day or two with the NASDAQ holding above 6830, we may consider going long.

Gold and silver prices are backing down a bit from last week's highs. These two metals could now be turning down to complete their final medium-term cycle bottoms over the next few weeks. If silver breaks below $13.89 with gold staying above $1161 (bullish divergence), we'll have a good opportunity to go long in both metals. On the sidelines of this market for now.

Crude oil is a little tricky to call right now. It appears that a medium-term cycle bottom could have been made on Nov. 29 at $49.41. That was in the center of a general reversal zone. But prices seemed reluctant to rally strongly from there, and they are now descending again towards $50 as we near the end of another reversal zone specifically for crude (it ends Wednesday). We could be seeing a double bottom here or the start of a descent to even lower prices (directional momentum in crude is currently 100% bearish). We are looking to go long at the bottom of this cycle, but let's stay on the sidelines for now until we see stronger bullish signals.

Trading Blog Friday, December 7, 2018

12/7/2018

BRIEF UPDATE ON THE BROAD STOCK MARKET (2:00 pm EST)

The broad stock market is giving us a good scare this week with its wild gyrations, but things might settle down a bit by the end of next week as we are moving out of a high volatility period that has been in place over the last three weeks. Yesterday the DOW broke below a strong support level around 25,000 and is now testing another support area around 24,300 - 24,500. We note that (at the time of this writing - 2:00 pm EST) the DOW, S&P 500, and NASDAQ have not broken below their Oct. 29 lows (DOW, S&P 500) or Nov. 20 low (NASDAQ), but they are getting close. These indices are going below what would be a normal sub-cycle correction (assuming they all started new bullish medium-term cycles on the dates mentioned above) which is putting in jeopardy our idea of a bullish rally from here. We are fortunately still on the sidelines of this market and will stay there for now as we wait and see if the new support area holds. If the NASDAQ and/or the S&P 500 break their lows (6,830 and 2,603, respectively) while the DOW stays above its low (24,122) then there's still a chance for a bullish "Santa Claus" rally into the end of the year. If all three indices break their lows then this market could be in trouble.

Trading Blog Wednesday, December 5, 2018

12/5/2018

MARKETS UPDATE (5:30 pm EST)

In Sunday's blog on the broad stock market I wrote:

"We are now in the center of a strong reversal zone for equities that technically ends this Wednesday (but let's extend that into Friday). There is a good chance we will see a top by the end of this week and then some sort of correction...
If the DOW tops out early this week, a correction might go down to the 24,900 area..."

Well, the DOW did top out on Monday then fell dramatically on Tuesday (nearly 800 points) to bring it close to the 25,000 level. Today regular trading on Wall Street was closed in observance of a day of mourning for George H.W. Bush, but stock index electronic trading remained open and the DOW was up about 100 points at the end of morning trading. The big question now is if this correction will find support over the next few days and serve as a base for another strong rally. Usually a significant sub-cycle correction will last 3-8 days. This one is in its second day and it is already at a strong support level.

As I stated in Sunday's blog, there is a good chance the DOW, S&P 500 and NASDAQ recently started new medium-term cycles (the DOW and S&P 500 on Oct. 29 at 24,122 and 2,603, respectively, and the NASDAQ on Nov. 20 at 6,830). If so, the current correction should not break those lows and this correction should end and another strong rally should start before the end of next week. If this market continues to plunge and those lows stated above are broken then we will have to abandon our bullish view as the market could be in serious trouble. President Trump's announcement on Monday to delay tariffs on China for 90 days gave a big boost to equities until Mr. Trump causally "tweeted" later that a deal with China would "probably" happen and gave himself the nickname "Tariff Man". Wall Street is very nervous right now and does not like such uncertainty so we cannot rule out a major downturn in the broad stock market now. I am still favoring, however, the bullish idea of of new cycles and more rallying into the new year. This would be following the traditional pattern of a "Santa Claus" rally at this time of year. Let's wait and see if the current support around 25,000 will hold. We may look to buy over the next day or two. On the sidelines of the broad stock market for now.

Gold and silver seem to be topping out in this week's reversal zone (which we will extend into Friday). This week's rally so far has not been very strong, and this is a bearish sign. As I discussed in Sunday's blog, both metals may be near the end of their current medium-term cycles and about to complete their final cycle bottoms. We will be watching for these bottoms to buy over the next several weeks. Ideally, gold's final bottom will stay above $1161 as silver pushes below $13.89 for a strong intermarket bullish divergence signal. Still on the sidelines of the precious metals.

Last Thursday's low in crude oil at $49.41 (Jan. contract chart) could have been the final bottom of a medium-term and even longer-term cycle in crude. We are, however, in the center of a reversal zone specifically for crude that extends into next Wednesday, and prices are rallying into it. Let's wait and see if this reversal pushes prices back down before considering a long position. On the sidelines of crude for now.

Trading Blog Sunday, December 2, 2018

12/2/2018

UPDATE ON THE BROAD STOCK MARKET and PRECIOUS METALS (6:30 pm EST)

Last week's strong rally in the broad stock market is supporting the idea that a new medium-term cycle started in the DOW from its Oct. 29 low of 24,122. New medium-term cycles may also have started in the S&P 500 (Oct. 29 at 2,603) and in the NASDAQ (Nov. 20 at 6,830). We are now in the center of a strong reversal zone for equities that technically ends this Wednesday (but let's extend that into Friday). There is a good chance we will see a top by the end of this week and then some sort of correction. If these indices have indeed started new cycles then the correction should not be great and we should look for a small dip to buy as it is early in these cycles and they are likely bullish. Such a scenario would line up well with a "Santa Claus" rally which is often seen at this time of year on Wall Street. What we don't want to see is a correction down that breaks below those lows stated above which (very likely) started the new cycles. If that happens, we could see these indices down for at least a few more weeks and possibly much longer. Our strategy now will be to buy any short-term correction that holds above those lows. If the DOW tops out early this week, a correction might go down to the 24,900 area, but if the market is still giddy from Jerome Powell's "dovish" comments about interest rate policy made last week then we could see "irrational exuberance" take these indices higher and further into the week. We will stay on the sidelines for now and watch for that top and then a corrective dip to buy this week or next.

It is starting to look like gold and silver are completing the final bottoms of older medium-term cycles. (I had recently introduced the possibility of gold starting a new cycle with its low of $1196 on Nov. 13, but that looks unlikely now). This means that we could see lower prices over the next several weeks as both metals complete their final cycle bottoms. Silver could easily break below its recent Nov. 13 low of $13.90, but gold might hold above the low that started its cycle ($1161 on Aug. 16). If that happens, it would be a strong bullish divergence signal and a good place to buy the start of new cycles in both metals. We will watch for this. In the meantime, both metals could rally some more before pushing down to their cycle bottoms. If we get a strong rally now, we may even consider selling short at a cycle top before the final descent down; otherwise, we will wait for the cycle bottoms to buy. Still on the sidelines of gold and silver.

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