Those who have been reading my blog over the last few weeks will know that it has been difficult to determine which way the wind is blowing in the broad stock market and that we've been waiting for a signal from the market to clarify the structure of the current medium-term cycle (i.e. has a new medium-term cycle already started or are we still waiting for an older one to bottom?) We are getting that signal today. It is telling us that the winds are blowing south and that the old cycle is still bottoming.
In my blog on Dec. 23 I described two possible trajectories for the broad stock market into the new year, one bullish and one bearish. It appears that the second (bearish) one is playing out. On Dec. 23 I wrote:
"The second possibility is that we haven't finished the old cycle yet and the bottom is due within the next several weeks at lows beneath the lows mentioned above. In this situation we could see these indices make new monthly lows before making new yearly highs. Those lows could come next week or ideally in mid-January (the next strong reversal zone). A good target for those lows would be around 16,700 for the DOW and around 1970 (possibly lower) for the S&P 500."
The DOW dropped briefly below 17,000 today (a 400 point plunge) but recovered a bit near the end of the day and closed with a 276 point loss. We are now approaching another strong reversal zone for equities which starts at the end of this week and continues through the end of next week. The DOW, S&P 500 and NASDAQ are all making new monthly lows today so we should now be looking for their medium-term cycles to bottom by the end of next week, ideally near the target levels mentioned above (16,700 in the DOW and 1970 in the S&P 500). If these target lows hold, we will likely have a good opportunity to buy the start of a new cycle in these markets. If the DOW moves below 16,400, however, we may have to abandon this strategy as the market could turn very bearish and could possibly start to "melt down". Unfortunately, there are technical signals now suggesting that all markets could be unusually volatile in January so we need to be especially careful in our trading. Holding my sideline position in the broad stock market for now.
After falling steadily last week, gold and silver prices rallied today (gold rather dramatically) which is encouraging for our long positions in both metals. We are not out of the woods, however, in terms of averting a downward plunge toward new lows into next week's reversal zone, and that is still a possibility. Nevertheless, several technical indicators still support the idea of a rally into next week so I am going to hold my long positions for now. If gold prices can clear $1090, we could see a sharp rally to $1120 or higher. On the other hand, we don't want to see gold drop below its low of $1046 from Dec. 2 as it would negate the idea of that being the start of a new medium-term cycle and would suggest that the old cycle is still finding a bottom. Note that even if this bearish scenario plays out, we would still be looking for a bottom to buy, possibly as early as next week. Gold's Dec. 2 low and silver's Dec.14 low are holding up so we will keep our fingers crossed for a rally into next week. Still long in both gold and silver.
The U.S. Dollar Index rallied today yet this did not push down gold and silver prices. This supports our short-term bullish view of the precious metals. The dollar has managed to clear the 98.5 level, but as I stated last week, it faces heavy resistance all the way up to 100 so any rally now could easily turn back down.
Taking its cue from the broad stock market, crude oil prices backed down today and closed around $36.80. Crude oil's current medium-term cycle is nearing completion, and the ideal time for a cycle bottom would be in next week's reversal zone. So far the low of this cycle has been $35.35 on Dec. 21. If we see a double bottom to that low or even lower prices next week we will look to buy as the start of any new cycle is always at least short-term bullish. On the sidelines of crude oil for now.