We are still holding the belief that that a long-term cycle in the broad stock market peaked in late November last year (NASDAQ) and early January this year (DOW and S&P 500) and that this market will most likely go much lower over the next several years. Nevertheless, there will be ups and downs along the way, and right now we are looking at the possibility of all three indices forming a final medium-term cycle low and starting a new medium-term cycle that could possibly challenge those all time highs from November and January.
The DOW and S&P 500 both made a deep low on June 17 (29,653 and 3,637, respectively), and the NASDAQ did so on June 16 (10,565). These lows were in a strong reversal zone, and these indices rallied strongly up from those lows. This means the lows could represent the start of new medium-term cycles. But significant tops formed on June 27 (NASDAQ) and June 28 (DOW and S&P 500), also in a strong reversal zone, and the indices have been falling from there. If they continue down past the June 16 and 17 lows, it will mean either:
1) The new cycle has peaked early and turned bearish, or
2) We will have to abandon the idea of new cycles and instead assume an older medium-term cycle is in place and moving down to its final bottom.
Note that we are still in a reversal zone that ends this week. Today the DOW made a new weekly low while the S&P 500 did not, and all three indices are rallying up from their lows. This gives us an intermarket bullish divergence signal in a reversal zone and supports the idea that we have new medium-term cycles. To verify this we now need to see these indices break above their highs from June 27 (11,675 in the NASDAQ) and June 28 (31,885 and 3,945 in the DOW and S&P 500, respectively). After this week, there are no reversal zones for the rest of this month. Therefore, whatever trend (up or down) establishes itself early next week will likely be in effect for at least three more weeks. If it looks bullish, we may look to go long for a rally that could potentially challenge the all-time highs in this market. We will stay on the sidelines for now.
Crude oil prices took a cue from today's early plunge in equities and also tumbled down. Unlike the broad stock market, however, they didn't snap back up. We had set a stop loss for our long position in crude on a break below $102. Today's prices are closing just below $100, so our stop has been triggered and traders should be out of this market now. It's possible that any low forming this week could be a sub-cycle bottom that will snap back up, but even if that's the case, it's likely that the current medium-term cycle has turned bearish and will not challenge the early June high of $120 (Aug. contract chart). (Traders who didn't get out today can do so tomorrow and may even get a better price as we could see at least a short-term bounce from today's low.)
Gold and silver prices also plummeted dramatically today confirming that both metals are moving to the final bottoms of older medium-term cycles. It looks like we got out a little too early when we covered our short positions in both metals on Friday (but still got a good profit), but we are still in a reversal zone for the precious metals (it ends tomorrow). That means prices could be bottoming now and ready to reverse back up for at least a short-term rally. If that happens, we may look to short both metals again as the overall trend is looking quite bearish. We are now on the sidelines of gold and silver.
The dramatic plunge in the precious metals today was not surprisingly accompanied by a surge up in the U.S. Dollar Index. Although inflation is high in the U.S., it is apparently not as high as it is in many other countries, and so in a basket of international currencies, the U.S. dollar may be the "least rotten apple" of the bunch. This is why many investors who are nervous about a collapse in equity markets may now be fleeing to U.S. dollars as a safe haven investment as they did during the 2008-2009 "crash". It looks like the U.S. dollar may be aborting its normal 15-16 year cycle and is instead following a U.S. "political cycle". I wrote about this in more detail in my April 27 blog earlier this year. I am re-posting this blog below for those who wish to read it again:
(April 27, 2022) We are at an important turning point in our analysis of the U.S. Dollar Index. Please refer to my blog post from earlier this month (April 9) on the U.S. Dollar.
Today the U.S. dollar is testing and challenging it's two "double-top" highs (103.82 from Jan. 2017 and 102.99 from March 2020). It rose to 103.28 earlier today, and is closing a bit below 103. As I explained in my April 9 blog, those two earlier highs could have been the final tops to a long-term 15-16 year cycle in the dollar that started with the low of 70.69 on March 2008. Today's high may be creating a "triple-top" to this cycle. If so, the dollar is ready to take a very steep fall to the final cycle bottom which is due anytime over the next two years (we are 14 years from that 2008 low).
But as I mentioned in my April 9 blog, there's also the possibility that the greenback is not following a normal 15-16 year cycle and is instead following a "political cycle" related to which political party is currently in the U.S. White House. The dollar tends to rise during a Democrat administration, and indeed, it has been rising sharply since Jan. 2021. It's still possible an older "normal" cycle is in place and is ready to fall from this "triple-top". However, if this index breaks clearly above $104 and continues to rise, we may have to assume the political cycle is taking over, and we will have to relabel the cycle as a younger, bullish one.
Although a bullish dollar seems to contradict current inflation, the dollar may be viewed right now as a "safe haven" from a potential stock market crash (as it was in 2008-2009). As I wrote in my April 9 blog:
"It will be interesting to see which cycle (the regular 15-16 year cycle or the political cycle) prevails here. The current rise in the U.S. Dollar Index seems to contradict current rising inflation, but fears of a crash in equity markets could be driving investors into the greenback as a safe haven hedge, just as it did during the 2008-2009 "crash". We will keep a close eye on that 104 level for the rest of this year. If the U.S. dollar can't break above there, and especially if it starts closing below 88, we will stay with the idea of a bearish dollar falling into the 55 - 60 range into 2023 - 2025."
Let's keep our eyes on that 104 level.