Part of the thrust for today's strong rally in the broad stock market came from France's presidential election and the edging ahead of centrist Emmanuel Macron over far-right leader Marine Le Pen. Equity markets had been fearing the election of Le Pen and her campaign against globalization which many think could collapse the European Union. Investor's fears may be justified. Last summer's Brexit vote caused the DOW to drop nearly 1000 points in two days, and although the DOW recovered quickly, investors could see a Le Pen victory as a continuation of anti-EU sentiment that is closer to the heart of the EU and thus more serious. The final vote for either Macron or Le Pen will come in two weeks (May 7th). It appears that Macron is ahead now, and equity markets are happy, but if Le Pen pulls off a surprise victory (as Trump did in November's U.S. election), the markets could panic and sell off (at least short-term). We will have to wait and see how this unfolds.
For now, a "Frexit" seems less likely (that may change in two weeks), and all is well on Wall Street. At least it was today. The DOW opened over 200 points above Friday's close and maintained that gain into the end of the day. This seems to confirm the idea that the broad stock market is starting a new medium-term cycle (the DOW from its 20,379 low last week and the S&P 500 and NASDAQ from their March 27 lows - 2,322 in the S&P 500 and 5,769 in the NASDAQ). The cycle lows in these indices all occurred within a major reversal zone for equities, and there was intermarket bearish divergence (the DOW made a new low last week while the S&P 500 and NASDAQ did not). For these reasons we entered a long position in the broad stock market today (see earlier blog and trade alert). We are now out of a major reversal zone for this market, but if these indices start to fall again and break below the lows mentioned above, we could see them fall to a new bottom in May or June. That doesn't seem likely at the moment, but if it happens, we might have to relabel the bottoms of these cycles. Right now a rally seems more likely into early May when we will be keeping an eye on the French presidential election results. Holding a long position in the broad stock market.
We are also coming out of a reversal zone for the precious metals. That reversal zone seems to have correlated with a high in both gold and silver on April 16, but so far the correction down has not touched our target areas of $1,200 in gold and $17 in silver. There are technical signals now suggesting that both metals could be very volatile this week (and even into next week), and cycle patterns are showing a possibility of gold pushing higher and maybe even exceeding its April 16 high of $1,295. If this happens and silver does not exceed $18.64, we may have a good signal (bearish divergence) to sell both metals short. If instead prices continue to fall, we will wait for these cycles to bottom over the next few weeks and look to buy closer to those targets mentioned above. On the sidelines of gold and silver for now.
As usual, the U.S. dollar may determine the fate of gold and silver. On Monday last week I wrote:
"The cycle structure of the U.S.Dollar Index is very ambiguous at the moment, i.e. it could be either very bullish or very bearish. A major reversal zone for currencies is ending this week and the dollar is falling. If we get a significant reversal here, that may give us more clues as to the longer-term direction of the dollar. If the dollar starts to break down, we could see precious metal prices take off."
Well, the U.S. Dollar Index made a new monthly low yesterday (Sunday) which was within its reversal zone, and it is now up a bit from that low. We could therefore see a rally now, but that rally may not get very far before turning down again. The fact that the dollar made a new monthly low is adding weight to the idea of the dollar's trend turning bearish. Directional momentum is also now 100% bearish in the chart of the U.S. Dollar Index. While that could change if this reversal becomes a pivot point for a strong rally, right now it looks like the dollar could be in trouble. The current favoring of pro-EU Macron in the French presidential election is good for the euro, but it is probably weakening the U.S. dollar. (and strengthening gold and silver). On the other hand, if anti-globalist Le Pen can pull off a surprise victory (like Trump) in two weeks, we might see the U.S. dollar recover (as gold and silver prices drop).
In last Monday's blog on crude oil I wrote:
"Crude oil most likely started a new medium-term cycle from its low in late March and has been rallying strongly from there. From a high of $53.76 (May contract chart) last week (in a reversal zone), crude seems to taking a sub-cycle correction. A normal target for this correction would be in the $50 - $51 area. If we get there this week that might be a good spot to buy."
Today crude prices dropped to $49.20 (June contract chart) which is a bit below our target for this correction, but more importantly, directional momentum in some crude charts changed from mixed bullish and bearish to 100% bearish. This is making me reluctant to go long now. We are moving out of a reversal zone for crude, but there is another one coming up in the second week of May. It is possible for this correction to continue down and bottom in that time period. If prices break below the start of this cycle on March 22 ($47.58), the cycle trend would likely be turning bearish, and we might switch our trading strategy to selling short the top of any short-term rally. Still on the sidelines of crude oil.