It is the day after Christmas and equity markets were down just a bit. This week is a major reversal zone for the broad stock market (centered around Thursday and could extend into Jan. 2), and it is late in the medium-term cycle of the DOW, S&P 500 and NASDAQ so the market could fall steeply now and make a cycle bottom this week. I think it is more likely, however, to see equities edge higher this week and form a top in this reversal zone. If that happens with intermarket bearish divergence (i.e. one or two- but not all three- market indices making new highs) then we will consider selling short for a correction to the final cycle bottom that would likely end sometime in January/February. Trump's signing of the tax reform bill on Friday has relieved the fear on Wall Street that the president was going to delay that signing into the new year. For this reason it wouldn't be surprising to see equities rally this week. But if they do fall we will be on the lookout for a bottom and a good spot to buy (the end of a cycle and start of a new one). On the sidelines of the broad stock market.
I would like to start my gold and silver analysis by saying that the longer-term picture for both metals is looking quite bullish. One reason for this is that the long-term chart of gold is showing the near completion of a giant inverted "head and shoulders" chart pattern that started forming in 2013. This is a very bullish formation that once complete can lead to a very powerful rally. Silver's chart is also looking quite bullish (also with a giant 'head and shoulders" bottom) and looks like it could be poised for a major rally from a huge base pattern soon. Supporting all of this is the fact that the COT (Commitment of Traders) charts for both metals are recently showing "dumb money" bailing out of gold and silver and "smart money" going long.
Shorter term, we have recently been waiting for the bottom of a medium-term cycle to buy. In my Dec.18 blog I wrote:
"Gold and silver may have completed their medium-term cycle bottoms [Dec. 12]...(gold at $1237 and silver at $15.64)...Gold needs to start closing above $1270 and silver above $16.40 to make the case for [these] new cycles ..."
Today gold closed at $1282 and silver at $16.54 so it's looking like new cycles began on Dec. 12. We should be looking to go long, but this week through Jan. 3 is a strong reversal zone for the precious metals, and prices are rising into it. Even if we started new bullish cycles on Dec. 12, we could still see a short-term correction back down. (That correction would stay above those Dec. 12 lows if these are new cycles, but it could go below those lows if we're still forming older cycle bottoms). I am not comfortable buying at the top of this rally in such a strong reversal zone so I am staying on the sidelines for now. There is currently a resistance line for gold around $1285 and another stronger one at $1300 - $1310 so it is possible we could see the current rally deflected at either of these points this week. There is resistance for silver around $16.75. Any pullbacks in the prices of these metals will be regarded as opportunities to go long.
The U.S. Dollar Index made a new low yesterday near the end of a reversal zone specifically for currencies (it ended today) so we could see a reversal up now. That could help push precious metal prices down to a better entry point to buy. Such a rally, however, would probably be short-lived as the overall chart for the dollar looks bearish. Note also that this entire week's reversal zone could also affect the dollar and a rally could start from any new low this week.
In last Thursday's blog on crude oil I wrote:
"Crude prices have been rising, but they still haven't breached the $58.94 high of Nov. 24. If crude exceeds that high it gives more weight to the idea of a new cycle starting Dec. 7."
Well, crude prices soared today and closed at $59.73 (Feb. contract chart). It's starting to look like a new medium-term cycle began on Dec. 7 (at $55.88). This week's reversal zone(s) could also affect crude prices, and crude is rising into it. If this is a new cycle then any correction now should not be serious and should stay above $55.88. Let's stay on the sidelines of this market for now.