The U.S. Senate passed the modified debt-ceiling bill today in a strong 63 - 36 vote. Wall Street responded with a great sigh of relief that propelled the broad stock market into a massive rally. The DOW closed with a 701 point gain, the S&P 500 gained 61 points, and the NASDAQ was up 140 points. Investors and traders were clearly happy that a U.S. debt default was averted, but will this euphoria subside next week now that the crisis is over?
Our cycle analysis can now confirm that the DOW and S&P 500 made significant sub-cycle bottoms on May 25 and May 24, respectively. The NASDAQ, however, only made a small 2-day dip into May 24, which technically does not qualify as a significant sub-cycle correction. This makes the NASDAQ the most bullish of the three indices, and its rise over the last 4 weeks has been the steepest. But we note now that both the NASDAQ and S&P 500 both made new highs in their current medium-term cycles today, but the DOW is still below its medium-term cycle high of 34,258 (from May 1). This sets up another bearish divergence signal until the DOW can clear that high. So while the NASDAQ and S&P 500 cycles are now bullish, the DOW's cycle is still bearish.
The strong emotional impact of the Senate vote that triggered today's rally will be gone next week, and other fears (inflation, U.S. political divisiveness, geopolitical tensions, possible stock market crash, etc) will likely reassert themselves. Monday and Tuesday are potential "pivot point" days for equity markets. If market pessimism returns and the DOW cannot break above that May 1 high (34,258) early next week, we could see the broad stock market turn back down. Alternatively, if it doesn't, we could see more rallying into the second half of this month. We will remain on the sidelines of the broad stock market for now.
This week's gold rally closed above the 15-day moving average yesterday, but today prices fell and closed back below. Silver prices also fell a bit but managed to stay above the 15-day moving average. We have to watch these metals carefully now. We don't want silver to fall below last week's low ($22.69) as that might suggest the current medium-term cycle is turning bearish. But if gold falls below this week's low ($1932) and silver stays above $22.69, it could be a good bullish divergence signal - especially if it happens in the second half of next week as there is a new reversal zone coming up specifically for the precious metals then (June 7 - 19). Let's keep holding our long positions in both gold and silver for now.
Like the broad stock market, crude oil prices rallied strongly to news of the resolution of the debt ceiling crisis. Prices stayed above the May 4 low of $63.89 (July contract price) and closed back above the 15-day moving average keeping alive the possibility of May 4 being the start of a new medium-term cycle. Let's stay on the sidelines for now and see if today's relief rally can gain some legs next week to show that it is not just a "flash in the pan".