In my blog last Wednesday I wrote:
"If prices continue lower into the end of the week and especially into early next week, we will probably look for a low to buy as this is a strong reversal zone for all markets. Any break below 17,210 in the DOW and 2019 in the S&P 500 would mean that the top of the current medium-term cycle is in and that we should be watching for a correction and cycle bottom."
On Friday the DOW plunged to 17,230 intraday and then closed the day at 17,265 with a 309 point loss. The S&P 500 closed the day at 2012 and a 39 point loss. The current reversal zone for this market ends this Wednesday (the same day the Fed concludes its two day meeting and announces its interest rate policy), and it looks like prices are definitely falling into it. This means we should now be watching for a bottom and some sort of rally to follow. I also wrote in last Wednesday's blog that:
" It is hard to predict how markets will react to the first interest rate hike. If equities fall steeply into next week they may already be factoring in a rate hike announcement, and the actual announcement on Wednesday could send the markets up (a classic case of sell on the rumor and buy on the news)."
So last week's steep fall could be reflecting a nervous market's anticipation of the first interest rate hike. If so, we might see more downside into Wednesday and a "buy on the news" reaction if the Fed does raise rates. But what if the Fed decides to delay a rate hike yet again? Because most analysts are expecting a hike, a postponement could easily trigger a massive wave of equity buying and could deliver a "Santa Claus" rally that is not uncommon at this time of year. Perhaps the Fed will play Santa Claus and delay the hike to avoid a possible sell-off during the holiday season. (Come to think of it, Janet Yellen does look a bit like Mrs.Claus).
A more bearish scenario could unfold if, despite all the warnings of a rate hike, the markets "freak out" on the first hike announcement and continue to fall. Although it is not common, in some instances a market reversal zone can coincide with a breakdown (or breakout) instead of a reversal so this scenario is not impossible. If it does happen, we will look towards the end of the month or the middle of January for a final bottom to the current equity market cycle. For now, we will anticipate a reversal and will look for a spot to go long next week. Currently on the sidelines of the broad stock market.
In last Wednesday's blog on gold and silver I wrote:
"This week (and early next week) is a reversal zone for gold and silver so it is still possible to see one or both metals make a deeper cycle bottom before rallying significantly. In fact, having gold or silver (but not both) make a new low would be an ideal case of bullish intermarket divergence."
On Friday silver did make a new monthly (and yearly) low but gold did not. We thus have a case of bullish divergence until gold breaks below $1046. The Fed's interest rate decision could also have an effect on precious metal prices. An interest rate hike would likely strengthen the U.S.dollar, and this could push gold and silver prices down. We should note, however, that precious metal prices have been fairly stable recently despite extremely strong moves in the dollar and that the chart of the U.S. Dollar Index is looking very bearish following the dollar's breakdown over the last two weeks. Right now it looks like gold's medium-term cycle low was $1046 on Dec. 2. Silver's cycle low could have been on Friday (at $13.79), but there is still time for it to move lower (gold could move lower too) this week as the reversal zone ends this Thursday. One strongly bullish factor for gold right now is the Commitments of Traders (COT) report for this metal. Without going into a technical explanation of this report, just let me say that this indicator of short-term directional trend is rarely wrong, and its chart readings for gold over the last week have been extremely bullish. This factor (along with cycle analysis) has encouraged me to hold my long position in both gold and silver which I hope we can continue to do up to the Fed's announcement on Wednesday. If gold can rally towards $1100 by Wednesday, I will consider selling these long positions and taking profits. Holding a long position in both gold and silver for now.