Last week's broad stock market was quite a roller coaster ride. The DOW was up 138 points on Monday, down 332 points on Tuesday, up 259 points on Thursday and finally down 145 points on Friday. This kind of market is great if you are a day trader (I am not) and you're timing is good. For longer term traders, however, this kind of volatility makes trading difficult, if not dangerous, and it is often best to stay on the sidelines during such times (which is what we have been doing). The broad stock market's directional momentum is now ambiguous (mixed bullish and bearish) so it can go either way here. In the DOW last week, support around 17,600 held very well, and it was the ideal timing window for a significant bottom. From this we could make a case for another rally towards a new all-time high into the first week of April. I would like to see some short-term technical buy signals, however, before going long based on that idea. The alternative bearish view would see the DOW continuing down from here (or perhaps rallying a bit more without making a new all-time high and then turning down) with the final cycle bottom below 17,000 two to three months from now. If the DOW breaks and closes below the 17,540 - 17,600 area next week then this latter (bearish) scenario may be starting. I might add here that wild market fluctuations such as those seen last week is indicative of a lot of fear and uncertainty in the markets, and this often precedes a significant correction. On the other hand, we don't want to underestimate the power of the Federal Reserve to keep the Wall Street party going. Their main (overt) tool for doing this now is the continuation of low, near-zero interest rates, but, of course, this is supposed to come to an end in June. Over the last several weeks it seems that even the mere suggestion in the media of an early rate hike is enough to spook equity markets into a brief tumble. What, then, will happen when the real rate hike comes? Will the Fed delay raising interest rates a little longer to avoid a potential market crash? Perhaps the Fed meeting this week will shed some light on these questions. The ambiguity of the current market is keeping us on the sidelines for now.
Directional momentum in the gold and silver markets still looks quite bearish (especially in gold), but there are also technical and cycle patterns that suggest a significant low could be forming now in both metals. (It may have formed last week). We will watch to see if the current rally can gain any legs this week, but my bias is to see new lows, perhaps into the first week of April, for a good spot to go long at the start of a new cycle (assuming gold prices stay above $1132 and silver above $14.50). On the sidelines of both gold and silver for now..
The U.S. Dollar Index is now testing the 100 level, but so far has not made a clear break through it. The dollar is ridiculously overbought and its chart pattern is now taking the form of a classic "blow off". A blow off top is normally followed by a severe correction, but there are some technical indicators suggesting that this dollar rally could continue further (although in the late stage of a blow off technical indicators aren't that reliable). If the dollar pauses and takes even a modest correction now, it could take some downward pressure off of gold and silver prices (as well as equities and crude oil) and encourage these markets to rally, at least short-term. Some analysts are suggesting that this current dollar rally is indicative of an imminent serious upheaval in all financial markets. If so, a dollar correction now would help to postpone such a disaster (perhaps until June when interest rates are expected to rise?).
Directional momentum in crude oil charts is now 100% bearish, and yesterday (Sunday) crude prices made a new low at $43.57 which is lower than the low that started the current cycle on Jan. 29 ($44.37). This means the cycle has also turned bearish and is likely pointed down for the next two or three months. Our trading strategy should now be bearish and we will look to sell short the top of any short-term rally. We may get one into the first week of April. Still on the sidelines here.