Last Monday I wrote:
"...all three major market indices (DOW, S&P 500, NASDAQ) most likely started new medium-term cycles from their lows on Oct. 3 (25,743 in the DOW, 2,855 in the S&P 500, and 7,700 in the NASDAQ). Now we watch to see if these indices can make new highs this week, and especially new all-time highs."
Well, all three indices did make new weekly highs last week, but none exceeded their all-time high. Thus we had no bearish divergence signal (although markets fell strongly on Friday, which is a bearish sign). We are also now out of our reversal zone (it ended last Thursday) so if Thursday's highs were not a top, this market will most likely push higher into November. This is only the third week of a new medium-term cycle so a lot more rallying is certainly possible, but if last week's highs were an early top to this new cycle then this market is turning very bearish and will be down for many, many more weeks. My bias at the moment is that these indices will push higher to challenge their all-time highs (27,399 in the DOW, 3,028 for the S&P 500, and 8,340 in the NASDAQ). If this happens with a bearish divergence signal [one or two but not all three breaking their high(s)] then we will want to sell the market short. Let's stay on the sidelines for now and wait and see if Friday's downturn gains any momentum this week or if the market turns higher. If last week's highs are exceeded, this market could be bullish for at least the next two weeks.
One reason for my bullish view of the broad stock market right now is the fact that the Federal Reserve just recently announced a new program to pull the economy out of a potential financial crisis. Fed Chairman Jerome Powell stated in late September that there may be a need to "resume balance sheet growth sooner than expected". Although the Fed is stating that this program is different than the asset purchase program that was used to "rescue" equity markets in the 2008-2009 financial crisis (i.e. QE or "quantitative easing"), some analysts are calling the new plan QE4. Without going into the details of this new scheme from the Fed, we can assume it will give at least a temporary boost to the broad stock market. I emphasize the word "temporary" here because this is obviously a desperate attempt by the Fed to postpone an overdue correction of an extremely overbought and bloated equity market bubble. From our cycle point of view, any "QE4" right now could theoretically push equity markets into a "blow off" to new highs that would quickly be followed by a severe crash. If all three major market indices can break through their all-time highs then we may see this scenario unfold.
"QE4" should have a positive effect on equities, but it may have the opposite effect on the precious metals market. We have been watching gold and silver prices for a good spot to buy as it looks like we are close to the start of new medium-term cycles in both metals. COT (Commitment of Traders) charts for gold, however, are currently looking quite bearish which means we could see a significant correction soon. This may mean an older cycle bottom is still forming, but it could also mean a newer cycle will peak early and then fall to its final bottom (which would be very bearish). Needless to say, this makes me very cautious about going long until we see some sign of this market turning bullish. If gold can stay above $1465, it may be able to rise into a bullish pattern, but a break below $1460 would reinforce the bearish view. Let's remain on the sidelines of both gold and silver for now.