The patterns in the current medium-term cycles in the DOW and S&P 500 are becoming a little more clear this week. We were debating whether these two indices were old cycles ready for a steep correction to their final bottoms or younger cycles with a little more bullish energy. (We are fairly confident that the NASDAQ is an older cycle ready to correct.) It looks like both the DOW and S&P 500 are likely "younger" cycles that both started with their lows from June 15. Although those lows were two and a half months ago, that is still younger than our original labeling which had them both starting at their lows from March 23 (which is still a possibility, but less likely now). So what does all of this mean? If the DOW and S&P 500 are "younger" cycles, any correction now may be a short and modest "sub-cycle" corrective dip (i.e. not a final steep correction) and soon followed by new highs. We could theoretically buy this dip, but I would rather wait for the final top in these cycles to sell short.
Because we've been going with the idea that the NASDAQ is an older cycle ready for its final deep correction, our focus has been on selling that index short at its final top. But the final top has been eluding us. The broad stock market in general has been very bullish and seems to be "breaking upside" through several resistance levels. Last week's announcement that the Fed is going to continue its dovish policies of money printing, bond buying, and near-zero interest rates indefinitely certainly adds to any bullish thrust now propelling equity markets up. Today, both the NASDAQ and S&P 500 made new weekly highs, but the DOW did not (and closed over 200 points in the red).
Yes, this is another bearish divergence signal, and yes, it is happening in the middle of our current reversal zone
( Aug. 25 - Sept. 3). Nevertheless, I am reluctant to sell the NASDAQ short here. While this could be the final top, we might also see the NASDAQ take a breather and correct down modestly with the DOW and S&P 500 and then rise with them to its final top a bit later (possibly in the first half of September). I don't want to underestimate the bullishness of this market right now. Let's remain on the sidelines of the broad stock market for now.
I think diminishing panic over the COVID pandemic and positive support for President Trump has been driving this summer's rally in equities. Any bad news on the COVID front and/or a diminishing of Trump's popularity would therefore be factors that could reverse this bullish trend and cause a potential sell-off. The next two months should tell us which way the trend is going to go.
There are currently two ways to interpret the medium-term cycles in gold and silver, but in both cases there is the potential for a substantial downward correction soon. If these cycles are older, that correction could be very soon. If they are younger, they may rally some more before turning down. If gold breaks below its Aug. 12 low of $1869, it is an older cycle headed to its final bottom that we will look to buy (probably below $1900). But if gold rallies to challenge or take out its all-time high from Aug. 7 ($2070), we may have to wait a bit longer for a significant correction down and a good buying spot. An older silver cycle might get down to the $24 area very soon, but a younger cycle could rally to challenge the Aug. 7 high of $29.77 before it takes any significant correction. Because this market could go either way, we will stay on the sidelines of both metals for now.
The U.S. Dollar Index could determine which direction the precious metals take now. The dollar seems to be finding some support around 92, and as we are in the middle of our general reversal zone, we could see a bounce and rally here which could push gold and silver prices lower. But if that support does not hold, a falling dollar could trigger a rally in the precious metals.
It looks like crude oil is nearing the end of its medium-term cycle (i.e. it is old), and a final top is imminent, that is, if it didn't happen already with last week's high of $43.78 (Oct. contract chart). As with all our markets right now, directional trend is uncertain. Crude prices could push to a new high this week (or even into next week) or fall now to a bottom in the same time frame (probably to $40 or below). Let's stay on the sidelines of crude for now.