The announcement of the new "Omicron" COVID-19 variant last week discouraged any holiday rally into the week-end and instead sent the broad stock market into a dive on Friday. That dive pushed our three major indices (DOW, S&P 500, NASDAQ) into the range of our original targets for a sub-cycle correction. From my Nov. 10 blog:
"...a good downside target for the DOW would be around 35,000 - 35,500. We may consider going long if the correction stays above 35,000. (A break below there might lead to a bigger drop). In the S&P 500, 4,500 might be a good spot to buy. Somewhere between 15,000 and 15,500 could be a buying opportunity in the NASDAQ. We will watch for these targets within the time frame of our new reversal zone."
On Friday, the DOW got down to 34,750, the S&P 500 to 4,585, and the NASDAQ plunged to 15,456. Today, this market seems to be shrugging off its COVID-19 worries with a strong rally. Was Friday a significant sub-cycle bottom in these indices? Maybe, but tomorrow we move into a moderate reversal zone that will last through the middle of December (Nov. 30 - Dec. 15). (This reversal zone has two potential pivot points: Dec. 3 and Dec. 10, which means we should watch for a significant high or low near those days.) Here are two potential scenarios that could play out now:
1) If today's rally aborts, we could see a lower sub-cycle low this week or next. From that low, another rally could send these indices rising into a VERY strong reversal zone coming up Dec. 21 - 31 (possibly extending into early January). The top of THAT rally would probably be a good point to sell this market short for a long and potentially very severe correction down.
2) If today's rally gains legs this week and next, this new reversal zone might correlate to a high instead. In that situation, we may also look to sell short for a steep fall into that Dec. 21-31 reversal zone.
I prefer the first scenario (strong "Santa Claus" rally into the end of the year), but right now, it looks like it could go either way.
Bottom line here: All three indices now appear to be taking a significant sub-cycle correction in the middle of their medium-term cycles. That correction may have completed on Friday, or it could continue lower this week. Once that correction is in, we need to watch the rally that follows to see how high it goes. If one or two, but NOT ALL THREE, indices make a new all-time high, we will have a strong intermarket bearish divergence signal and a good point to sell short for a potentially long and severe correction in the broad stock market - possibly a "crash" into 2023 - 2024.
Gold is near the end of its current medium-term cycle and should be forming its final cycle bottom anytime over the next few weeks. Prices seem to be stabilizing just above $1780 over the last several days, but it is a little too early for the final cycle bottom (although that is a possibility). Gold did stay above last week's low today while silver made a new weekly low, and this creates a bullish divergence signal. There are other technical signals suggesting a potentially strong rally now, but also signals indicating a potential plunge. Even if we see a rally now, it may be short-lived and then prices could plunge lower to the final cycle bottom. These mixed signals will keep us on the sidelines of gold for now.
Silver's medium-term cycle is a bit younger than gold's. Silver seems to be taking a steep sub-cycle correction in the middle of its medium-term cycle. That may have been completed today as prices dipped down to $22.76, but prices could still go lower (say, all the way down to $22.00) as we are not in any strong reversal zone today. Anything lower than $22 would be a bearish sign. As with gold, there are some technical signals suggesting a strong rally now, but that has to start NOW. Lower prices tomorrow will tend to negate the possibility of that rally. If we don't get a rally tomorrow, there is a chance of a strong plunge down. Let's stay on the sidelines of silver for now and see how prices move over the next few days.
The U.S. Dollar Index peaked last week at 96.94 and has been falling from there, but it seems to be finding support around 96 - just above the 15-day moving average. If the greenback can resume its rally from there, it could put pressure on the precious metals and push gold and silver prices lower. We'll watch for that.
The news of the Omicron virus hit crude oil especially hard on Friday, sending prices from a high of $78.65 to a low of $68.15 (January 2022 contract price) at the closing bell - a drop of $10 in one day! This plunge means that the current medium-term cycle has now turned bearish, and prices should continue lower over the next 4 - 7 weeks to the final cycle bottom. If prices can stabilize in the $62 - $64 area over the next several weeks, we may have a good spot to buy at the start of a new medium-term cycle. But if crude starts closing below there, this commodity could be in trouble with significantly lower prices ahead. We will remain on the sidelines of crude for now.