A major development on the geopolitical scene last week was the news of militant groups in Iraq threatening to seize control of Baghdad. This crisis seems to have caught the U.S. White House off guard and struggling for an appropriate reaction to a conflict it thought it had left behind with the end of the Second Gulf War and the withdrawal of all U.S. troops in 2011. President Obama is now promising assistance to Iraq's government to help fight insurgents but has stated that there will be no American "boots on the ground" in Iraq. The immediate and most obvious effect of this crisis on financial markets was a surge in oil prices to over $107 last Thursday. Any escalation of the crisis in coming weeks could potentially cause an already nervous stock market to drop hard and also trigger a strong rally in precious metals. We now have three geopolitical situations to keep our eye on for their potential influence on financial markets: Iran, Ukraine, and Syria (this country's civil war continues and is being exploited by the same terrorist group, ISIS, that is now seizing control of cities in Iraq). Significantly, directional momentum in crude oil charts has been persistently bullish over the last four weeks, perhaps foreshadowing the current crisis in Iran (markets can sometimes be bellwethers of political events).
After dropping a bit from a peak near 17,000 last Monday, the DOW seems to be leveling off between 16,700 and 16,800. Monday's peak could be a significant top, and it is possible now for the DOW to continue down into the 16,200 - 16,300 area over the next few weeks, especially considering potential investor fears from the new geopolitical crisis in Iraq. Directional momentum, however, continues to be strongly bullish in the DOW, S&P 500 and NASDAQ indices, so I am reluctant to sell short at the moment. I still favor the idea of further rallying into July before any serious correction. Remaining on the sidelines of the broad stock market for now.
With this new instability in the Middle East, crude oil prices could become quite volatile over the next several weeks and it may be wise to avoid any trading of this commodity (especially short selling as escalating political instability in Iraq could trigger major price surges). Crude charts are still showing strong bullish momentum, and cycle studies are now suggesting that we are in a new cycle that started in early May, so prices may have room to go much higher.
I may consider going long on any short-term correction, but for now I am staying on the sidelines.
My main focus in trading right now is in the precious metals market. As I have been stating in recent blogs, it looks like gold and silver prices are at or near their long-term cycle bottoms, and we should be looking to go long heavily in these metals soon. Short-term, however, I have been watching for a final price correction down into July, which would be the ideal time for the long-term cycle lows. Strong bearish momentum in the charts of gold and silver as well as in the charts of gold and silver mining company stocks have been supporting this idea of one more leg down in prices. That may be changing, however, as the two main mining company stock indices, HUI and XAU, have now shifted from 100% bearish to mixed bearish and bullish. Today silver charts are doing the same thing (they are now mixed bearish and bullish; gold charts remain 100% bearish, at least for now). This is a sign that precious metals are about to turn up, so we may be very close to the final cycle bottoms. We can still get another correction down first (in fact, several short-term technical signals are strongly suggesting this) so there may still be an opportunity here to short sell this market before going long. I will wait for a daily sell signal before attempting this. That signal may come over the next few days. Stay tuned. On the sidelines at the moment.
The U.S. Dollar Index backed down a bit last week from its "breakout" above 80.80 but is now hovering above strong support at 80.40. If the dollar launches another assault at the 80.80 level it could help push the precious metals down to a final bottom. On the other hand, if support at 80.40 breaks down we may see gold and silver start to rally strongly. As always, we will keep an eye on this index to help us gauge the behavior of the precious metals.