Last week the broad stock market indices (DOW, S&P 500, NASDAQ) all made new highs on Wednesday but closed the week below those highs. Fed Chairwoman Janet Yellen announced on Friday that the next interest rate hike would likely be this month. This news, though not unexpected, most likely curbed investor buying on Friday, and we shall see if that continues into this week. As I outlined in last week's blogs, there are many reasons for equity markets to turn down right now, and a hawkish Fed could be the trigger for this correction. We are still holding our short position in this market. If one or two (but not all three) of these indices make(s) a new high before the end of this week, it will be another sign of an imminent reversal.
The picture for precious metals is still a bit unclear although it looks like gold did make a significant sub-cycle high last Monday at $1,263 and is now falling to the bottom of that sub-cycle which is due this week or next. It is even possible that Friday's low of $1,223 was already the bottom, but I think prices could go lower this week. If gold can stay above $1,200 this week then we could see another rally to new highs (above $1,263) soon. If instead prices break below $1,200 (say, to the $1,180 - $1,190 area) then any subsequent rally may not make new highs, and this market could turn quite bearish. I am concerned here because several respectable analysts that I follow seem to disagree at the moment on whether the precious metals are bullish or bearish. The bearish view is currently being supported by the fact that the COT (Commitment of Traders) chart's Commercial positions (i.e. "smart money") are heavily short in the precious metals. Gold and silver mining company stocks are also very bearish right now, and they are often a bellwether for the metals. Even if these metals rally now and make new highs, those highs could be followed by a severe correction. We are still in a reversal zone for precious metals for the rest of this week so let's see how low gold prices can go over the next several days. If they stay above $1,200, we may consider going long for a short-term rally that could break to new highs. On the sidelines of gold and silver for now.
One thing that could turn precious metal prices down now would be a strong U.S. dollar. If the Fed is turning hawkish (as Yellen's comments on Friday suggested), this should strengthen the dollar. Last week the U.S. Dollar Index broke above a strong resistance at 102. It is now back under that line, but directional momentum is currently bullish, and it could easily launch another assault on that resistance and break through it. It is starting to look like the Feb. 1 low in the U.S. Dollar Index (at 99.5) could be the start of a new medium-term cycle. If that is the case, the dollar could be turning bullish and might soon be challenging its January high at 103.44. I should note here that even though the U.S. dollar and precious metal prices usually move in opposite directions, that is not always the case. If investors start losing faith in the stock market, both the U.S. dollar and precious metals could be perceived as "safe haven" investments, and both could rise at the same time.
Speaking of COT (Commitment of Traders) charts, those for crude oil are also looking strongly bearish (i,e. heavy short positions by Commercial traders). This is not a good sign and suggests an imminent and significant drop in price. We are still in a reversal zone for crude through most of this week so it is possible for prices to fall to new lows and then reverse back up; however, prices could also edge back towards or above $54 (April contract chart) this week and then reverse down. Directional momentum is currently bullish so we have a lot of mixed signals here. A support area to watch is $51 - $52. If prices break below there, we could see a very steep drop follow. The COT charts are supporting this scenario. Let's stay on the sidelines of crude oil for now and see how prices move this week.