Friday's better than expected jobs report raised fears on Wall Street of an early interest rate hike by the Fed and spooked the broad stock market into a steep plunge with the DOW dropping 279 points and the S&P 500 losing 30 points (about 1.5% each). We were expecting a market reversal in early March and it appears that we are getting that now. The question now is how serious will this correction be. One can make the case for a very serious correction now, but, despite last week's "scary" news of an improving economy, the Fed is not likely to raise interest rates before June (some analysts even feel they might postpone a hike past the mid-year projection), and we don't want to underestimate the power of the Fed (and others) to keep the markets rallying as long as they can. In the U.S. we are also currently in tax season when lots of money is being put into investment funds before the end of the tax year in April. This could also help keep markets buoyant over the next several weeks. Because it is still early in the new cycles of the DOW and S&P 500, it's possible for these markets to make a small correction now and then rise into the next reversal zone in early April before starting a more serious downturn (I mentioned this possibility in last Monday's blog). Directional momentum (still very bullish in the DOW, S&P 500 and NASDAQ charts) is supporting this idea. In this scenario a good spot for the DOW to turn up is in the 17,600 -17,700 area. I am still watching this target as a possible spot to go long for a short-term rally. If the DOW starts closing below that range it could mean that a more serious correction is underway. Any break below 17,000 (the start of the current cycle in the DOW) would indicate that these markets are turning bearish and we wouldn't see the bottom until May or June. Right now, however, I am going with the more bullish scenario that anticipates a new high in early April. Still on the sidelines.
Friday's panic on Wall street was accompanied by a surge in the U.S. Dollar Index as investors continue to view U.S. currency as the "least rotten apple" in a barrel of collapsing and unstable European and Asian economies. This dollar surge caused gold to break its support at $1200 and both gold and silver plunged on Friday. We were stopped out of our long gold positions, but there is a possibility of a new low forming now as we are still in a reversal zone and both gold and silver are near the end of their current cycles. What we want to watch for here is intermarket bullish divergence, that is, we want to see either gold or silver, but not both, go lower than last week. Today silver moved slightly below its low of last week but gold did not, so this could be setting up now. If gold starts to break below last week's low, then this bullish divergence signal will be negated and gold could drop towards $1140. I realize that there is not much enthusiasm for jumping back into precious metals after just bailing out with a loss last week, but as long as gold prices hold above $1132, there is a good chance of a substantial rally (from the start of a new cycle) soon. I will watch for short-term trading signals over the next few days for a possible bottom to buy. The U.S. Dollar Index may finally be forming a top at 98 (it is grotesquely overbought) and about to back down a bit. If it does, we could then see gold and silver rally. Out of both gold and silver for now.
Crude oil prices continue to hover around the $50 level and are showing no clear signs of a top or bottom yet. My preference is still to see a new weekly bottom in the $47 - $48 area (hopefully this week) to buy, but if prices start to surge up towards $55, I will consider selling short. Still on the sidelines.