There were some major developments in all financial markets last week that requires us to update and clarify our trading strategies. On Wednesday the Federal Reserve officially announced the termination of its extended bond buying program known as "quantitative easing" (QE) which had been sustaining the U.S. stock market's steady rise since the crash of 2008 -2009. Markets at first seemed a little hesitant about how to react to this and were flat on Wednesday. On Thursday and Friday, however, equities had clearly decided to be bullish as the DOW, S&P 500 and NASDAQ all surged to challenge their highs for the year. Apparently these markets had already factored in the end of QE (which the Fed had repeatedly stated throughout the year would likely occur in October). But another factor that helped drive up markets on Friday was the unexpected announcement by the Bank of Japan to significantly expand its own QE program in order to "...shake the country from its economic torpor..." according to a report by The Economist. Suddenly the U.S. is looking very fiscally responsible in the global marketplace, and the U.S. stock market is now being perceived as a safe haven for investor capital fleeing the crumbling economies of Europe and parts of Asia. Of course, Japan's move to further debase its own currency also gave a huge boost to the U.S. Dollar which also surged on Friday.
The broad stock market's directional momentum has suddenly turned bullish. This abrupt switch from bearish to bullish is unusual and is creating a distorted cycle in this market right now. Technically, it looks like the lows of Oct.15 (15,855 in the DOW and 1,820 in the S&P 500) were cycle bottoms and we are now starting new cycles in the broad stock market. The Oct.15th bottom in the S&P 500 represented a 9.8% correction off its Sept.19th high while the DOW corrected only 8.6%. These are both lower than the expected 10 - 20% corrections (or more) that were (are) overdue based on technical and cycle studies. These markets may therefore still be unstable and susceptible to a deeper correction. The next major turning point for these markets could come in the second or third week of November so we will watch how the indices move into that time frame. All markets could continue to be quite volatile for the entire month, and we may end up making some short-term trades with tight stop losses. We will try to focus, however, on that Nov.10-21 window. We could see a new high to sell short or another low to buy (or both) within that time frame. On the sidelines for now.
The Bank of Japan's decision to boost it's QE (and debase the Yen) and the subsequent surge in the U.S. Dollar on Friday was the kick in the pants that gold needed to break below its strong support level at $1,180. Both gold and silver dropped steeply last week which is setting up an ambiguous cycle pattern in their charts. There are two possible scenarios for the precious metals right now, one bearish and one bullish. If the early October lows in both gold and silver were the start of of new cycles then the price of these metals will likely continue down into the end of the year with gold possibly going as low as $1000, or even the $900 area (this is because prices have already broken below those early October bottoms and so the cycle is pointed down). However, it is possible that new cycles are starting with the new lows we are seeing now or sometime over the next two weeks, and if that is the case gold and silver could become very bullish as these lows could be the final long-term cycle bottoms. So how do we trade from here? In both of these scenarios gold will likely find short-term support in the $1140 area (possibly this week). If that happens, I will cover my short position in gold. Gold may then rally, but if the rally stalls in the $1170 - $1180 area and looks like it is turning down, I will sell short again as prices would likely be heading down to the $1000 area (or lower) by the end of the year (this is the first - bearish - scenario, which I favor at the moment). If any rally clearly breaks through the $1180 level, however, then we will have to consider that the precious metals are turning bullish and look to go long. Gold would have to close above $1250 to confirm a bullish trend (accompanied by bullish momentum and other technical signals). Nov.6, Nov. 10-12, and Nov.14 could be significant turning points for gold and silver so we will watch those dates carefully. Momentum signals are currently very bearish for both gold and silver. I want to emphasize here that should gold move down to the $900 - $1000 area (and silver to the $13 - $14 area), it would not be the end of the bull market in precious metals but would most likely represent the final long-term cycle bottoms in these two metals and a "golden opportunity" to buy.
Still holding my short position in gold.
Crude oil prices have today broken below my final "line in the sand" stop loss level of $79 so I am going to take a loss here and bail out of my long position in crude. When I entered this position in late September I wrote :
"Because crude prices can be very volatile under the current circumstances I am investing only a moderate amount of money in this trade." This mitigates to some degree the loss from this trade, and considering the profit we are now making with our short gold position, we are in pretty good shape with our capital. As I've mentioned in recent blogs, crude's cycle is distorting which means its bottom is overdue (for 3 weeks now) so it still could happen anytime. The boost to the dollar from Japan's debasement of the Yen is likely putting downward pressure on oil prices, but another factor may be a deliberate downward manipulation of prices by the West to weaken Russia's economy (see my Oct.15th blog). This may explain why crude is so reluctant to rally now despite the fact that technical and cycle factors are indicating it should. If downward pressure on crude continues, we may see a small rally followed by a further breakdown in prices. Directional momentum in this market is now 100% bearish. I am selling my long position in crude and staying out of this market for now.