Here we are the day before the U.S. presidential election. The melodrama that has made this election one of the most tumultuous and bizarre elections in recent history continues with reaction to yesterday's announcement that the FBI (or at least director James Comey) has cleared Hillary Clinton a second time of wrongdoing after examining 650,000 of her newly discovered emails. Last month's reopening of the investigation of Hillary's mishandling of email boosted Donald Trump in the polls. It also seemed to cause a small selloff in equity markets. (Whether you like Donald Trump or not, stock markets do not like uncertainty, and Mr. Trump, a newbie politician, is considered to be an "unknown variable" by Wall Street investors.) Not surprisingly, equities rallied strongly today as Clinton's polls are getting a boost from Comey's exoneration. The DOW closed the day with a 371 point gain. Is this the start of a new uptrend, or is it just a volatile, knee-jerk reaction to today's news?
While the DOW made a new weekly high today, the S&P 500 and NASDAQ did not. We therefore have a potential case of intermarket bearish divergence here which is suggesting more downside in equity markets. I wrote in my blog last Thursday that:
"We are coming to the end of a reversal zone on Friday, but I am going to extend that into early next week because next Tuesday (election day) could be a significant turning point for many markets. Equities could bottom then and start to rally again. If they don't, we could see them fall lower into the end of the month when we have our next strong reversal zone."
Last Friday's low could be a significant bottom. The DOW dropped to 17,883 and got into the upper part of our target range for a cycle bottom (17,300 - 17,900). The S&P 500's low of 2,083 on Friday, however, was some distance above our target of 2,030 - 2,060. Also, despite today's rallies, directional momentum in the DOW, S&P 500 and NASDAQ remains nearly 100% bearish. OK, this is a tough call. If Trump wins tomorrow, equities could plummet back down sharply, but if Hillary wins, we could see today's rally skyrocket even higher. Our short position in the broad stock market is now at a break even point. I am going to play it safe here and cover (unload) this short position now. Hillary's victory could mean that last Friday's lows were broad stock market cycle bottoms. That would be confirmed if the Dow starts to move above a resistance area at 18,400 - 18,450. A Donald trump win, however, could push equities lower, and in that case these cycles would likely bottom near the end of this month. We will move to the sidelines now to avoid any election hysterics in the markets. Covering my short position in the broad stock market tonight for tomorrow's market open.
We can now confirm that both gold and silver started new medium-term cycles in October. This could be very bullish (early stages of cycles are usually bullish), but current directional momentum in both metals is mixed bullish and bearish so there is a chance of the trend turning bearish if at any time prices start to move below the start of these cycles ($1,243 in gold and $17 in silver). Both metals rallied and made new highs last week but are now down significantly from those highs. It is hard to say how the election will affect this market, but it looks like the prospect of a Trump victory was boosting precious metal prices last week, and the news of Hillary's "exoneration" may have depressed prices today. In my blog last Thursday I wrote:
"...if gold and silver have started new cycles and the trend stays bullish then any subcycle correction now should not go too deep and would be a good spot to buy. We will watch for this. "
We could be seeing that subcycle correction starting now. If Hillary wins tomorrow, prices could continue lower for another week or two, but a Trump victory might push prices higher and delay any correction for at least another week. We will remain on the sidelines here and watch how the election moves this market. Ideally, we are looking to buy a subcycle correction that holds above $1,243 in gold and $17 in silver which could happen between now and the end of the month.
As I stated in last Thursday's blog, crude oil's cycle may be turning bearish. Prices have been falling steeply and last week broke below some important technical support levels which is why we held off buying any subcycle correction. Tomorrow's election could create volatility in all markets so, as with the broad stock market and the precious metals, we will remain on the sidelines of crude for now.