UPDATE on the BROAD STOCK MARKET and PRECIOUS METALS (3:45 pm EDT)
With the important October Fed meeting taking place this week, I thought it would be a good time to present a brief overview of the broad stock market and precious metals and our current trading strategies.
In an important markets update on Oct.13, I suggested that it was likely the broad stock market's general trend was shifting from bearish to bullish and that the August 24 market lows were a significant bottom even though the correction from the all-time high in the DOW was only a little over 16% (I had been expecting 17% or higher). This bullish scenario appears to be playing out as equity markets have been rallying strongly over the last two weeks. However, even if this is a new and bullish rally from a long-term cycle bottom on Aug. 24, cycle patterns and timing suggest that a short-term correction is now due, and we are still in a reversal zone for the broad stock market this week. Under normal circumstances, the target for this correction would be towards 16,950 in the DOW and around 1970 in the S&P 500; however, there are some global economic events unfolding now that could deliver an extra bullish thrust to these markets and possibly diminish any correction. Last Thursday European Central Bank President Mario Draghi suggested new stimulus measures such as quantitative easing (QE) to help ailing European economies, and, as if on cue, the next day the People's Bank of China lowered its interest rates in an attempt to revive its sluggish economy. This double dose of "easy money" in two foreign markets that U.S. investors had recently been worried about triggered a wave of Wall Street buying at the end of the week, and the DOW closed at a new weekly high of 17,646 last Friday.
So what do we do now? This week's Fed meeting on Tuesday and Wednesday could easily be an important turning point for the markets as investors and analysts will learn whether the first interest hike will be this year or in 2016.
As I mentioned in my last blog, many investors seem to feel that the Fed will postpone the hike, and much of the broad stock market's recent rally may be in anticipation of this. If so, we could get a "buy on the rumor, sell on the news" effect with the market selling off right after the meeting. An even more dramatic selloff could happen if the Fed surprises investors and decides to raise rates this year. Many of the analysts that I follow seem to feel that some sort of correction is imminent this week. Based on all of this, I am going to try and hold on to my short position in the broad stock market at least through Wednesday in anticipation of a correction that will allow us to cover our position at a better price and start to look for a place to go long as the market could be turning bullish for the rest of the year. Traders that are already out of the broad stock market may want to wait and see how equities react to the Fed meeting. Note that directional momentum in the DOW, S&P 500 and NASDAQ is still mixed bullish and bearish so any strong movement now could be up or down.
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Draghi's "dovish" economic policy announcement last week may have been good for equity markets (at least short-term), but it wasn't good for the euro. Not surprisingly the EU's currency plummeted. This, however, was very good for the U.S. dollar. A little over a week ago the U.S. Dollar Index corrected down to 93.90 but then rallied from there and last week got as high as 97.20. That 93 area represents major support for the dollar. If Draghi is serious about more monetary accommodation in Europe, we could now be seeing the start of a major rally in the U.S. dollar that could continue into the end of the year.
Of course, a rising dollar would not be good for gold and silver prices, and there are some signs now that the precious metals could be turning bearish again soon. Gold is nearing the end of its current medium-term cycle. Gold's high of $1191 on Oct. 15 may already be the peak to this cycle, but there is still time for it to go higher. Once that peak is in, gold prices will take a significant correction which could possibly go as low as the $1100 area (maybe lower). We should be looking to sell short this cycle peak. Right now it appears that gold prices could find support in the $1145 - $1150 area and start to rally, but that rally may not get beyond $1200 before gold starts its significant correction. We will keep all of this in mind as we move towards the Fed's interest rate announcement on Wednesday which could be a turning point for many markets. Silver could also find support over the next week or two around $15 and, like gold, may then rally a bit before turning down and completing its current cycle with a significant correction. If we do see silver prices near $15, it may be a good buy spot for a short but strong rally, but then we would look to sell short at the peak of that rally for a strong correction down. I know this is all a bit confusing, but I will make these short-term strategies clear if and when the markets direct us to use them. At the moment we are still on the sidelines of both gold and silver.
With the important October Fed meeting taking place this week, I thought it would be a good time to present a brief overview of the broad stock market and precious metals and our current trading strategies.
In an important markets update on Oct.13, I suggested that it was likely the broad stock market's general trend was shifting from bearish to bullish and that the August 24 market lows were a significant bottom even though the correction from the all-time high in the DOW was only a little over 16% (I had been expecting 17% or higher). This bullish scenario appears to be playing out as equity markets have been rallying strongly over the last two weeks. However, even if this is a new and bullish rally from a long-term cycle bottom on Aug. 24, cycle patterns and timing suggest that a short-term correction is now due, and we are still in a reversal zone for the broad stock market this week. Under normal circumstances, the target for this correction would be towards 16,950 in the DOW and around 1970 in the S&P 500; however, there are some global economic events unfolding now that could deliver an extra bullish thrust to these markets and possibly diminish any correction. Last Thursday European Central Bank President Mario Draghi suggested new stimulus measures such as quantitative easing (QE) to help ailing European economies, and, as if on cue, the next day the People's Bank of China lowered its interest rates in an attempt to revive its sluggish economy. This double dose of "easy money" in two foreign markets that U.S. investors had recently been worried about triggered a wave of Wall Street buying at the end of the week, and the DOW closed at a new weekly high of 17,646 last Friday.
So what do we do now? This week's Fed meeting on Tuesday and Wednesday could easily be an important turning point for the markets as investors and analysts will learn whether the first interest hike will be this year or in 2016.
As I mentioned in my last blog, many investors seem to feel that the Fed will postpone the hike, and much of the broad stock market's recent rally may be in anticipation of this. If so, we could get a "buy on the rumor, sell on the news" effect with the market selling off right after the meeting. An even more dramatic selloff could happen if the Fed surprises investors and decides to raise rates this year. Many of the analysts that I follow seem to feel that some sort of correction is imminent this week. Based on all of this, I am going to try and hold on to my short position in the broad stock market at least through Wednesday in anticipation of a correction that will allow us to cover our position at a better price and start to look for a place to go long as the market could be turning bullish for the rest of the year. Traders that are already out of the broad stock market may want to wait and see how equities react to the Fed meeting. Note that directional momentum in the DOW, S&P 500 and NASDAQ is still mixed bullish and bearish so any strong movement now could be up or down.
'
Draghi's "dovish" economic policy announcement last week may have been good for equity markets (at least short-term), but it wasn't good for the euro. Not surprisingly the EU's currency plummeted. This, however, was very good for the U.S. dollar. A little over a week ago the U.S. Dollar Index corrected down to 93.90 but then rallied from there and last week got as high as 97.20. That 93 area represents major support for the dollar. If Draghi is serious about more monetary accommodation in Europe, we could now be seeing the start of a major rally in the U.S. dollar that could continue into the end of the year.
Of course, a rising dollar would not be good for gold and silver prices, and there are some signs now that the precious metals could be turning bearish again soon. Gold is nearing the end of its current medium-term cycle. Gold's high of $1191 on Oct. 15 may already be the peak to this cycle, but there is still time for it to go higher. Once that peak is in, gold prices will take a significant correction which could possibly go as low as the $1100 area (maybe lower). We should be looking to sell short this cycle peak. Right now it appears that gold prices could find support in the $1145 - $1150 area and start to rally, but that rally may not get beyond $1200 before gold starts its significant correction. We will keep all of this in mind as we move towards the Fed's interest rate announcement on Wednesday which could be a turning point for many markets. Silver could also find support over the next week or two around $15 and, like gold, may then rally a bit before turning down and completing its current cycle with a significant correction. If we do see silver prices near $15, it may be a good buy spot for a short but strong rally, but then we would look to sell short at the peak of that rally for a strong correction down. I know this is all a bit confusing, but I will make these short-term strategies clear if and when the markets direct us to use them. At the moment we are still on the sidelines of both gold and silver.
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