Last week's equity markets were truly a roller coaster ride with large triple digit price swings up and down in the DOW, but the week's average remained centered around 18,200 which was not much changed from the previous week. The DOW, S&P 500 and NASDAQ are now all getting late in their medium-term cycles (which started in late June) which means we should start seeing tops in all three indices from which a significant correction will follow. I have been bullish on the broad stock market since the start of these cycles because it seems likely to me that the Federal Reserve and the current political establishment (both Democrats and Republicans) would not want a major stock market crash before the November 8th presidential election since that would favor the non-establishment candidate Trump. Also, the early stage of a new cycle is usually bullish. But we are now in the late stage of this equity cycle, and the rally from late June has been very weak. Despite the Fed's efforts to delay interest rate hiking, equity markets seem reluctant to rally strongly. In my last blog I stated:
"Politics aside, Wall Street does not like uncertainty, and in this presidential race Hillary Clinton, an establishment politician with a long history in political office, is a known quantity whereas Donald Trump, a political newcomer, is an unknown variable."
I believe that Donald Trump's continued strength in this race is making Wall Street nervous and is working against the Fed's efforts to buoy the markets with low interest rates. Right now Trump and Hillary seem to be running neck and neck, but if Hillary starts to move significantly ahead, we could still see a strong equity rally into November. On the other hand, if Trump takes the lead these markets could tumble down into the election. (Please note that I am not trying to tout the merits or deficiencies of either candidate - I am simply observing how financial markets are reacting to them.) Because we are late in the cycles of the DOW, S&P 500 and NASDAQ, it is possible that the tops to these cycles already happened with the highs of Aug. 15 in the DOW and S&P 500 (18,688 and 2,194 respectively) and the more recent high in the NASDAQ on Sept. 22 (5,343). In fact, the large time gap between the DOW - S&P 500 highs and the high of the NASDAQ is actually a case of intermarket bearish divergence as the NASDAQ has made several new highs since Aug. 15 while the DOW and S&P 500 are still below those mid-August tops. We also need to keep in mind that there is resistance for the DOW at 18,400 -18,450 (this is a "gap down" area from Sept. 8-9 and is the right side of a "bearish island reversal" - see my blog on Sept. 12). My point here is that it's possible for this market to turn bearish now, especially if Trump continues to be a strong rival against Hillary. We still can't rule out more rallying into the election, but I would at least like to see that gap down area in the DOW exceeded before I can feel comfortable being bullish. We will remain on the sidelines of the broad stock market for now.
Gold and silver prices continue to edge lower and challenge our long positions in both metals. Gold is staying above $1,300, but silver has broken below our original second stop loss point of $19. In my blog last Tuesday I wrote:
"We may even tolerate silver falling below $19 as long as gold remains above $1,300 (but we don't want to see silver go below $18.40)."
Silver closed today at $18.84. Tomorrow is the last day of the strong reversal zone for precious metals from last week so both metals need to start rallying now if that reversal is going to be valid. There is another reversal zone for gold and silver next week so it is possible for prices to fall lower into that time frame before turning up. If that happens, we could get a case of bullish intermarket divergence if silver falls below $18.40 but gold stays above $1,300 or the opposite with gold falling below $1,300 and silver remaining above $18.40. Both scenarios would be a bullish signal. What we don't want to see is gold below $1,300 and silver below $18.40. That would be bearish and would likely force us to abandon our long positions. I am going to hold my long positions in both gold and silver for now. Any traders who were stopped out of their long silver position should remain on the sidelines.
We are doing well with our long position in crude oil which we entered on Sept. 26. The current medium-term cycle in crude began on Aug. 3 at $40.77 (November contract chart) and prices reached $50 on Aug. 19 before correcting back down. Today crude got back up to $49.02 in intraday trading so it is challenging that August high. Directional momentum in crude also recently switched from 100% bearish to mixed bullish and bearish which is suggesting a trend change and the possiblility of exceeding that $50 high. The subcycle structure in crude is also telling us that it may be a bit early to take profits in this rally. Let's hold our long position here and see if crude can exceed $50 over the next week or two. Holding my long position in crude oil for now.