We are about to enter a time period (now through the third week of May) that contains several reversal zones for several financial markets with many overlapping each other. We are thus on high alert for tops with significant turn downs or bottoms with significant turn ups. The reversal zones are as follows:
BROAD STOCK MARKET (and other markets): April 22 - May 1 and May 1 - May 9
CURRENCY MARKETS : April 23 - May 1 and May 7 - May 16
GOLD and SILVER : April 30 - May 9 and May 15 - 22
CRUDE OIL : April 29 - May 9
All of this means we will likely be trading more frequently than usual over the next several weeks, but we have to be careful as trades may be short-term with markets possibly reversing more than once in a relatively short period of time. Our understanding of cycles will help us with our trade decisions.
Speaking of cycles, gold is most likely still finding the bottom of its current medium-term cycle, and that final bottom could end up in one of the above reversal zones for gold and silver or the broad stock market (that could mean as early as next week). A good target for this low would be between $1251- $1273. This scenario (bottom still forming) would be bullish, and we would expect a strong rally from that bottom. An alternative scenario (less likely) would view the medium-term cycle as having already bottomed on March 7 (at $1281). That would be bearish because prices are already below the start of the cycle and gold would thus be pointed down for at least another two months. Even if this bearish scenario is correct, however, a sub-cycle bottom is now due and should happen in one of the upcoming reversal zones. That means we can still buy and then just wait to watch the strength of the rally. A strong rally will support the bullish (new cycle) scenario and we will stay long. A weak rally and/or a move back below the bottom will tell us to bail out. Silver's medium-term cycle bottom may be forming now, but, like gold, the bottom may already be in with last Tuesday's low at $14.79. It would be nice to see gold make a new low this week with silver staying above $14.79 (bullish divergence in a reversal zone), but if both metals make new lows, we might have to wait another week or two to go long. Bottom Line: There are many technical signals suggesting we are at or near a medium-term cycle bottom in both metals and that a significant rally is imminent. We are therefore very keen to go long in both gold and silver at some point over the next three weeks. On the sidelines of both metals for now.
In the broad stock market, the S&P 500 and NASDAQ are also nearing the end of their current medium-term cycles and so we are watching for a final cycle top to be followed by a sharp downturn as both indices fall to their final cycle lows. Selling short from this top could give us a profitable short-term trade as final cycle corrections are usually steep, but if we miss this trade we will not have to wait long for the bottom, which will be an excellent spot to buy. Both these indices made new monthly highs last Wednesday, which was within our last reversal zone. It's therefore possible those highs were the cycle top(s) already. If so, they will now fall to their final bottom(s) which will most likely be in one of the upcoming reversal zones listed at the start of this blog. But this market seems bullish now, and these indices could easily push higher this week for a final top in these new reversal zones instead of a bottom. We will have to wait and see how the market moves this week. An intermarket bearish divergence signal next week between the DOW, S&P 500 and NASDAQ (where one or two of these indices makes a new high, but not all three) might give us a good signal to sell short. I have left the DOW out of most of this discussion because there is a possibility the DOW already started a new medium-term cycle (ahead of its two companions) on March 25 at 25,372. If that's the case, the DOW could be very bullish now, and we would not want to sell it short. Bottom Line: Let's watch for a signal to possibly sell short the S&P 500 or NASDAQ. If we miss it, we will wait for these cycles to bottom and then go long. I am still expecting the next medium-term cycle to rally strongly into the summer. Still on the sidelines here.
It is also very late in the medium-term cycle of crude oil, and the final cycle top is due (overdue). It had looked like that top was in on April 8 at $64.77 (May contract chart), but today crude is making a new high. At the time of this writing, Sunday's crude price has jumped a bit above our $65.50 stop loss point for our short position. Because we enter a new reversal zone on Monday and a top is due at any time, I am going to raise that stop loss to a close above $66. We would like the upcoming reversal zone for crude (April 29 - May 9) to be the final cycle bottom (with a profit on our short position), but if we are stopped out, it may instead turn out to be a new final top in a slightly distorted cycle. Stay tuned tomorrow as we may need to cover our short position. Holding my short position for now.