All eyes this week will, of course, be on the broad stock market as the DOW on Friday took a whooping 530 point dive. Yes, it is official, the market is now in panic mode. This means we may see some crazy volatility in equities over the next several weeks with major short-term price movements both up and down. Nevertheless, even wild movements in the stock market indices should stay within the parameters of major market cycle structures, and timing signals for directional reversals can still be used (although they may be less reliable). Fortunately, we foresaw this downturn two weeks ago and entered short positions in the broad stock market.
It is very likely the DOW and S&P 500 (and probably the NASDAQ) started new medium-term cycles in early July and that those cycles will be pointing down for at least two more months. That means we shouldn't see the lowest point of this correction for at least eight more weeks. That correction could easily be 17% or more from these indices' all-time highs. (The DOW has already fallen 10%.) Does this mean the markets are heading straight down for eight more weeks? Not likely. There should be bounces along the way and possibly some strong short-term rallies, but our strategy should remain bearish until it is clear the correction is over. That means we should be looking to add to our short positions at the top of any short-term rally. (We may also look to take profits on our short positions if a significant rally appears imminent). As I stated in last Thursday's blog, any long-term investors who don't want to sell short or trade short-term should simply be out of the stock market for at least the next two months.
Next week we enter another strong reversal zone so we will be on the lookout for a possible short-term bottom and bounce in the broad stock market. Possible target bottoms could be the 16,000 area in the DOW and around 1860 in the S&P 500. Holding my short position in the broad stock market.
We sold our gold and silver long positions last Thursday for good profits, and we should now be looking for a top in both these metals to sell short. That top could come this week as we enter a strong reversal zone. The potential for a reversal is especially strong for gold at the end of the week. In fact, there are some short-term technical signals that suggest the possibility of an accelerated rally into this Friday which would be the ideal lead-in to a top and subsequent reversal. There is resistance for gold in the $1180 - $1190 range, so prices may not get beyond there. However, the current panic in equity markets could spill over into other markets so we could get unusual surges (or dives) that violate normal technical parameters. Traders fleeing the stock market might view gold and silver as a safe haven for their money, and this could fuel more rallying in the precious metals. Or they may chose the U.S. dollar instead (as they did in the 2008-2009 crash) which would send gold and silver prices down. If gold rallies strongly, we could see prices peak in the first week of September instead of this week. Our sideline position now is probably a good one until we see how these prices move over the next several days. Gold and silver's medium-term trend is still bearish, and gold prices would have to exceed $1235 to start looking bullish. I don't think that's going to happen any time soon (although with the markets in panic mode anything is possible). On the sidelines of gold and silver and looking to sell short sometime within the next two weeks.
Speaking of the dollar, the U.S. Dollar Index is now approaching another support level at 94. A bounce from this support could trigger the reversal we're anticipating in the precious metals so we will watch this index carefully next week. As I mentioned above, investors could chose the U.S.dollar as their safe haven instead of gold as they did in 2008-2009. Although the U.S. economy is not in the best of shape at the moment, compared to Europe and Asia it is looking pretty good, and the dollar is perceived by some investors as a good place to park their money when equities are falling.
Crude oil prices continued to creep lower last week, which is not surprising considering what is happening in the broad stock market. There is support for crude around $38.50 this week as we enter a strong reversal zone. It is also very late in crude's current cycle so a bottom is due from which some sort of rally will commence. Normally I would be looking to buy this bottom for at least a short-term relief rally, but considering the serious correction now taking place in the broad stock market as well as the strong bearish momentum in crude charts, I am reluctant to go long right now. It may be better to just wait for the top of the next rally and then sell short. If crude breaks below $39 this week and then closes the week above $39.50, I will consider a long position. Out of this market for now.