After reading over my posts from last week, I noticed that I have been referencing a lot of current cycle patterns which is most likely confusing to a lot of readers. When one is immersed in this kind of chart analysis, it is easy to get carried away and forget the "outsider's perspective". One of my objectives on this website is to try and avoid too much technical "chit-chat" so I apologize for perhaps not presenting a clearer picture of the recent cycle patterns. Sometimes, though, chart patterns are a little complex, and it is difficult to describe what's going on in simple terms.
Before I try and give a clearer overview of the current markets, let me first briefly clarify what I mean by a "cycle".
When you study the charts of most financial markets (e.g. the DOW and other indices, gold and other commodity prices, etc.), you will find that prices (or index values) rise and fall in regular, periodic cycles. Each cycle starts at a low point, rises to a peak, and then falls to another low point which starts another cycle, and so on. In a bull market, the final low point will be higher than the starting point; in a bear market, the final low is lower than the starting point. One way to visualize this is to think of a bull market as an upwardly sloping road with a series of consecutive, ascending speed bumps or hills (cycles) and a bear market as a down slope with a series of descending speed bumps or hills. An analyst's job is to try and buy at the start (bottom) of each bump (cycle) and sell at the peak or top of each bump. This task is made easier when we are able to predict and pinpoint "reversal zones".
"Reversal zones" are segments in time (usually about a week long) when a market is very likely to make a significant reversal in its trend (if it is rising, it should peak and start falling; if falling, it should bottom and start rising). Explaining how we determine reversal zones is beyond the scope of this brief discussion. The main point here is to understand that coordinating cycles with reversal zones makes it easier to identify when a market is peaking or bottoming. For example, if a cycle is twelve weeks long and it has been bullish and rising for, say, eight weeks, and we can see that the next reversal zone is coming up in the tenth week, there is a very strong chance that cycle will peak in the 10th week and we should sell (or sell short) then.
OK, I may have confused even more people with the above rambling, but hopefully some may better understand my use of cycles and reversal zones.
BRIEF OVERVIEW of CURRENT MARKETS
Broad Stock Market:
It is late in the current medium-term cycles of the DOW, S&P 500 and NASDAQ (all are 17 weeks old and most medium-term cycles last around 15 -23 weeks). Each of these cycles peaked recently (Sept.- early Oct.) and are now falling to their final cycle bottoms which can happen any time now over the next several weeks. It is possible that the recent sharp plunge to new lows on Oct. 11 was the end of this medium-term cycle (and the start of a new one), but it is more likely the final cycle low is still ahead and will happen in one of the upcoming reversal zones in October or especially November. The second week of November (around the 16th) looks like an ideal spot for the cycle bottoms, but it could also be earlier (say, around Nov. 7th). Note that both of these times are after the Nov. 6 elections in the U.S. which is significant as reactions to the election results could potentially reverse a trend in the market. The middle of this week has a minor (weak) reversal point that could also be a turning point for a bottom (if equities fall sharply this week and break their Oct. 11 lows). So our strategy now is to hold on to our short positions for an anticipated low coming up sometime over the next several weeks, most likely below the lows of Oct. 11.
One clue that the cycle lows are in would be to see a bullish divergence signal where only one or two (not all three) indices break their Oct. 11 lows. Of course, we will also remain aware of the (less likely) possibility that new cycles began on those Oct. 11 lows. If that is the case, this market will rally strongly now. To hedge our bets we will consider covering our short positions if the DOW breaks above 26,000 and/or the S&P 500 gets above 2,870. Holding my short position in the broad stock market for now.
Gold and Silver:
Gold and silver seem to be in the early stages of new medium-term cycles that started from the lows on Aug. 16 in gold and Sept. 11 in silver. That means both metals should be bullish. Gold also may have started a new longer-term cycle on Aug. 16 which is even more bullish. We sold our gold and silver long positions early last week (with a very good profit in gold) to avoid a possible sharp sub-cycle correction. That correction may be in progress now and could bring gold prices back down towards $1200. We will be alert for any technical signals to go long again in gold and silver once any correction has run its course. Out of gold and silver for now.
My blog post on crude oil from Thursday seems to clearly describe the current cycle and remains unchanged. I am therefore going to re-post it here:
"Crude oil prices continue to fall and now look like they are heading to the final bottom of the current medium-term cycle which is due any time over the next three or four weeks (probably in November). We missed our opportunity to sell short near the cycle high in early October so we may just have to wait for the final bottom to buy. A normal target bottom for the medium-term cycle would be around $68 - $72 (we are there now - Nov. contract chart), but because crude may also be completing a longer-term cycle, it could go lower. Out of crude oil for now."