Most readers of this blog are aware of the fact that there are a lot of geopolitical events around the world right now that are affecting (or have the potential to affect) financial markets (rising terrorism, mass migration of immigrants from the Middle East and Africa into Europe, heated debate over the Iran nuclear deal, increasing tensions between Russia and the West, a weakening European economy, and, most recently, the collapse of the Chinese stock market). While I do pay close attention to all of this, in such an environment of global chaos it is probably best to focus on technical and cycle analysis of the markets and to avoid falling into the trap of trading on the news of the day. Fortunately, that approach seems to be serving us well over the last few weeks as markets seem to be falling into clearly defined technical patterns. (I've noticed that since the lifting of QE- quantitative easing - last October and the promise of a coming end to near-zero interest rates, the broad stock market appears to be "behaving" more normally, that is to say, more in accord with the technical and cycle patterns that manifest naturally in an unmanipulated free market. This is good news for those of us who study these patterns for trading.)
As I stated in my previous blog, the broad stock market appears to be bearish into at least late October, but there could be some strong short-term rallies between now and then. One possible scenario is for the market to rally into the next strong reversal date (the third week of September) and then turn back down for a new low into late October or November. An alternative to this would be the market falling into the end of September, rallying weakly from there, then turning back down to bottom in October/November. Both of these scenarios are bearish. A third (bullish) scenario which is much less likely (but still possible) says that the market's correction is over with the DOW achieving a 16+% correction on August 24 and that equities will now rally to new highs into 2016. For this to be valid, directional momentum in the three major stock indices (DOW, S&P 500, NASDAQ) would have to turn bullish (they are all currently 100% bearish), and the DOW would have to start breaking above 17,400 and the S&P 500 above 2080. None of this seems likely at the moment, so I am sticking with my bearish view until I see stronger bullish signals. In this bearish view, the final low could easily exceed 16% (perhaps 20 -30 % - possibly more if panic sets in) by the end of the year. Holding my short position in the broad stock market.
This week could be important as the Fed meets Wednesday and Thursday and all investors and analysts will be waiting with bated breath to see if short-term interest rates will be raised for the first time in nine years. Of course, even if the Fed decides to start raising rates, it will be done gradually and in very small increments so, technically speaking, the effects of the first hike shouldn't be great. However, the psychological impact of that first hike could be devastating as it represents the end of an unprecedented, almost decade long "near-zero" rate policy. That is what is frightening the markets now as many realize that near-zero interest rates (along with liberal doses of QE) have helped propel equity markets strongly upwards since the crash of 2008 -2009. The Fed's meeting will end on Thursday which is close to the center of the next timing window for a potential reversal in many markets (Sept. 16 - 25). It could be the trigger for another turning point in the broad stock market. If the Fed does decide to raise rates, equity markets will likely turn down strongly. If they delay a rate hike yet again, we could see equities rally, but the rally may not get far before turning down again. As long as the DOW stays under 17,400 we will maintain our bearish view of this market.
Next week could be another tricky week for calling the precious metals. Directional momentum remains very bearish for both gold and silver, and I am still expecting both metals to move lower into October. One thing that concerns me, however, is the way the U.S. Dollar Index has recently been moving in sync with the broad stock market. Normally, a Fed rate hike would be perceived as hawkish and this would be bullish for the dollar. Under present market conditions, however, a rate hike might tank the broad stock market and pull the dollar down with it. If this happens we could see a strong rally in the precious metals. We entered a short position in silver last Wednesday with a tight stop loss at $15. We will keep a close eye on silver prices and market signals as we move into Thursday as we may want to cover our short position before the Fed ends its meeting on Thursday. Holding a short position in silver but out of gold for now.
We should now be on the lookout for a good spot to short sell crude oil. Crude started a new medium-term cycle on Aug. 24 and looks like it is rallying towards an early cycle peak from which it will probably turn down again and remain bearish for the remainder of its cycle term (i.e. at least three months). Barring a new major conflict in the Middle East, crude prices will likely fall if the broad stock market continues to tank as investors anticipate less oil consumption in a failing economy. Next week is a reversal zone for crude so if we see another rally towards $50 or higher, we may look to sell short. On the sidelines of crude.