Gold and silver prices have been dropping steeply this month, but last week there were strong technical signals indicating that a temporary bottom may be forming in both metals and the potential for at least a short-term rally is strong. Public sentiment towards the precious metals (a contra-indicator for prices) is very negative at the moment while COT charts are showing the "smart money" currently bullish on gold. These are more signs suggestive of a strong rally soon. For these reasons I've decided to cover my short position in gold. This position was opened on Sept. 17 so we should be able to get out with little or no loss and maybe even a small profit. I want to point out here that this rally could be very brief and followed by more downside, but gold prices could get to the $1270 area and silver prices could climb back to $18.5 - $19, so I feel it is prudent to cover any short positions now and try to go short again at the top of any new rally. If prices do rally into the second week of October (close to Oct. 7-8) we may have an ideal spot to sell short as gold and silver could reverse there and fall to new cycle bottoms. The reason I am not looking to buy this rally is because it may be brief in duration (less than two weeks) and directional momentum is still strongly bearish in both gold and silver, so the rally may not get very far. Covering all gold (and silver - if you have them) short positions and stepping to the sidelines of gold and silver for now.
It appears that the long-term cycles in gold and silver are shifting and the final bottoms are not yet in. The current cycle analysis shows that the final bottom in gold could approach the $1000 area or even go lower ($800 - $900 area) by early next year. A key support area to watch now is $1180. If that support area is clearly broken it is likely we will see those lower prices in gold.
The U.S. Dollar index continues to be very bullish, but it is very overbought and is overdue for some sort of correction. Such a correction could coincide with a rally in gold and silver as the dollar's recent vigor has been a major factor contributing to the fall of precious metal prices. We should keep in mind here that investor capital fleeing a crumbling European economy continues to seek refuge in the U.S. Dollar so a dollar correction, if it happens, may be brief and small. If so, a resumption of the dollar's rally could send gold and silver prices back down to new lows. We will watch the dollar carefully over the next few weeks for its effect on the precious metals.
The broad stock market seems unable to decide whether or not it wants to take a serious correction or instead soar to new heights. Last week's ISIL war news made the markets nervous and resulted in some major stock price swings both up and down. The DOW did break below the 17,000 level on Thursday but surged back up and closed above it on Friday, so it is still not clear in what direction this market wants to go. Momentum is still strongly bullish in the DOW but is mixed bullish and bearish in both the S&P 500 and NASDAQ indices. Short-term technical signals are pointing to a rally in these indices from last week's lows which could lead to new highs (or double tops) into the second week of October. If this happens, we may have an ideal setup to sell the broad stock market short that week for an overdue correction of 5-10% (or more) that we have been expecting for some time. This is my ideal (and the most likely) scenario at the moment. If more geopolitical turmoil upsets the markets next week, however, it's possible we could see them continuing down into early October and giving us a corrective bottom to buy instead of a top to sell. We will have to wait and see how the market moves next week, but for now I am going with the idea of a top to sell short around October 7-8. On the sidelines of the broad stock market for now.
Crude oil appears to be starting a new cycle from a bottom made on Sept. 11 at $89.56. If so, prices should be bullish for at least two more weeks. I opened long positions in crude last Thursday. Turmoil in the Middle East could drive a strong rally here, but we need to be careful as increasing market volatility can move prices both up and down quickly. Holding long positions in crude oil.