The severe roller coaster ride in equities this week is making me glad to be on the sidelines of the broad stock market for now. The DOW and S&P 500 both made new lows yesterday (the NASDAQ made a low on Tuesday) and tomorrow ends the minor reversal zone we have been in since last week. These lows could be a significant turning point (especially since yesterday's rally- over 1000 points in the DOW- was so strong), and if so, we could see more rallying into next week. We are about to enter a very long and very strong reversal zone (January 1 - 17) with likely turning points centered around Jan. 4 and Jan. 12. If we do rally into next week (or the following week), we could see a good set-up for selling short in this market, especially if that rally stalls around 23,500 in the DOW and 2,550 in the S&P 500. This is our preferred scenario at the moment and, as I discussed in my last blog, it is based on the idea that both these indices started new medium-term cycles On Oct. 29 and have turned bearish as they head down to their final bottoms 6 - 15 weeks from now.
But, of course, there is always an alternative scenario. If this market continues to fall into the first half of January then we could see a significant bottom in that time period, and that bottom might be the end of older medium-term cycles in the DOW and S&P 500 (meaning new cycles did not start on Oct. 29). I think this scenario is less likely than the first one, but if it plays out, we would be looking to buy that bottom (the start of new cycles) as a strong rally could follow.
Let's stay on the sidelines for now.
Gold and silver are rallying strongly this week which is forcing me to reconsider the idea that gold started a new medium-term cycle on Nov. 13 (at $1197). If that is true then the cycle is still young and bullish and not moving to a final cycle bottom in a couple of weeks as I speculated in my last blog on these metals. Silver is breaking above its Nov. 2 high of $14.90 which may mean that, like gold, it too could have started a new medium-term cycle in mid -November (with the low of $13.89 on Nov. 14). Even if both metals are starting new (bullish) cycles, they are due for at least a sub-cycle correction right now. Let's wait and see if we get one and how low it will go. That will help us determine the correct cycle labeling in this market. We are still looking to go long in both metals soon. On the sidelines of gold and silver for now.
One reason gold and silver are suddenly looking so bullish is because the U.S. Dollar Index is starting to look weak. There are technical signals now pointing to a possible breakdown in the U.S. dollar. This is a surprising development as the dollar had been looking strong, and the Fed's recent rate hike was hawkish - something that usually supports the dollar. Perhaps investors are starting to realize that (for many reasons too numerous to go into here) the greenback's status as the world's reserve currency may be in jeopardy. If so, gold and silver may now be the preferred safety hedge in the event of a major crash in equity markets (unlike the 2008-2009 crash when investors initially bypassed the precious metals in favor of the perceived safety of the U.S. dollar). The fact that gold and silver prices have been holding up so well during recent plunges in the broad stock market is supporting the idea that investors will favor the precious metals over the greenback as a safe haven in an equity crash.
The price of crude oil seems to be taking its cues from the broad stock market. Because we are favoring a bearish view of equities right now, it seems like crude prices could also move lower. We are watching for a long-term (3 year) cycle bottom that is due any time now. The next major reversal zone for crude is coming up Jan. 13 - 25 so that may be a good time for the final 3 year cycle bottom and a buying opportunity. Let's wait and see if prices can push lower into that time frame. On the sidelines of crude oil for now.