U.S. equity markets are falling heavily this week as nervous investors react to news of the collapsing Chinese stock market. Today Chinese stocks plunged more than 7% forcing government officials to halt trading for the second time this week. Government intervention seemed to halt last summer's meltdown in China's equity markets and triggered what appeared to be a recovery rally as the Shanghai Composite Index surged nearly 20% from its August lows into the end of 2015. This week nearly all of those gains are being lost and it appears that the "recovery rally" (i.e. the government propping up its "free" market with drastic intervention and severe restrictions on trading) was not a recovery after all.
The U.S. broad stock market is now falling a bit below our target area for a bottom to the current medium-term cycle I have discussed in recent blogs (16,700 in the DOW and 1970 in the S&P 500). In Monday's blog I wrote:
"If these target lows hold, we will likely have a good opportunity to buy the start of a new cycle in these markets. If the DOW moves below 16,400, however, we may have to abandon this strategy as the market could turn very bearish and could possibly start to "melt down". Unfortunately, there are technical signals now suggesting that all markets could be unusually volatile in January so we need to be especially careful in our trading."
We are now near the center point of a strong reversal zone for several markets, but this reversal period is not over until the end of next week so a bottom could happen anytime over the next six trading days. An alternative to this could be a fear driven panic that might see equities bypass a "normal" reversal and plunge to deeper lows past next week. Right now I am favoring the idea of an imminent bottom to the medium-term cycle and a reversal. If tomorrow's jobs report is positive it may be a factor that helps turn the market back up. If it doesn't and the DOW starts to move below 16,400, equity markets could be in trouble. Still on the sidelines and looking for a cycle bottom to buy.
My decision to "ride out" the recent downturn in precious metals is now paying off. Gold prices are soaring today and are exceeding my original target price of $1100 for a rally. Silver prices are also rallying and are now above our buying price, but silver's rally is not as strong as gold's and silver has not yet made a new monthly high while gold has now broken far above its Dec.4 high of $1088. This could be a case of intermarket bearish divergence and it could be the signal for another downturn. There are other technical signals telling us to be cautious about this rally so I am going to take profits in my long positions in both gold and silver today. Yes, prices could surge higher into next week, but we are now at the center of a strong reversal zone, and all markets are very volatile and they could turn at any time between now and next Friday. We now have a good profit in gold and a small one in silver so I am going to take the money and run. Taking profits (selling) my long positions in both gold and silver today.