Yesterday U.S. Fed Chairman Ben Bernanke spoke in Cambridge, Massachusetts about Federal Reserve policies and the state of the U.S. economy and, not surprisingly, seemed to be tempering the optimism of his speech from last month (which had sent markets tumbling due to the spectre of QE tapering). In yesterday's speech he stated that the central bank will likely keep at least some of its easy-money policies going "for the foreseeable future". The DOW cheered this news today with a 169 point rally (more QE - yes!) and momentum indicators for the DOW, S&P 500 and NASDAQ are now strongly bullish. This could be the stimulus that kicks the broad stock market to new all-time highs (or at least to a double top at 15,542). On the other hand, the "Bernanke Effect" is sometimes dramatic but temporary (as it was last month) so I am suspicious of any strong rally now. Many technical, timing, and cycle studies point to the broad stock market making a major correction soon (this month or early August), so the big question is how high can the market go before a significant correction kicks in? Current technical analysis shows possible upside targets around 1700 in the S&P 500 and 15,700 -16,000 in the DOW, but markets are very volatile right now and may not achieve these levels. If the market moves down a bit, I will consider going long for a short-term rally, but for now I am going to take a conservative stand as a long-term trader and wait for the top of this rally to sell short.
Gold and silver are rising this week, but momentum remains bearish in both metals and a short-term reversal in price direction is likely this week. In Monday's blog I suggested that if precious metals moved lower this week there could be a reversal up, but since gold and silver have been rising, that reversal (if it occurs) may be down instead.
I don't think the final long-term cycle bottom in gold is in just yet. (It may be, but I would like to see it closer to 1100).
One possible scenario that could unfold now is for gold to rally significantly (perhaps to the $1350 area) before turning back down again to make a final bottom. Directional signals are still mostly pointed down at the moment, so we are still on the sidelines of this market.
There is nothing more frustrating in market timing than to be "whipsawed" out of a good trade in an equity or commodity and then watch it take off like a rocket. This happens when a stop loss is triggered but then the price "changes its mind" and reverses back up (or down if you are selling short) and continues strongly in the direction you originally anticipated. After going long in crude oil on June 19, the following day saw "fallout" from Ben Bernanke's speech push the price abruptly lower causing me to sell as it broke below several stop loss levels. Within a few days, however, the price was back up and running, and it is now rising steeply, being fueled by the fires of conflicts in Egypt and Syria, unfortunately with us on the sidelines. Even with good technical analysis and cycle timing, predicting the direction of a market that is strongly impacted by volatile current events is difficult at best. The good news is that even volatile markets still move within the restrictions of certain broad technical parameters, and we can use these to calculate our trading strategy moving forward. Chasing this current news driven steep rally is not a good idea, especially as all markets are unusually volatile through the end of this month, and we are still expecting a significant correction in crude oil soon. We will therefore remain on the sidelines, at least until the current rally takes a short-term breather.