In Tuesday's blog this week I wrote:
"...The broad stock market is looking very much like it wants to roll over and take some sort of correction. Based on medium-term cycle patterns, the DOW is especially vulnerable right now to a steep (but short-term) drop. Can Yellen's dovish overtures override any corrective forces and kick the markets higher? Maybe, but note... COT charts show that Commercial traders (the "smart" money) liquidated all their long positions in the S&P 500 last week so we shouldn't bet on a strong rally here. Perhaps the Fed (Yellen) realizes that a correction is due and is just trying to minimize it. If all three market indices (DOW, S&P 500, and NASDAQ) break above last week's highs this week then this market could rally for another three or four weeks. On the other hand, if only one or two indices make(s) a new high (but not all three) then we may have a case of intermarket bearish divergence and a strong signal to sell short for at least a short-term (but possibly steep) correction."
Yellen's comments have been kicking equity markets higher, and all three market indices (DOW, S&P 500, and NASDAQ) are making new weekly highs so we have no intermarket bearish divergence this week. The next strong reversal zone for this market falls in the last two weeks of April. If the upward momentum triggered by Yellen's comments continues, we may see this rally push higher into that time frame before any significant correction. All three indices are breaking above strong resistance levels this week. If they close the week above these levels it would be a strong support for more bullish rallying into the end of April. On the bearish side, however, COT (Commitments of Traders) charts still show that the Commercial traders (smart money) have unloaded nearly all of their long positions from last week. It is unwise to bet against the Commercials as they have a long history of being right most of the time. Also, the S&P 500 is now approaching the underside of a giant symmetrical "dome top" that has been forming since 2012 which is an ominous bearish sign (the dome line is currently around 2,075-2,080). Some traders have also noticed the famous "death cross" appearing in the chart of the S&P 500 since early January. This is when the 50-day moving average crosses and stays below the 200-day moving average for an extended period of time. It can also be a sign of bearishness ahead.
So what are we to make of this market? Directional momentum in all three indices is currently mixed bullish and bearish so a clear trend has yet to establish itself. Cycles, timing, and other technical data seem to favor some sort of correction now or within the next several weeks, but central banks (especially the Fed) seem intent on pushing equity markets higher. It could be that Ms.Yellen's speech this week was intended to give a lift to stock markets just before the end of the first quarter (to boost Wall Street profits and bonuses) with the realization that a correction will follow. The Commercial traders' sudden liquidation of their long positions seems to support this idea. Let's see if the markets close up or down tomorrow. If the DOW closes the week back below 17,600, this market may turn bearish. Otherwise, we could see more rallying into late April. Still on the sidelines of the broad stock market.
Crude oil prices made a new low today which means that Tuesday's low at $37.91 was not the subcycle bottom. That bottom is due any time by the end of next week so we could still see prices go lower. Our original target for this correction was around $36 so if we get there over the next six trading days, we could see prices start to rise again. They may not rise very far, however, because directional momentum in crude charts turned 100% bearish today which suggests that the current medium-term cycle may be turning down, and prices could go a lot lower into the summer. If this happens, our trading strategy will be to sell short the top of any short-term rallies. We sold our short position in crude on Tuesday for a good profit and are now on the sidelines of this market.
The surge in gold and silver prices triggered by Yellen's comments on Tuesday does not seem significant (so far), but we are keeping a close eye on it in case this rally starts to gain some legs. Sunday and Monday's lows in gold and silver seem a little too early for the medium-term cycle bottom, and neither metal got into what would be the normal target range for that bottom. The next major reversal zone for gold and silver will be in the last two weeks of April so unless these cycles bottomed earlier this week, we should see prices continue to fall into that time frame. Holding my short positions in gold and silver.
Yellen's dovish comments gave the U.S. dollar a severe beating and this has pushed the U.S. Dollar Index down to strong support at 94.50. If it can recover from here, we could see the precious metals resume their downward correction. Note that support for the dollar extends down to 93, but if that critical level is breached we could see the U.S. dollar start to seriously break down. In my opinion, it is unlikely that will happen right now - I think the dollar can recover and rally some more.