After moving down for three days, the broad stock market is rallying strongly today, and the DOW is getting close to its all-time high of 18,288. As I've been stating in recent blogs, if that level is exceeded it will negate the current intermarket bearish divergence with the S&P 500 and NASDAQ (both made new all-time highs in April) and make the market more bullish. What we need to be aware of now is that the last two weeks of May through the first two weeks of June is a time period when major reversals can occur in all the markets we follow. May 25 - June 5 is an especially strong reversal period. Because of this wide time span, we could see more than one significant reversal over the next four weeks, and we will use cycle analysis to help us gauge potential tops or bottoms. The current cycle structure in the DOW suggests that a high is due over the next several weeks to be followed by a major correction. If the DOW doesn't break 18,288 soon, we could see the cycle top out any day now followed by a four to six week correction that could break below 17,000. A break above 18,288, however, would be more bullish and could possibly lead to a top in the 18,600 - 19,000 area before any significant correction. I would like to point out here that despite any short-term bullishness in equities, the longer term picture of the broad stock market is looking very "toppy", and this market is due (overdue) for a major (15% or more) correction anytime now but especially when (if) the Fed starts to raise interest rates. This is the reason I have been cautious about going long in the stock market and have been focusing more on selling short. I may take a long position in equities, but it will usually be a short-term trade. Still on the sidelines and watching that 18,288 area carefully.
The U.S. Dollar Index is breaking below the strong support at 94 and this has triggered a bearish momentum signal in its chart making directional momentum in the dollar now 100% bearish. There is still some support for the dollar down to 92, and because it is very oversold at the moment, we could still get a short-term bounce here before moving to lower levels. A bottom above 92 by the middle of next week could be the turning point for such a bounce.
Not surprisingly, the dollar's breakdown has led to a surge in gold and silver prices. Today gold made a significant break above its April 6th high of $1224 but closed the day below (at $1222). This is a bullish sign and gold could rally higher now; however, we need to keep in mind that the next two weeks are a major reversal zone for gold. This means we should be watching for a top to sell short in that time frame. If gold can close above $1224, it may get to the $1230 - $1250 area (or even higher) before turning down. Some short-term trading signals are suggesting a top for this rally as early as next week. So the question is whether to go long now for a potentially strong (short-term) rally or just wait for the expected top and sell short. I am going to wait until gold breaks clearly above $1224 (and silver above $17.50) before considering a long position in these metals. Still on the sidelines.
After a brief surge on Tuesday and Wednesday, crude oil prices are back down again today. We are currently holding a short position in crude, and ideally we want to see a low over the next two weeks in the $52 area. If prices start to break above the May 6th high of $62.58, there is a possibility of a new high rather than a low into late May (which would be another shorting opportunity). For now, I am sticking with the idea of a low and am holding my short position in crude.