MARKETS UPDATE (3:30 pm EDST)
Yesterday the Federal Reserve announced it would leave interest rates unchanged. That seemed to push equities up a bit until Fed Chairman Jerome Powell's speech later in the afternoon threw a wet blanket on the market's bullish energy. Mr. Powell talked down the idea of lowering interest rates - something Wall Street has been hoping for in recent months - and this hawkish surprise (the Fed has lately been dovish in its monetary policy) pushed the market sharply down in the last two hours of trading.
Wall Street's loss, however, was our gain as we have had a short position in the broad stock market since last Thursday. The S&P 500 made a new weekly (and all-time) high yesterday (which was the last day of our first reversal zone - April 22 - May 1) The NASDAQ also made a new all-time high earlier in the week while the DOW remains below not only last week's high (26,696) but also its all-time high (26,952). Thus our strong bearish divergence signal held into our reversal zone, and we have likely seen the top to the current medium-term cycles in the S&P 500, NASDAQ, and probably the DOW. A sharp correction should follow to the final bottoms of these cycles. This morning's steep drop in the markets seems to be supporting this idea (so far) so we will hold on to our short position for now. A good target for a bottom in the DOW would be around 25,500 - 26,000 or possibly lower. A decline to the final cycle bottom normally lasts between 2-5 weeks. We are now entering another reversal zone for equities (May 1-9) so it's possible we could see the final bottom by the end of next week.
Our short position in crude oil is also doing very well. Crude prices are plummeting today (over 3% at the time of this writing) and have been falling steadily from a high of $66.18 (June contract chart) on April 23 (we went short on April 25). As I wrote in last Sunday's blog:
"It looks like crude is now falling to its final medium-term cycle low. That low could get down to $55, but a minimal correction might find support around $61. We enter another reversal zone specifically for crude this week (April 29 - May 8). A final cycle decline should last at least 2 weeks so we will watch for a low this week (the second week of the decline) between $55 -$61 to cover our short position and take profits."
Today prices got to $60.95 so we are now into the upper part of our target range. We are also near the center of that reversal zone, but I am not seeing any short-term technical signals that the correction is over. Let's see where prices go tomorrow before we decide to cover our short position and take profits on this trade. It would be perfectly appropriate here for risk adverse traders to take partial profits now (say, covering one third) and wait to see if prices move lower. Holding my short position in crude oil for now.
In Sunday's blog on gold and silver I wrote:
"It would be nice to see silver make a new low this week in our target range ($14.10 - $14.57) with gold holding above its $1265 low from last week as we enter the new reversal zone for precious metals this week. That would be a good buy signal (bullish divergence) for both metals....We need to see gold prices come down a bit early this week to maintain our bullish view (i.e. new cycle starting now - not on March 7). If we get that with the bullish divergence described above, we will look to buy."
OK. We are now nearing the center of that reversal zone for precious metals (April 30 -May 9). Silver made a new weekly low yesterday and just touched the top of our target range ($14.57), and gold is still holding above $1265 (it is close) creating bullish divergence. Should we buy now? Well, maybe, BUT in silver and gold's nearby contract charts
both metals did make new weekly lows (i.e. no bullish divergence). Also, short-term technical signals are still looking very bearish, and directional momentum in both metals is still nearly 100% bearish (as it is in the XAU - a gold/silver mining company index). This is making me very reluctant to go long now. This reversal zone for the precious metals will last through next Thursday so we could see a lower bottom next week. There is also another reversal zone for gold and silver coming up in mid-May (May 15 - 22). It's possible we could see the final lows then. Let's hold off buying for now.
More than likely Jerome Powell's hawkish rhetoric yesterday is at least partially responsible for keeping the precious metal prices down (because the dollar likes a hawkish Fed and a bullish dollar puts downward pressure on gold and silver). A steep plunge in the U.S. Dollar Index from early in the week reversed sharply back up after Powell's speech, and today the greenback rallied some more. If the dollar continues to rally over the next week or two, it may make a new high (or a double top to last week's high of 98.33) in the next reversal zone for currencies (May 7 - 16). That would be a good time for it to turn down again, and if it does, that might also correlate with a final cycle bottom in gold and/or silver. I am speculating here, but it is a scenario worth considering and we will watch for it.
Yesterday the Federal Reserve announced it would leave interest rates unchanged. That seemed to push equities up a bit until Fed Chairman Jerome Powell's speech later in the afternoon threw a wet blanket on the market's bullish energy. Mr. Powell talked down the idea of lowering interest rates - something Wall Street has been hoping for in recent months - and this hawkish surprise (the Fed has lately been dovish in its monetary policy) pushed the market sharply down in the last two hours of trading.
Wall Street's loss, however, was our gain as we have had a short position in the broad stock market since last Thursday. The S&P 500 made a new weekly (and all-time) high yesterday (which was the last day of our first reversal zone - April 22 - May 1) The NASDAQ also made a new all-time high earlier in the week while the DOW remains below not only last week's high (26,696) but also its all-time high (26,952). Thus our strong bearish divergence signal held into our reversal zone, and we have likely seen the top to the current medium-term cycles in the S&P 500, NASDAQ, and probably the DOW. A sharp correction should follow to the final bottoms of these cycles. This morning's steep drop in the markets seems to be supporting this idea (so far) so we will hold on to our short position for now. A good target for a bottom in the DOW would be around 25,500 - 26,000 or possibly lower. A decline to the final cycle bottom normally lasts between 2-5 weeks. We are now entering another reversal zone for equities (May 1-9) so it's possible we could see the final bottom by the end of next week.
Our short position in crude oil is also doing very well. Crude prices are plummeting today (over 3% at the time of this writing) and have been falling steadily from a high of $66.18 (June contract chart) on April 23 (we went short on April 25). As I wrote in last Sunday's blog:
"It looks like crude is now falling to its final medium-term cycle low. That low could get down to $55, but a minimal correction might find support around $61. We enter another reversal zone specifically for crude this week (April 29 - May 8). A final cycle decline should last at least 2 weeks so we will watch for a low this week (the second week of the decline) between $55 -$61 to cover our short position and take profits."
Today prices got to $60.95 so we are now into the upper part of our target range. We are also near the center of that reversal zone, but I am not seeing any short-term technical signals that the correction is over. Let's see where prices go tomorrow before we decide to cover our short position and take profits on this trade. It would be perfectly appropriate here for risk adverse traders to take partial profits now (say, covering one third) and wait to see if prices move lower. Holding my short position in crude oil for now.
In Sunday's blog on gold and silver I wrote:
"It would be nice to see silver make a new low this week in our target range ($14.10 - $14.57) with gold holding above its $1265 low from last week as we enter the new reversal zone for precious metals this week. That would be a good buy signal (bullish divergence) for both metals....We need to see gold prices come down a bit early this week to maintain our bullish view (i.e. new cycle starting now - not on March 7). If we get that with the bullish divergence described above, we will look to buy."
OK. We are now nearing the center of that reversal zone for precious metals (April 30 -May 9). Silver made a new weekly low yesterday and just touched the top of our target range ($14.57), and gold is still holding above $1265 (it is close) creating bullish divergence. Should we buy now? Well, maybe, BUT in silver and gold's nearby contract charts
both metals did make new weekly lows (i.e. no bullish divergence). Also, short-term technical signals are still looking very bearish, and directional momentum in both metals is still nearly 100% bearish (as it is in the XAU - a gold/silver mining company index). This is making me very reluctant to go long now. This reversal zone for the precious metals will last through next Thursday so we could see a lower bottom next week. There is also another reversal zone for gold and silver coming up in mid-May (May 15 - 22). It's possible we could see the final lows then. Let's hold off buying for now.
More than likely Jerome Powell's hawkish rhetoric yesterday is at least partially responsible for keeping the precious metal prices down (because the dollar likes a hawkish Fed and a bullish dollar puts downward pressure on gold and silver). A steep plunge in the U.S. Dollar Index from early in the week reversed sharply back up after Powell's speech, and today the greenback rallied some more. If the dollar continues to rally over the next week or two, it may make a new high (or a double top to last week's high of 98.33) in the next reversal zone for currencies (May 7 - 16). That would be a good time for it to turn down again, and if it does, that might also correlate with a final cycle bottom in gold and/or silver. I am speculating here, but it is a scenario worth considering and we will watch for it.
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