Tomorrow (Friday) we will be at the center of the first of two reversal zones for equity markets this month (those two reversal zones are May 8 - 16 and May 25 - June 5). Instead of falling into this reversal zone, the broad stock market is rallying strongly. This could mean one of two things: 1) the market is peaking and ready to turn down now; or 2) we will see a "breakout" instead of a reversal. This week the S&P 500 and NASDAQ have exceeded their peak highs from mid-April, but the DOW has not so we have a bearish divergence signal in this reversal zone supporting the idea of a peak to be followed by a turn down here (at least until the DOW exceeds its April 17 high - it is very close). Those April highs were 24,859 in the DOW and 2,718 in the S&P 500, and they are our stop loss points for our short position in this market. Today the S&P 500 exceeded 2,718 so some traders may be stopped out already. Because of the bearish divergence signal just mentioned and the fact that we are at the center of this reversal zone, I am going to hold my short position at least one more day and wait to see if the DOW breaks above its 24,859 high tomorrow. If it does, I will cover my short position in this market. We are very close to our entry point for this trade so we can exit our short position now with little or no loss on the trade.
I would like to point out here that if this market turns bullish now and bypasses a deeper correction (short-term), it will be creating an aberration in the "normal" cycle structure for the market. Such aberrations can and do occur when political and geopolitical instability in the country and globally create an extremely volatile market climate. Fortunately for us, while a cycle pattern may become temporarily distorted, a new pattern usually quickly establishes itself in a free market. (Free markets, i.e. unmanipulated markets, tend to exhibit a natural flow of orderly, cyclic patterns. Ironically, attempts to control and manipulate financial markets are usually what creates chaos and long-term instability.) As I wrote in last Sunday's blog on the broad stock market:
"...last week's lows were close to the lows of April 2 and February 9, and we could be seeing a bullish "triple bottom" forming here."
If that "triple bottom" is valid, we will soon be looking to buy.
After falling earlier this week, gold and silver prices are rallying strongly today and, like the broad stock market, are throwing off our trading plans a bit. We had anticipated buying a low in this week's reversal zone, but neither gold nor silver made a new low for the week, and there was also no intermarket bullish divergence signal to buy. Instead, we are now seeing new highs in the center of this reversal zone, and today silver is making a new weekly high while gold is not - a case of bearish divergence. Let's see if gold can make a new weekly high tomorrow. If not, we could see prices back down again to make new lows into next week. The shorter-term cycle structures of gold and silver are a little ambiguous at the moment, but this situation should resolve itself over the next few weeks and give us a clearer picture of how to trade. We are still waiting to go long for the longer-term cycle which looks very bullish (see April 30 update on the precious metals), but shorter-term cycles could push prices lower before we reach that buy spot. Still on the sidelines of gold and silver.
After rallying to a new yearly high of 93.27 on Tuesday, the U.S. Dollar Index took a corrective dip yesterday and today, and this is what's driving the rally in precious metals now. This dip could easily find support at 92.5 and rally again, especially since it looks like the dollar began a new cycle on March 26 and is relatively young and therefore bullish. The next reversal zone specifically for currencies is May 16 - 25 so I would not be surprised to see a rally continue into that time frame. If that happens, it would keep a downward pressure on gold and silver prices.
President Trump's announcement of withdrawal from the Obama administration's Iran deal earlier this week has caused a surge in crude oil prices. We are now at the center of a reversal zone specifically for crude (same as broad stock market reversal), and we are very close to our target range for a top in the current medium-term cycle ($72 - $75 area). We should be looking for signs of a top tomorrow or early next week and an opportunity to sell short. Stay tuned. On the sidelines of crude oil for now.