Wow! That was good timing for unloading our broad stock market positions yesterday! The DOW surged 240 points yesterday and gave all of it back on a plunge when the markets opened this morning. Yesterday's rally was apparently triggered by a brief surge in China's stock market and also by comments from one Federal Reserve official suggesting that a September rate hike may not be a done deal. Today's market plunge is being driven by China's overnight decision to devalue its currency. This is unsettling to global equity markets as it suggests that the Chinese government is desperately attempting to help its exporters in an economy that is failing. It should be noted here that any "recovery" rally in the Chinese stock market should not be taken that seriously as trading in China is now being tightly regulated by the government, and this can no longer be considered a "free" market. (Conspiracy buffs may be interested in knowing that financial giant Goldman Sachs recently praised the Chinese government's takeover of its country's stock market. Could we soon be seeing such overt regulatory control in U.S. markets?).
Conspiracy theories aside, there is no doubt that equity markets are extremely volatile right now, and we need to be cautious in all of our trading. The strategy I outlined in yesterday's blog for trading the broad stock market will help us navigate this dangerous trading environment. Note that if the DOW breaks below last Friday's low of 17,279, we will have to abandon the idea of that being the start of a new cycle, and equity markets could be bearish for the next two months. On the sidelines of the broad stock market for now.
Our timing for reentering our gold and silver long positions also seems to be good as gold prices have now broken above the upper line of a "bearish wedge" pattern, and both gold and silver seem to be starting rallies from new medium-term cycle bottoms. If this analysis is correct, we could see gold rise to at least $1140 and silver to $16. If we see those prices towards the end of this month, we will likely take profits in our long positions and consider shorting both metals if the longer term trend still looks bearish. Maintaining my long positions in gold and silver for now.
Crude oil prices continue to search for a bottom as crude made yet another new low today at $42.69. A medium-term cycle bottom for crude is due by the end of the month and could happen any time now. Timing factors suggest a possible reversal at the end of this week or early next week. I would normally be looking to buy this cycle bottom as the first few weeks of a new cycle are almost always bullish. The trend signals in this market, however, are remaining stubbornly bearish, and the threat of a broad stock market plunge now is also making me reluctant to buy oil. We will watch this market carefully over the next seven days for signs of a bottom. Out of this market for now.