The broad stock market rallied strongly this morning but ended the day with a 200 point loss. After yesterday's dramatic plunge in equities, some sort of relief rally can be expected, but it should not be more than a "dead cat bounce" as cycle structures and technical signals now clearly point to a deeper correction that should continue for at least another eight weeks. Any rally in the DOW should encounter resistance in the 16,500 area, and if that is breached, there is extremely strong resistance at 17,000. A rebound rally should not get beyond these points, and if approached they may be turning points for a reversal and a resumption of the correction. (Similar resistance is at 1980 and 2050 in the S&P 500.) The question now is whether or not we should take profits in our short position and sell short again at the top of a rebound rally or just stay short and ride out any rally. I am holding my short position for now.
Gold prices dropped steeply today from yesterday's new high while silver prices continued a downward slide that started from last Friday's high. It's possible the reversal we've been expecting is happening now, but it is a little early, and there are some unusual technical signals that are still suggesting a strong rally into Friday or next week. In last Sunday's blog I wrote: "Traders fleeing the stock market might view gold and silver as a safe haven for their money, and this could fuel more rallying in the precious metals. Or they may chose the U.S. dollar instead (as they did in the 2008-2009 crash) which would send gold and silver prices down." This week it looks like the dollar crashed with the broad stock market and is now rebounding in sync with it. This suggests that investors are choosing gold (and silver) as their safe haven. If this is true and the dollar continues down with equity markets, we could see a very strong rally in the precious metals. This calls into question our medium-term bearish view of these metals. If the U.S. Dollar Index turns back down and crashes support at 93 it could turn gold and silver very bullish. We will watch this carefully, especially into Friday and all next week which could be a turning point for the precious metals. On the sidelines of gold and silver.