MARKETS UPDATE (3:15 pm EST)
European Central Bank President Mario Draghi made public statements yesterday hinting at more stimulus measures for the eurozone economy. This had the effect of lifting European equity markets on Monday, and it seems to be helping the U.S. stock market today (after the Monday holiday). This follows on the heels of Janet Yellen's testimony to the Senate Banking Committee last week in which she acknowledged the possibility of an economic recession and admitted that the Fed was looking into the feasibility of negative interest rate policy (NIRP) to help stabilize the nation's economy. It is certainly ironic that dire news about the state of the European and U.S. economies would be such good news to Wall Street investors. The reason for this, of course, is that these bad economic forecasts pressure governments into adopting "easy money" policies such as quantitative easing, near-zero interest rates, and more recently, NIRP. Equity markets will salivate at the mere mention of these stimulus measures, but can these desperate attempts to prop up an already bloated stock market go on indefinitely? And even if they do, can they prevent a severe correction in a market that some economists have described as "a bubble looking for a pin"? Cycle and timing studies and recent technical analysis are suggesting that they cannot.
The large "head and shoulders top" pattern forming underneath a gigantic "dome top" in the S&P 500 that I described several weeks ago (see blog posts from Jan. 20 and 24) is still valid, and, in fact, the right "shoulder" of the "head and shoulders" pattern is nearly complete. A likely scenario now could be a brief relief rally into the 1950 - 2000 area to relieve this market's short-term oversold condition and then another plunge possibly leading to a serious meltdown. If instead the broad stock market continues to rally and the S&P 500 breaks clearly above the dome top mentioned above (say over 2100), I will have to change my bearish view. Right now, however, it doesn't look like that will happen (but it is possible). Current directional momentum in all three major stock indices (DOW, S&P 500, NASDAQ) is nearly 100% bearish. We will enter another likely time period for a reversal in equity markets at the end of this week and into the middle of next week and then another period in the middle of March. We will watch any rallies into those times for a possible top to sell short. Our general target areas will be 1950 - 2000 in the S&P 500 and 16,400 - 17,000 in the DOW. Still on the sidelines of the broad stock market.
In Sunday's update on precious metals I wrote:
"Our trading strategy in both metals will now be bullish, and we will look to buy any corrective dips in the current rally. There is a good chance we could get one next week...A general target for a correction would be around $1190 in gold and perhaps $14.50 in silver, but there is a good chance prices could go lower."
We are getting that dip now. Gold dropped close to our target range today, but silver did not quite get there. There are mixed short-term bullish and bearish technical signals right now so this is a difficult call. The correction could be over and we could see a strong rally now, but prices could also drop significantly lower, especially in silver. I am going to give this correction another day to allow silver a closer approach to our target. Still on the sidelines of gold and silver.
The cycle labeling of crude oil continues to be a little ambiguous. It is possible that last week's low at $26.13 (March contract) was the medium-term (and possibly longer-term) cycle bottom. If so, the market is bullish and we should see prices rise to at least $35 or higher. The other possibility is that these cycles bottomed on Jan. 20 and the new cycle has already peaked early on Jan. 28 at $34.82. If that is the case then this market is bearish and prices will start to move below $26.13. Jan. 28 is unusually early for a cycle peak so the bullish scenario seems more likely at the moment. I am therefore going to hold my long position in crude in anticipation of higher prices over the next several weeks. If the broad stock market rallies now, it could help lift the price of crude.
European Central Bank President Mario Draghi made public statements yesterday hinting at more stimulus measures for the eurozone economy. This had the effect of lifting European equity markets on Monday, and it seems to be helping the U.S. stock market today (after the Monday holiday). This follows on the heels of Janet Yellen's testimony to the Senate Banking Committee last week in which she acknowledged the possibility of an economic recession and admitted that the Fed was looking into the feasibility of negative interest rate policy (NIRP) to help stabilize the nation's economy. It is certainly ironic that dire news about the state of the European and U.S. economies would be such good news to Wall Street investors. The reason for this, of course, is that these bad economic forecasts pressure governments into adopting "easy money" policies such as quantitative easing, near-zero interest rates, and more recently, NIRP. Equity markets will salivate at the mere mention of these stimulus measures, but can these desperate attempts to prop up an already bloated stock market go on indefinitely? And even if they do, can they prevent a severe correction in a market that some economists have described as "a bubble looking for a pin"? Cycle and timing studies and recent technical analysis are suggesting that they cannot.
The large "head and shoulders top" pattern forming underneath a gigantic "dome top" in the S&P 500 that I described several weeks ago (see blog posts from Jan. 20 and 24) is still valid, and, in fact, the right "shoulder" of the "head and shoulders" pattern is nearly complete. A likely scenario now could be a brief relief rally into the 1950 - 2000 area to relieve this market's short-term oversold condition and then another plunge possibly leading to a serious meltdown. If instead the broad stock market continues to rally and the S&P 500 breaks clearly above the dome top mentioned above (say over 2100), I will have to change my bearish view. Right now, however, it doesn't look like that will happen (but it is possible). Current directional momentum in all three major stock indices (DOW, S&P 500, NASDAQ) is nearly 100% bearish. We will enter another likely time period for a reversal in equity markets at the end of this week and into the middle of next week and then another period in the middle of March. We will watch any rallies into those times for a possible top to sell short. Our general target areas will be 1950 - 2000 in the S&P 500 and 16,400 - 17,000 in the DOW. Still on the sidelines of the broad stock market.
In Sunday's update on precious metals I wrote:
"Our trading strategy in both metals will now be bullish, and we will look to buy any corrective dips in the current rally. There is a good chance we could get one next week...A general target for a correction would be around $1190 in gold and perhaps $14.50 in silver, but there is a good chance prices could go lower."
We are getting that dip now. Gold dropped close to our target range today, but silver did not quite get there. There are mixed short-term bullish and bearish technical signals right now so this is a difficult call. The correction could be over and we could see a strong rally now, but prices could also drop significantly lower, especially in silver. I am going to give this correction another day to allow silver a closer approach to our target. Still on the sidelines of gold and silver.
The cycle labeling of crude oil continues to be a little ambiguous. It is possible that last week's low at $26.13 (March contract) was the medium-term (and possibly longer-term) cycle bottom. If so, the market is bullish and we should see prices rise to at least $35 or higher. The other possibility is that these cycles bottomed on Jan. 20 and the new cycle has already peaked early on Jan. 28 at $34.82. If that is the case then this market is bearish and prices will start to move below $26.13. Jan. 28 is unusually early for a cycle peak so the bullish scenario seems more likely at the moment. I am therefore going to hold my long position in crude in anticipation of higher prices over the next several weeks. If the broad stock market rallies now, it could help lift the price of crude.
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