After yesterday's dramatic plunge, equity markets are having a "relief rally" today fueled by traders attempting to "buy the dip" on the assumption that this market is still very bullish and will soon shrug off the panic over China's alarming coronavirus epidemic. This market may still be bullish, but I'm not so sure the "dip" is over. As I discussed in yesterday's blog, there's a good chance we are seeing the final corrective drop in the medium-term cycles of all three stock indices (DOW, S&P 500, NASDAQ). This drop would normally last 2 - 5 weeks. This is week 2 for the DOW and only week 1 for the S&P 500 and NASDAQ so they could (should) drop some more before hitting a bottom. Furthermore, we haven't yet reached any of the normal bottom target prices for the DOW that I mentioned in yesterday's blog. Of course, markets don't always behave the way we want them to, and if this one is in a "blow-off" mode it is possible to see more rallying from here. But today's rally looks suspiciously like a "dead cat bounce". For now, I am going with the idea that equities are headed lower, most likely into the first two weeks of February. We already have a large gain in our short position from yesterday's drop so I think we can afford to ride out this rally (as long as it doesn't go too high). Holding my short position in the broad stock market for now.
The price of crude oil has also been dropping towards its final medium-term cycle bottom which, like the stock market, is also due anytime over the next several weeks. We are in a reversal zone now (it ends Wednesday) and yesterday crude made a new low at $52.13 (March contract chart). That could be the final cycle bottom, but that low is very close to the $50.18 low that began this cycle on Oct. 3, 2019. That means this market could be turning bearish. If crude goes down with the broad stock market, the final cycle low in crude could end up well below that Oct. 3 mark. Let's stay on the sidelines of crude for now
Gold and silver prices have been edging up over the last two weeks and seemed to be on the verge of "breaking out" over their recent Jan. 8 highs. They may still do that, but today gold and especially silver were sharply down. We are in a reversal zone so a correction from a top can be expected. The overall picture for these metals still looks quite bullish, but we may see some short-term price fluctuations before any major rally takes off. COT (Commitment of Traders) charts still look quite bearish for both gold and silver which makes me less than enthusiastic to buy at the moment. If we get any significant correction in gold and /or silver, it might give us a good buying opportunity, but let's stay on the sidelines for now.
One reason for the precious metals backing down today is because the U.S. Dollar Index seems to be breaking out of a downtrend channel it has been in since October 2019. A rally in the dollar now could push gold and silver prices lower, but in mid-February we come into a reversal zone specifically for currencies. That could put a cap on the greenback's rally and send it down again. Maybe that will also correspond to a low to buy in the precious metals. We shall have to wait and see if the dollar can sustain a rally over the next three weeks.
The longer-term picture for the U.S. Dollar depends a lot on whether or not the greenback can exceed its 14 year high of 103.82 from January 2, 2017. Right now, that seems unlikely (but not impossible). If that 103.82 high holds, the dollar should roll over soon and continue a steady decline into 2024 - 2025. On the other hand, if the dollar can exceed that 103.82 high, it could become very bullish and rally as high as 120 before declining into a 2024 - 2025 bottom. Right now, the U.S. Dollar Index is up to 98. We will keep an eye to any rally with special attention on that 103.82 mark. I should note that normally a dollar rally as I've described here (up to 120) would tank the gold and silver markets. That could happen, but the world's economic and financial landscape these days is far from normal. Under certain conditions, the U.S. Dollar and the precious metals can rise together. In other words, a "super rally" in the dollar will not necessarily spell doom for the precious metals. "Gold bugs" can take some comfort in this.