In Sunday's blog I speculated that, "Market volatility this week may continue to be high." That is turning out to be true.
It looks like this year's "Santa Claus" rally is over as the post holiday broad stock market plunges with the DOW breaking support at 17,600 as it approaches another support level at 17,200. Despite yesterday's and today's steep fall, however, directional momentum in the DOW, S&P 500 and NASDAQ remains strongly bullish (so far). This suggests that the market might still find a bottom over the next few days and start to reverse and rally again. On the other hand, if these indices continue to move lower past the end of this week, equity markets could be in trouble (especially if the DOW breaks clearly below 17,000), We will continue to look for a bottom over the next day or two
as long as momentum stays bullish and the DOW stays above 17,000. Still on the sidelines.
Crude oil appears to be taking its cues from the broad stock market (or perhaps it is the other way around) as prices continue to fall this week. I sold my long position in crude on Dec. 29 (at $54) as I thought there was a chance prices could reach the $45 area. It looks like that was a wise decision as crude dropped to $47.55 (intraday) today.
If prices start to turn up over the next few days and can close the week above $51, we may have a good signal to go long. We appear to be at the end of a major cycle in crude and potentially the start of a new one, and if this is the case crude should turn bullish (at least for a good short-term trade). If prices continue lower past Friday, however, we will remain on the sidelines and reevaluate our timing strategy for a bottom. Out of this market for now.
Gold and silver are rallying strongly today and may be breaking out now. Some significant technical signals are still bearish, however, so I am viewing this rally with caution until next week as there is still a chance of prices pulling back over the next several days. Relevant to the price of precious metals is the U.S. Dollar Index. The dollar has been rallying like gangbusters since last August and is overdue for some sort of correction. Nevertheless, directional momentum in the U.S. Dollar Index remains strongly bullish as it pushes against resistance at the 91.50 level.
It seems likely that the overbought dollar will correct now, and that would help drive a strong rally in the precious metals. But if the dollar stabilizes above 91 and pushes higher, gold and silver could back down again. We will watch the U.S. Dollar Index carefully over the next several days and how it affects the precious metals. Still on the sidelines of gold and silver.