MARKETS UPDATE (5:30 pm EDT)
We are currently in a trading environment of high volatility which will likely continue at least through the end of August. It is important to be a nimble and flexible trader in such times and not get too attached to one position. This may require us to do short-term trading more than I would like, but this is necessary when technical chart patterns change suddenly and abruptly. (A good example of this is the recent directional shift in gold from bearish to possibly very bullish). It is tempting to just stand aside during such volatile periods (well, we do spend a lot of time on the sidelines!), but we are on the verge of some potentially very substantial moves in several markets so we don't want to be completely out of the trading game. This volatile period could see significant reversals in several markets.
Let me repeat what I wrote in my July 13th blog on the broad stock market as it is still valid:
"We are now more than halfway through the medium-term cycles of the DOW, S&P 500, and NASDAQ which means that we should be watching for a top (high) from which a significant correction (to the end of the cycle) will follow. Technical studies are showing that this correction could be in the 8-10% range or possibly more. This top will most likely happen sometime between July 18 and August 23. Timing and reversal studies are pointing to July 21, July 26, Aug.3, and Aug. 21 as possible pivot points for a significant reversal. This means that the likelihood of a top and reversal down will be highest on or near any one of these dates. Our main trading strategy will therefore be to watch those dates for signs of a top and an opportunity to sell short."
It is even later now in these medium-term cycles. We are past July 21 and approaching July 26 and equity markets are still pushing higher. Today the S&P 500 and NASDAQ both made new all-time highs while the DOW remained a bit below its all-time high from July 14 (21,682) for yet another case of intermarket bearish divergence. Yes, the market could turn down now, but directional momentum in all three indices is still 100% bullish, and the DOW is just a whisker away from breaking that 21,682 high. We are waiting to sell short, but if the DOW does break its high and negates this week's bearish divergence signal, we will probably stay on the sidelines until next week. Still out of the broad stock market.
Gold and silver charts are currently giving us mixed signals. One reason for this is that the cycle patterns in both metals may have to be relabeled so that the July 10 low in gold at $1206 and the July 10 low in silver at $15.23 are representing the starting points of new cycles which could now rally strongly. We had earlier been labeling those lows as only sub-cycle corrections with the final cycle bottoms to come a bit later and lower. This later scenario is still possible, but the bullish, new cycle labeling is also possible and is being supported by recent bullish COT charts (see July 13 blog ). This unresolved ambiguity in cycle labeling is putting us on the sidelines of both metals for now. Yes, we are in a reversal zone for precious metals this week so we could see the current rally turn down, but reversal zones occasionally see rallies breaking out instead of breaking down, and there are reasons to think that might happen here. Our main strategy right now is to look to buy the cycle bottom in both metals. If these are still older cycles then we should see that bottom over the next several weeks at lower price levels, but if new cycles started on July 10 (as stated above) then we may have to scramble and look for a good entry point to go long before prices take off toward new highs. On the sidelines of both gold and silver for now.
Not surprisingly, the chart of the U.S. Dollar Index is also looking ambiguous, at least short-term. The dollar has been plummeting and is now approaching critical support in the 92 - 93 area. If the greenback breaks below there, it could be in big trouble and in danger of going into "free fall" and a severe decline. We are now in the center of a reversal zone for currencies, however, so the dollar could turn up from this support line and rally now. But that rally may not get very far before the dollar drops again to assault that 92 - 93 support. Needless to say, if that support breaks, gold and silver prices could really take off.
It looks like crude oil was not ready to fall from its July 20th high of $47.74 and has rallied higher today to $47.97 (Sept. contract chart). We are still in a reversal zone for crude (it ends Friday) so prices could still turn down this week. Because prices are making new highs, there is a good chance that the June 21 low of $42.27 was the start of a new medium-term cycle and maybe even a longer-term cycle which would mean that crude's trend is turning bullish. Nevertheless, this new high is in a reversal zone so some sort of correction now is likely from a high forming this week. We entered a short position early last Friday around $47 which looked good until today's rally which puts us a bit in the red. Our original stop loss for this trade was a close above $48. Because of the current reversal zone, I am going to raise that stop to $49. Traders may still use $48 as a stop depending on their loss tolerance. Holding my short position in crude for now.
We are currently in a trading environment of high volatility which will likely continue at least through the end of August. It is important to be a nimble and flexible trader in such times and not get too attached to one position. This may require us to do short-term trading more than I would like, but this is necessary when technical chart patterns change suddenly and abruptly. (A good example of this is the recent directional shift in gold from bearish to possibly very bullish). It is tempting to just stand aside during such volatile periods (well, we do spend a lot of time on the sidelines!), but we are on the verge of some potentially very substantial moves in several markets so we don't want to be completely out of the trading game. This volatile period could see significant reversals in several markets.
Let me repeat what I wrote in my July 13th blog on the broad stock market as it is still valid:
"We are now more than halfway through the medium-term cycles of the DOW, S&P 500, and NASDAQ which means that we should be watching for a top (high) from which a significant correction (to the end of the cycle) will follow. Technical studies are showing that this correction could be in the 8-10% range or possibly more. This top will most likely happen sometime between July 18 and August 23. Timing and reversal studies are pointing to July 21, July 26, Aug.3, and Aug. 21 as possible pivot points for a significant reversal. This means that the likelihood of a top and reversal down will be highest on or near any one of these dates. Our main trading strategy will therefore be to watch those dates for signs of a top and an opportunity to sell short."
It is even later now in these medium-term cycles. We are past July 21 and approaching July 26 and equity markets are still pushing higher. Today the S&P 500 and NASDAQ both made new all-time highs while the DOW remained a bit below its all-time high from July 14 (21,682) for yet another case of intermarket bearish divergence. Yes, the market could turn down now, but directional momentum in all three indices is still 100% bullish, and the DOW is just a whisker away from breaking that 21,682 high. We are waiting to sell short, but if the DOW does break its high and negates this week's bearish divergence signal, we will probably stay on the sidelines until next week. Still out of the broad stock market.
Gold and silver charts are currently giving us mixed signals. One reason for this is that the cycle patterns in both metals may have to be relabeled so that the July 10 low in gold at $1206 and the July 10 low in silver at $15.23 are representing the starting points of new cycles which could now rally strongly. We had earlier been labeling those lows as only sub-cycle corrections with the final cycle bottoms to come a bit later and lower. This later scenario is still possible, but the bullish, new cycle labeling is also possible and is being supported by recent bullish COT charts (see July 13 blog ). This unresolved ambiguity in cycle labeling is putting us on the sidelines of both metals for now. Yes, we are in a reversal zone for precious metals this week so we could see the current rally turn down, but reversal zones occasionally see rallies breaking out instead of breaking down, and there are reasons to think that might happen here. Our main strategy right now is to look to buy the cycle bottom in both metals. If these are still older cycles then we should see that bottom over the next several weeks at lower price levels, but if new cycles started on July 10 (as stated above) then we may have to scramble and look for a good entry point to go long before prices take off toward new highs. On the sidelines of both gold and silver for now.
Not surprisingly, the chart of the U.S. Dollar Index is also looking ambiguous, at least short-term. The dollar has been plummeting and is now approaching critical support in the 92 - 93 area. If the greenback breaks below there, it could be in big trouble and in danger of going into "free fall" and a severe decline. We are now in the center of a reversal zone for currencies, however, so the dollar could turn up from this support line and rally now. But that rally may not get very far before the dollar drops again to assault that 92 - 93 support. Needless to say, if that support breaks, gold and silver prices could really take off.
It looks like crude oil was not ready to fall from its July 20th high of $47.74 and has rallied higher today to $47.97 (Sept. contract chart). We are still in a reversal zone for crude (it ends Friday) so prices could still turn down this week. Because prices are making new highs, there is a good chance that the June 21 low of $42.27 was the start of a new medium-term cycle and maybe even a longer-term cycle which would mean that crude's trend is turning bullish. Nevertheless, this new high is in a reversal zone so some sort of correction now is likely from a high forming this week. We entered a short position early last Friday around $47 which looked good until today's rally which puts us a bit in the red. Our original stop loss for this trade was a close above $48. Because of the current reversal zone, I am going to raise that stop to $49. Traders may still use $48 as a stop depending on their loss tolerance. Holding my short position in crude for now.
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