Today the S&P 500 and NASDAQ surged to new weekly highs while the DOW dropped lower, further accentuating a strong bearish divergence signal in this market. We have extended our general reversal zone through the end of this week as this is the deadline for the U.S. Congress to agree and vote on legislation that will lift the debt ceiling and avoid a catastrophic default. Last Thursday I wrote:
"We have been expecting a steep sub-cycle corrective low this week or next. We got it in the DOW, but not the other two indices. It's possible the S&P 500 and NASDAQ will bypass any steep correction. If that's the case, we could see a strong rally now in all three indices. But there's still time for these indices to drop lower into next week, and if the debt-ceiling crisis continues unresolved, that may indeed happen (the "deadline" to avoid a default seems to be June 2). In that situation, we would look for a good buy spot - as long as the corrections don't go TOO low."
Whether this market falls steeply now or starts to rally seems dependent on the resolution (or not) of this debt ceiling crisis this week. The House votes on Wednesday, and the Senate at the end of the week, but any delays in this process could push final voting into the week-end. A final vote before Monday (June 5) next week would be necessary because that's when the U.S. Treasury Department says it will not have enough money to cover its obligations. We will happily remain on the sidelines of the broad stock market into the end of the week as we watch how this situation plays out.
Today is the last day of our "pivot point" window for both gold and silver. Gold made a new weekly low early today ($1932.85), and prices are rallying off of that. Silver did not make a new weekly low (yet), so we are starting the week with a bullish divergence signal. Gold's sub-cycle bottom is due this week. In fact, it may already be overdue and distorting. This is putting our bullish view of gold in jeopardy. Prices need to rally NOW and start closing above $2000 to maintain a bullish scenario. I am going to raise the stop loss on our long position in gold to a break below today's low at $1932.85. We will hold that long position for now and see if today's rally can gain any legs.
Silver may have made its sub-cycle corrective bottom last Friday at $22.69. As with gold, that bottom was late, and as we are now out of any reversal zone or pivot point for the metals for the rest of this week, we don't expect a deeper low this week. If prices do fall below $22.69, it would strongly suggest the cycle is turning bearish. Let's hold our long position for now with a stop loss based on a break below $22.69.
The U.S. Dollar Index has been rallying over the last three weeks but may now be encountering resistance just above 104. If the greenback turns down from this resistance, it could boost precious metal prices. But if it breaks higher, that could send gold and silver lower. Right now, the longer-term picture for the U.S. dollar looks bullish, but any corrective dips that break below the February low of 100.82 could change that view.
Continued uncertainty over a debt-ceiling deal being passed as well as recent mixed signals from OPEC pushed crude oil prices deeply lower today. Prices are breaking below the $69.39 (July contract chart) low of May 15, but they remain above the May 4th low of $63.89 that may have been the start of a new medium-term cycle. We are now out of our reversal zone for crude (May 16 - 25), so last Wednesday's high at $74.73 may have been a significant turning point. On May 17, I wrote in my update on crude oil:
"The medium-term cycle labeling in crude oil is still not clear. That deep $63.89 (July contract chart) low on May 4 could be the start of a new medium-term cycle as well as a new longer-term 3-year cycle in crude. If correct, crude would be quite bullish now and ready to rise to new heights shortly. This is my preferred scenario at the moment. However, we still can't rule out the possibility that a new medium-term cycle started with the $64.58 low on March 20. In that case, the May 4th low ($63.57) could be considered the first sub-cycle bottom, and because it is lower than the start of the cycle, it would mean the cycle has turned bearish and is headed lower for many more weeks."
All of this still applies. If the current correction can stabilize around $68, it would suggest May 4 as the start of a new medium-term cycle, and that might be a good spot to buy. If prices start breaking below $64, however, it would likely mean the medium-term cycle started March 20 and is bearish with prices falling back to the $50 - $55 area. It looks like the resolution (or not) of the debt ceiling crisis by the end of this week will determine which way this market is going to go. We shall remain on the sidelines of crude for now as we watch how this unfolds.