There are some major shifts occurring in the charts of several financial markets this week that are going to affect our trading strategies moving forward. I have been focusing on last week and this week as a likely reversal zone for all of the markets we trade. Usually this means that a falling market will turn up or a rising market will turn down. I want to point out here, however, that a reversal zone can also coincide with an abrupt breakdown in a falling market or a breakout if markets are rising. This happens infrequently, but it does happen, especially in a highly volatile trading environment like we have now. We may be seeing this now in several markets.
The broad stock market fell dramatically yesterday and the DOW is now in our target zone range of 17,600 - 17,700. That area seems to be holding today. This could be a good spot to go long for a possible rally into early April. I am a little hesitant to buy, though, because yesterday's plunge triggered a major bearish momentum signal in the chart of not only the DOW, but the S&P 500 and NASDAQ indices as well. This means that these markets are now mixed bullish and bearish (they had been 100% bullish). This adds a little more weight to the possibility of the markets breaking down further instead of reversing. Even if they do reverse up here, the new bearish momentum may put a damper on any rally. Nevertheless, cycle structures and the current reversal zone suggest a bottom here and some sort of rally into the first week of April. I may still go long if support at 17,600 holds and we get a short-term buy signal in the charts over the next few days, but if we do get a rally into early April, I will be looking to reverse position and go short then. The bottom line here is that I am anticipating a potentially serious correction in the markets, but it is not clear if it is starting now (from the highs of early March) or if it will start from a new high (or double top) in early April. We will have to wait and see if the markets rally now or break lower over the next several days. Remaining on the sidelines for today.
My decision to sell my gold long position last week is turning out to be a good one. Gold (and silver) prices are falling sharply today. In Monday's blog I wrote: "What we want to watch for here is intermarket bullish divergence, that is, we want to see either gold or silver, but not both, go lower than last week...... If gold starts to break below last week's low, then this bullish divergence signal will be negated and gold could drop towards $1140." Gold and silver are now breaking well below their lows from last week and the bullish divergence is negated. In addition to this, a major bearish momentum signal appeared today in gold metal charts. The gold chart is now 100% bearish. Silver metal charts are still mixed bullish and bearish, but the chart of the XAU (an index of gold and silver mining companies) also turned 100% bearish today, which is not a good sign for the precious metals. We are now moving out of the reversal zone for gold and silver, and while it is possible we could still form a cycle bottom this week, this market's sudden bearishness is suggesting a deeper correction over the next several weeks. Gold prices could go to $1130 - $1140. Any close below $1130 would be an extremely bearish sign for this market as it would suggest that the next gold cycle would be pointed down. I may still be looking to buy the bottom of this correction as it will represent the start of a new cycle which is usually bullish for at least a couple of weeks, but our general trading strategy in precious metals may be turning bearish now, which means we should probably look to sell short any significant rallies. I am remaining on the sidelines of gold and silver until I am more certain of the bottom to this current correction.
Crude oil prices are starting to penetrate my target zone for a buy ($47 - $48) but today's price dip also triggered a major bearish momentum signal. This turns the crude oil charts 100% bearish now and strengthens the possibility of a further breakdown in prices past this week. As with gold, I am losing my enthusiasm for buying a low this week in crude. I want to see at least a short-term buy signal in the crude charts before considering a long position. If we don't get one this week we may have to wait until early April for a bottom. Still out of this market.
The U.S. Dollar Index surged today and nearly touched 100, its highest level since 2004. The greenback's accelerating steep rise since July 2014 is ominously similar to its steep spike in late 2008 when investors fled equity and commodity markets for the perceived safety of U.S. dollars. This played a major roll in the collapse of these markets. Is history about to repeat itself? We will have to wait and see. For now, the dollar's parabolic rise is certainly contributing to the breakdown of precious metal prices and is also having a negative effect on crude oil and equities as well. That 100 mark, however, may be hard for the greenback to break, and any dollar pullback now would take some of the bearish pressure off the markets, at least temporarily. But even if the dollar backs down a bit, it has already broken through an important resistance level in the 90 -92 area so we could easily see the 100 level exceeded soon.