IMPORTANT MARKETS UPDATE (10:30 pm EDT)
We are now approaching the center (April 22) of a strong reversal zone for gold and silver (and other markets) and both metals (especially silver !) are rising into it. Silvers's strong surge yesterday and today supports the idea that silver began a new medium-term cycle on April 1. The start of a new cycle is always bullish (as this one is), but this cycle could also peak early and prices could start to fall again. Supporting this idea is the fact that prices are rising into a strong reversal zone and silver is making a new yearly high while gold's rally has not yet even exceeded it's high from last week. This is a strong case of intermarket bearish divergence in a reversal zone which suggests an imminent reversal. COT (Commitment of Traders) charts also continue to show Commercial traders (smart money) to be very bearish on the precious metals which does not bode well for prices (at least short-term).
More evidence for a reversal in these metals now is coming from the chart of the U.S. Dollar Index. The dollar has backed down this week and is again testing strong support at 93 - 94. We are now in the dead center of a reversal zone for currencies so we could see the dollar start to rally back up again from this strong support. What could trigger such a reversal and rally? Tomorrow morning (Eastern U.S. time) European Central Bank President Mario Draghi will give a press conference and will comment on current ECB policy. In his last press conference, Draghi enthusiastically announced a generous stimulus package for the eurozone economy which included more QE (quantitative easing) and further interest rate cuts into negative territory. The euro fell dramatically on that news but then shot back up when Mr. Draghi added that this would be the last rate cut from the ECB. Some analysts feel that Draghi may have changed his mind about this and could hint at more rate cuts during tomorrow's press conference. If he does, the euro could fall again and push the dollar higher as well as send precious metal prices back down.
Based on all of the above we will try and go short tomorrow in both gold and silver for what could be a significant correction in both metals. Draghi is expected to speak at 8:30 am EDT (an hour before markets open here in the U.S.) so we should wait to see the effect this has on precious metal prices before trading. We may go short early in the morning so stay tuned. We will have to abandon our bearish strategy if gold makes a new yearly high (i.e. moves above $1,283) as this would negate the intermarket bearish divergence with silver. On the sidelines of gold and silver but now looking to short both metals.
If Draghi does hint at more rate cuts from the ECB tomorrow morning this could have a bullish effect on the broad stock market and kick the current equity rally higher. This market is already being lifted by recent accommodating money policy statements from both the ECB and the Federal Reserve, but the rally is now moving into the center of a strong reversal zone that could trigger at least a short-term correction. It seems like the Fed wants to keep equity markets strong at least into the upcoming U.S. presidential election, and it would probably be unwise to bet against them. This is why I am reluctant to get too bearish on the broad stock market even though one could make a good argument for a strong correction now. The current medium-term cycles of the DOW, S&P 500 and NASDAQ could be peaking in this strong reversal zone and getting ready to move down to their final cycle bottoms, but that corrective fall may not be very severe if the Fed gets its way. Nevertheless, we are market timers, and because we are looking at a potential medium-term cycle correction from its peak, it could be significant and worth trading. We are still looking for a top this week or next to sell short. This week the DOW is breaking above 18,000 and is exceeding the peak of its last medium-term cycle, and this is very bullish, but the S&P 500 and NASDAQ are still below their previous medium-term cycles so we are getting an intermarket bearish divergence signal here as well. If the S&P 500 can get above 2,117 (it is close) it will weaken this bearish indicator. Directional momentum is still nearly 100% bullish in all three indices so I would like to see a few more bearish signals this week or next before selling this market short. Still on the sidelines of the broad stock market.
In Monday's blog on crude oil I wrote:
"Directional momentum in this market is currently mixed bullish and bearish. If prices can snap back up and exceed that double top area (around $42.50 - May contract), it can turn bullish."
This week crude prices did snap back up. They closed today at $46.63 so this market has turned bullish for the first time since July 2015. This means our trading strategy in crude should now be to buy any corrective declines. We may get one soon as the current high could lead to a subcycle peak in the current reversal zone this week or next. On the sidelines of crude oil for now.
We are now approaching the center (April 22) of a strong reversal zone for gold and silver (and other markets) and both metals (especially silver !) are rising into it. Silvers's strong surge yesterday and today supports the idea that silver began a new medium-term cycle on April 1. The start of a new cycle is always bullish (as this one is), but this cycle could also peak early and prices could start to fall again. Supporting this idea is the fact that prices are rising into a strong reversal zone and silver is making a new yearly high while gold's rally has not yet even exceeded it's high from last week. This is a strong case of intermarket bearish divergence in a reversal zone which suggests an imminent reversal. COT (Commitment of Traders) charts also continue to show Commercial traders (smart money) to be very bearish on the precious metals which does not bode well for prices (at least short-term).
More evidence for a reversal in these metals now is coming from the chart of the U.S. Dollar Index. The dollar has backed down this week and is again testing strong support at 93 - 94. We are now in the dead center of a reversal zone for currencies so we could see the dollar start to rally back up again from this strong support. What could trigger such a reversal and rally? Tomorrow morning (Eastern U.S. time) European Central Bank President Mario Draghi will give a press conference and will comment on current ECB policy. In his last press conference, Draghi enthusiastically announced a generous stimulus package for the eurozone economy which included more QE (quantitative easing) and further interest rate cuts into negative territory. The euro fell dramatically on that news but then shot back up when Mr. Draghi added that this would be the last rate cut from the ECB. Some analysts feel that Draghi may have changed his mind about this and could hint at more rate cuts during tomorrow's press conference. If he does, the euro could fall again and push the dollar higher as well as send precious metal prices back down.
Based on all of the above we will try and go short tomorrow in both gold and silver for what could be a significant correction in both metals. Draghi is expected to speak at 8:30 am EDT (an hour before markets open here in the U.S.) so we should wait to see the effect this has on precious metal prices before trading. We may go short early in the morning so stay tuned. We will have to abandon our bearish strategy if gold makes a new yearly high (i.e. moves above $1,283) as this would negate the intermarket bearish divergence with silver. On the sidelines of gold and silver but now looking to short both metals.
If Draghi does hint at more rate cuts from the ECB tomorrow morning this could have a bullish effect on the broad stock market and kick the current equity rally higher. This market is already being lifted by recent accommodating money policy statements from both the ECB and the Federal Reserve, but the rally is now moving into the center of a strong reversal zone that could trigger at least a short-term correction. It seems like the Fed wants to keep equity markets strong at least into the upcoming U.S. presidential election, and it would probably be unwise to bet against them. This is why I am reluctant to get too bearish on the broad stock market even though one could make a good argument for a strong correction now. The current medium-term cycles of the DOW, S&P 500 and NASDAQ could be peaking in this strong reversal zone and getting ready to move down to their final cycle bottoms, but that corrective fall may not be very severe if the Fed gets its way. Nevertheless, we are market timers, and because we are looking at a potential medium-term cycle correction from its peak, it could be significant and worth trading. We are still looking for a top this week or next to sell short. This week the DOW is breaking above 18,000 and is exceeding the peak of its last medium-term cycle, and this is very bullish, but the S&P 500 and NASDAQ are still below their previous medium-term cycles so we are getting an intermarket bearish divergence signal here as well. If the S&P 500 can get above 2,117 (it is close) it will weaken this bearish indicator. Directional momentum is still nearly 100% bullish in all three indices so I would like to see a few more bearish signals this week or next before selling this market short. Still on the sidelines of the broad stock market.
In Monday's blog on crude oil I wrote:
"Directional momentum in this market is currently mixed bullish and bearish. If prices can snap back up and exceed that double top area (around $42.50 - May contract), it can turn bullish."
This week crude prices did snap back up. They closed today at $46.63 so this market has turned bullish for the first time since July 2015. This means our trading strategy in crude should now be to buy any corrective declines. We may get one soon as the current high could lead to a subcycle peak in the current reversal zone this week or next. On the sidelines of crude oil for now.
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