CRUDE OIL TRADE ALERT, MARKETS UPDATE, and COMMENT ON THE FED MEETING (9:00 pm EST)
As expected, the Federal Reserve concluded its monthly meeting on Wednesday with no change to its key interest rate. Chairman Jerome Powell said in his press conference after the meeting that Fed officials are likely done raising interest rates because inflation has cooled substantially. To quote Mr. Powell: "Inflation keeps coming down, the labor market keeps getting back into balance and, it’s so far, so good." (Note that "so far, so good" suggests that any change for the worst in inflation and the labor market could bring back more rate hikes. Just saying.) Furthermore, Fed officials signaled today that they expect to make 3 (three) quarter-point cuts next year, although it's still not clear when they will start. Many investors are hoping to see cuts as early as March, but most economists are expecting the first cuts to be later - probably around June.
The broad stock market enthusiastically cheered this dovish rhetoric from the Fed as a flat market shot straight up after the Fed's statement was released at 2 PM and continued to rise steeply during Powell's press conference. So it looks like the "Santa Claus" rally may be "full speed ahead" for the final stretch into New Year's day. Well, maybe. But we need to consider several other things here.
This market has been rising steeply for six weeks without a significant correction, so it is entitled to a "breather", and the timing is right (and ripe) for a sub-cycle correction in the current medium-term cycle. Furthermore, we are now inside a strong general reversal zone (Dec.12 - 21). And lastly, the DOW soared to a new ALL-TIME high today while both the S&P 500 and NASDAQ remain below their all-time highs (the S&P 500 is close, but the NASDAQ is well below its Nov. 2021 high). This gives us a strong intermarket bearish divergence signal (inside a strong reversal zone in an overripe and "toppy" market). Hence the strong case for an imminent reversal and correction. On the other hand, it's the "Santa Clause" season (bullish), the Fed just gave this market a strong signal to rally, and as we have seen in the past, "reversal" zones pointing down can sometimes correspond to upside "break-outs" instead of reversals (not common, but it can happen, especially in strong bullish markets, which we seem to be in now).
Well, it's obvious that my long-winded analysis here is pointing to one conclusion, and that is: we can't tell which direction this market is going to go right now (LOL). We can take comfort, however, from the fact that we are on the sidelines and not vulnerable to any unexpected moves. Our strategy now is still to look for a significant sub-cycle correction down to buy (as long as it doesn't go too low). Right now that could just be a 3 - 8 day corrective decline to fall between the 15-day and 45-day moving averages (that would be around 35,000 - 35,500 in the DOW). If instead this market continues to push higher past next week, we may have to wait a bit longer for a correction. We remain on the sidelines of the broad stock market for now.
A dovish Fed is usually not good for the U.S. Dollar Index, and today was no exception. The greenback dropped steeply to a new weekly low (102.78). We note, however, that we are near the center of a reversal zone specifically for currencies (Dec. 06 - 18). We got an isolated high last Thursday and Friday inside this reversal, so this corrective drop is not unexpected. But this reversal zone lasts through next Monday, and it overlaps with our strong general reversal zone Dec. 12 - 21. This means we could see an isolated bottom this week or next and a reversal back up. There is a strong support line near 102 that could become the base for another rally. If this happens, it could put downward pressure on precious metal prices.
Not surprisingly, as the U.S. dollar plummeted, gold and silver prices shot up, but not before making new weekly lows. Those lows happened in the first day of our reversal zone specifically for precious metals (Dec. 13 - 21) and the second day of our general reversal zone (Dec. 12 -21). This means today's lows could be the sub-cycle bottom we've been anticipating; however, it is very early in this reversal zone, and prices didn't quite reach our targets of at least $1950 in gold and close to $22 in silver. Let's stay on the sidelines of these metals for now.
As I mentioned in my blog on crude oil yesterday, we could be seeing the formation of the bottom of a medium-term cycle (and possibly a longer-term 4 year cycle as well) right now. Today was the last day of a reversal zone specifically for crude and the second day of our general reversal zone. Crude tested a trend line near $67 and bounced off of it to close near the top of today's range. This looks like it could be a good place to buy. We can set a close stop loss for this trade on a close below $67. I am going to put an order to go long in crude oil for tomorrow's market open.
As expected, the Federal Reserve concluded its monthly meeting on Wednesday with no change to its key interest rate. Chairman Jerome Powell said in his press conference after the meeting that Fed officials are likely done raising interest rates because inflation has cooled substantially. To quote Mr. Powell: "Inflation keeps coming down, the labor market keeps getting back into balance and, it’s so far, so good." (Note that "so far, so good" suggests that any change for the worst in inflation and the labor market could bring back more rate hikes. Just saying.) Furthermore, Fed officials signaled today that they expect to make 3 (three) quarter-point cuts next year, although it's still not clear when they will start. Many investors are hoping to see cuts as early as March, but most economists are expecting the first cuts to be later - probably around June.
The broad stock market enthusiastically cheered this dovish rhetoric from the Fed as a flat market shot straight up after the Fed's statement was released at 2 PM and continued to rise steeply during Powell's press conference. So it looks like the "Santa Claus" rally may be "full speed ahead" for the final stretch into New Year's day. Well, maybe. But we need to consider several other things here.
This market has been rising steeply for six weeks without a significant correction, so it is entitled to a "breather", and the timing is right (and ripe) for a sub-cycle correction in the current medium-term cycle. Furthermore, we are now inside a strong general reversal zone (Dec.12 - 21). And lastly, the DOW soared to a new ALL-TIME high today while both the S&P 500 and NASDAQ remain below their all-time highs (the S&P 500 is close, but the NASDAQ is well below its Nov. 2021 high). This gives us a strong intermarket bearish divergence signal (inside a strong reversal zone in an overripe and "toppy" market). Hence the strong case for an imminent reversal and correction. On the other hand, it's the "Santa Clause" season (bullish), the Fed just gave this market a strong signal to rally, and as we have seen in the past, "reversal" zones pointing down can sometimes correspond to upside "break-outs" instead of reversals (not common, but it can happen, especially in strong bullish markets, which we seem to be in now).
Well, it's obvious that my long-winded analysis here is pointing to one conclusion, and that is: we can't tell which direction this market is going to go right now (LOL). We can take comfort, however, from the fact that we are on the sidelines and not vulnerable to any unexpected moves. Our strategy now is still to look for a significant sub-cycle correction down to buy (as long as it doesn't go too low). Right now that could just be a 3 - 8 day corrective decline to fall between the 15-day and 45-day moving averages (that would be around 35,000 - 35,500 in the DOW). If instead this market continues to push higher past next week, we may have to wait a bit longer for a correction. We remain on the sidelines of the broad stock market for now.
A dovish Fed is usually not good for the U.S. Dollar Index, and today was no exception. The greenback dropped steeply to a new weekly low (102.78). We note, however, that we are near the center of a reversal zone specifically for currencies (Dec. 06 - 18). We got an isolated high last Thursday and Friday inside this reversal, so this corrective drop is not unexpected. But this reversal zone lasts through next Monday, and it overlaps with our strong general reversal zone Dec. 12 - 21. This means we could see an isolated bottom this week or next and a reversal back up. There is a strong support line near 102 that could become the base for another rally. If this happens, it could put downward pressure on precious metal prices.
Not surprisingly, as the U.S. dollar plummeted, gold and silver prices shot up, but not before making new weekly lows. Those lows happened in the first day of our reversal zone specifically for precious metals (Dec. 13 - 21) and the second day of our general reversal zone (Dec. 12 -21). This means today's lows could be the sub-cycle bottom we've been anticipating; however, it is very early in this reversal zone, and prices didn't quite reach our targets of at least $1950 in gold and close to $22 in silver. Let's stay on the sidelines of these metals for now.
As I mentioned in my blog on crude oil yesterday, we could be seeing the formation of the bottom of a medium-term cycle (and possibly a longer-term 4 year cycle as well) right now. Today was the last day of a reversal zone specifically for crude and the second day of our general reversal zone. Crude tested a trend line near $67 and bounced off of it to close near the top of today's range. This looks like it could be a good place to buy. We can set a close stop loss for this trade on a close below $67. I am going to put an order to go long in crude oil for tomorrow's market open.
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