It doesn't take much to spook a jittery stock market. Today's 200 point drop in the DOW after Fed chairman Ben Bernanke spoke late in the afternoon about the possibility of tapering off QE (perhaps later in the year and only if the unemployment rate goes down) shows just how volatile this market can be. Mr. Bernanke did, however, express optimism about the economy which perhaps led many investors to see rising interest rates as being just around the corner. It is too early to tell if this knee jerk reaction to Bernanke's comments will trigger a major sell off or if the market recovers quickly (as it often does following abrupt reactions to statements by the Fed). Despite its 200 point drop, technical momentum in the broad stock market remains unchanged (mixed bullish and bearish signals) and so the direction is still ambiguous for the moment. If fear takes hold of this market we might get an early start to that major correction I was expecting later in the summer (possibly 10% or more), but we will have to wait and see how prices behave tomorrow and Friday before considering this possibility. Still out of this market.
Gold and silver also disliked Bernanke's statements as both metals dropped sharply in late afternoon trading. This is not that surprising as directional momentum in the precious metals has been consistently bearish for the past several months. Today many gold and silver mining company stocks negated some of their recent bullish signals and turned bearish. As I've mentioned in previous blogs, the stock prices of precious metal mining companies often lead the actual price of gold and silver metal, so the entire precious metal sector is very bearish at the moment. As with the broad stock market, we will have to wait and see if this is just a knee jerk reaction to the Fed's statements or a legitimate bearish development that will lead to lower prices. Still out of both gold and silver.
This afternoon (around 3:30 pm EST) I posted a trade alert for crude oil and went long in this market. Crude oil, which usually follows the broad stock market, also fell in afternoon trading but not as severely as the DOW, perhaps buoyed by the worsening Syrian conflict. Oil is now dropping some more in the overnight market (U.S.time), but momentum signals remain bullish. I made this trade because there is a strong potential now for a significant short-term rally that could reach the $105-107 price range; however, I am prepared to bail out quickly should chart signals turn bearish. We will need to watch the price carefully tomorrow. If any traders were unable to go long before the market closed, I would hold off placing a trade until we see how the price moves tomorrow.