The markets were quite active yesterday (Tuesday), and this was at least partly due to the release of the U.S. jobs report for last month which was weaker than expected. This slowdown in job creation means the Fed will likely refrain from scaling back its easy money policy (QE) until next year. Wallstreet, of course, was cheered by this news and the stock market (which has become addicted to regular doses of QE) showed its approval with a 75 point rally in the DOW. A continuous flow of QE, however, is not healthy for the economy, and the stock market's enthusiasm for this desperate Federal Reserve tactic demonstrates how out of touch it can be with real economic conditions. Indeed, what is good here for Wall Street (more QE) is bad for Main Street (more unemployment).
Over the next three weeks all financial markets may be prone to frequent changes in direction and may give false trading signals that don't pan out. This is due to a configuration in financial astrology known as "mercury retrograde", and we therefore need to be especially careful when establishing trade positions.
Yesterday the DOW chart flashed an important bullish momentum signal and is now mixed bullish and bearish. The S&P 500 and NASDAQ both continue to be 100% bullish, so the overall directional momentum for the broad stock market is at least short-term bullish, and we may see the DOW reach for another all-time high soon. However, there are other technical, cycle and timing factors still pointing to an imminent significant correction in this market, and despite the upward momentum, I think it is a little late to be going long on what has been a steep rally over the last two weeks. All three indices (DOW, S&P 500, NASDAQ) are now approaching resistance zones, and I am going to wait and see if these can contain the current rally. If so, we may start to see a reversal down from these points. Still out of this market.
The promise of more QE (which is bad for the economy) was also liked by gold and silver yesterday (if economies collapse, gold prices soar) and both metals rallied strongly. Momentum in silver is now 100% bullish, but despite its strong surge up, gold remains 100% bearish. This means that directional momentum between these two metals is diametrically opposed at the moment and cautions us to remain on the sidelines. We are also in a time period (which started last week and is over at the end of this week) when the likelihood of precious metals making a significant reversal is higher than normal. Both metals are now approaching areas of strong resistance (gold at
$1350 -$1425 and silver at $23- $25), so if gold and silver are going to turn down again this would be a good place and time to do it. That said, there is still the potential now for an explosive breakout rally so we want to keep a watchful eye on those resistance zones. Still on the sidelines here.
Crude oil has broken its support just above $100 and, unlike the broad stock market, is falling steeply this week. As these two markets usually move together, this may not bode well for the DOW. Momentum in the crude charts is still mixed bullish and bearish, however, so the medium and longer-term direction is still not clear. The cycle picture for crude is also unclear at the moment, but it is possible that a new cycle bottom is forming with this current correction, and if so, the market could start to turn very bullish as a new cycle begins. We will watch for evidence of this in momentum and other technical signals. Out of this market for now.
I haven't dicussed the U.S. Dollar in my blog for some time, but it is clear to anyone looking at the chart of the U.S. Dollar Index that it has been breaking down since July. Directional momentum in the dollar has been 100% bearish over the last month. Not surprisingly, the most recent downleg of this correction was kicked off by a huge gap down in the index on October 17, the day after Washington's 11th hour "resolution" of the U.S. fiscal budget, suggesting global disapproval of the way our leaders are handling the U.S. economy. (China's rating agency Dagong downgraded its U.S. sovereign credit rating that day). So where is the dollar going from here? There is important and critical support for the U.S. Dollar Index at 78-79. The index is testing this area now, and if it breaks, the dollar could be in big trouble. Many financial analysts that I follow feel this support will hold and the U.S. Dollar will recover from here. I am therefore staying in the bullish camp for now (with a watchful eye on that support zone).