Due to the many volatile issues arising now in the news (QE, debates on Obamacare funding, the debt ceiling, the possible shutdown of government, and the on hold Syrian crisis) the financial markets are also becoming volatile, and this makes short-term trading difficult. My observation (in last Friday's blog) that the stock market's surge after Bernanke's speech could be a short-term "sugar high" turned out to be correct as the DOW has been falling since then. There were some reports on Friday that Fed president James Bullard was talking about possible QE tapering in October should employment data improve. This may have spooked the market to give back the gains it had made from Wednesday's announcement of leaving QE unchanged for September. Several analysts that I follow seem to feel the Fed is bluffing with its threats of QE tapering (because it knows such action will tank the stock market) and that markets will soon start ignoring these statements. This may be true, but even if the Fed maintains QE, it may not be able to control rising interest rates, which is something the stock market fears even more than QE tapering. This, in addition to the imminent crises looming in the news, could still turn the broad stock market bearish and cause it to take a deeper correction before the year is over. But for now, momentum is still mostly bullish in the DOW, S&P 500 and NASDAQ, and we are approaching support levels in these markets. We could, therefore, get yet another bounce up to new highs before a deeper correction kicks in. At the moment, I think it is too risky to take a long or short position, so I am remaining on the sidelines.
Unfortunately, the price of gold and silver has been falling with the stock market (possibly due to the tempering of inflation fears) but seems to be finding some support just above $21 in silver and $1300 in gold. The timing and cycle scenario I discussed in last week's blogs that prompted me to enter long positions in both metals are still in effect (through the end of this week), and we could still see a rally here based on these factors. The sudden drop in metal prices on Friday was, however, a bearish signal that could cancel out an immediate rally. It is important now for the support level around $1300 in gold to hold or there is a danger of prices going to the $1200 area or lower. We will therefore use $1300 to define our stop loss area while also keeping in mind that prices need to turn up by the end of the week for timing and cycle factors to be valid. Please note that we are trading short-term here and that the longer term scenario for gold and silver that I have been describing for the last four months or so is still valid (see Brief Overview of Financial Markets for the Second Half of 2013). If gold and silver do fall significantly lower now, we will bail out of our long positions but will look to buy back aggressively at what will likely be the long-term cycle low in both metals before the year is over. I had been thinking we were going to get a final (short-term) rally in the precious metals (we still could) before a final plunge to the long-term cycle bottoms by the end of the year, but we now have to consider the possibility of seeing that plunge a little early. I want to emphasize here that the long-term bullish technical and cycle picture for gold and silver is still intact and all of the analysts I follow are in agreement on this. Once we are more confident of the long-term bottoms in these metals (before the year is over) we will be able to make more "buy and hold" trades with less focus on short-term trading. For now, though, we may have to bail out of our long positions this week if prices drop significantly lower. Holding our long positions in gold and silver with a close eye on the $1300 level in gold and $21 level in silver.
We have recently been avoiding the trading of crude oil as the unresolved Syrian crisis makes the price of crude potentially very volatile. A significant development in the chart of crude prices this week has been the appearance of a medium-term bearish momentum signal (long-term momentum is still bullish). This could be foreshadowing bearishness in the broad stock market since these two markets often move in sync with each other.
Standing aside crude oil for now.