Sell Signals on U.S. Equity Markets, Buy Signal on Gold

Dow Jones Industrial Average and the U.S. Equity Indices
The U.S. equity markets were in heavy selling mode when they opened at 9:30 this morning. There were several factors that contributed to the heavy selling. These factors include reports that North Korea is testing nukes, reports that AAPL may cut its IPhone 6s and 6s Plus production by 30% in the current quarter, the fear of the economic slowdown in China, and the decline in crude oil prices.

On November 27th I stated that if the Dow Jones Industrial Average got into the 17800-18400 range I would look to sell and be 100% in cash. In the first week of December the Dow Jones Industrial Average got up to the 17880 level and is now down about 900 points from that level.

Today the Dow Jones Industrial Average closed down about 250 points, closing at the 16900 level. The U.S. equity indices are now somewhat oversold and as of today’s close I have sell signals on the Dow Jones Industrial Average, S&P 500, NASDAQ, and Russell 2000 on the daily charts. I am now waiting for a bounce to start working off the somewhat oversold condition and get to a somewhat overbought condition where I would look for opportunities to get short. I would be looking to short the QQQ (NASDAQ), SPY (S&P500), DIA (Dow Jones Industrial Average), and the IWM (Russell 2000); ETFs which mirror the major U.S. equity indices. I am expecting this bounce to possibly bring the Dow Jones Industrial Average into the 17250-17400 range.

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FOMC Minutes

At 2:00 today the minutes for the December FOMC meeting were released. In the December meeting the FOMC decided to raise interest rates by a 0.25%. This was the first rate increase in around 9 years after holding rates at 0% for 7 years. The Federal Reserve is stating that their real fear is inflation and that they are confident that their inflation target of 2% will be met sometime in 2016. I do not see this target being met. Inflation is currently at around 0.5% and we are seeing major deflation in commodity prices. Brent crude got to its lowest levels since 2004. The minutes also showed that they would be looking to gradually increase interest rates and that the decision would be data dependent. The minutes failed to emphasize the global economic slowdown, specifically in China. In October the Federal Reserve stated they would be monitoring this. I do not believe the Federal Reserve will be looking to raise interest rates in the first meeting of the year. The markets are telling us that they are fearful of the slowdown in China as well as the possible slowing of the U.S. economy. I am not calling for a recession in the first three quarters of 2016. I believe it could possibly come in the end of the fourth quarter but I definitely see a recession going into 2017.

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Crude Oil

At 10:30 the EIA Petroleum Status Report showed a decline in crude oil inventories by 5.1 million barrels, an increase in gasoline inventories by 10.6 million barrels, and an increase in distillates inventories by 6.3 million barrels. Despite the bullish crude oil inventory number, the massive increase in gasoline inventories put heavy selling pressure on crude oil. Crude oil was down about 6% today trading down to the 33.70 level before closing above the 34 level. I stated that there was a gap in crude oil at the 34.70 level and that I would be looking to buy crude oil in the 32.90-35.50 range using a 31 stop. Crude oil filled that gap at 34.70 and entered my range. I am looking for a push up from this extreme oversold condition to the 37-39 range where I would look to exit any long positions.

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Gold

I have been saying that 1040 is a big number for gold. Gold got down into the 1040-1050 range a couple times but the 1040 level held. I have stated that because of the way gold has been trading I believe the gold bugs do not expect the Federal Reserve to continue to raise interest rates. This mindset can be attributed to the slowdown in China as well as the weak U.S. economic numbers we have been seeing. U.S. economic numbers including GDP, existing home sales, pending home sales, and new home sales are not showing a robust economy. I stated that I would be looking to buy gold if it got into the 1045-1060 range. On December 31st gold traded down to 1056.50 and then shot up from there. I stated that I would be looking to exit any long positions in gold in the 1079-1083 range. Today gold traded as high as 1094 and as of today’s close I have a buy signal on gold on the daily chart. I am now looking a pullback in gold to present a good buying opportunity.

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