Q4 got underway with a welcome 2%+ gain for the Bulls on very strong Advance/Decline data which should help prices extend in the days ahead. Nine sectors rose more than 2% while over four etched out 3%+ gains which looks constructive during a time when Equities are due to carve out an initial trading low. While many rightly require additional technical improvement before weighing in positive, my thinking has more to do with sentiment and cycles than a true change of technical structure at the very bottom of a decline. Overall, I think that the risk/reward certainly favors betting on an above-average bounce in the “Bear Killer” month of October, and upside gains should be likely as part of a bearish downtrend which might very well reach 3890 initially and then possibly 3953 before any backing and filling. While October certainly could prove volatile, the odds favor good performance in mid-Term Election year Octobers with average gains at +1.0% vs. average October gains of +0.3%. Bottom line, I like playing for this advance to extend, regardless of if some “pieces of the puzzle” might not be completely in line. I’m betting that markets are higher between now and year-end, and Monday’s bounce should allow this week to produce a good trading low with any further downside likely proving limited for now given such rampant pessimism and oversold conditions.
Reasons why Markets should bottom out and rally in Q4
I’ve discussed in recent weeks why October is important, and why the first part of this October particularly stands out as having a heightened chance of a reversal. Today was likely an important first step to this process.
While markets did NOT correctly signal a DeMark-based Sell on Treasury yields ahead of Monday’s surge, I do feel like this should materialize sometime this month, and could also bring about a downward reversal in the US Dollar. Both Yields and USD have preempted their exhaustion signals and turned down sharply as of Monday.
Overall, it’s tough to stand in the way of a market bounce given that I’ve expected this should be likely this week. Therefore, I’m willing to stand by my call for markets to bottom this week, and that any dips likely should prove buyable and turn higher in the weeks to come.
While the shape, technical structure, and group participation during any bounce will be paramount to study closely before expecting rallies to have any meaningful longevity, I do feel that enough factors are in place to allow rallies to extend, regardless of this happened early in the week. Some of the reasons “why” markets can rally are discussed below.
Silver helping Precious Metals gain some Luster
Monday’s spike in Silver back above $20 helps to bolster the view that precious metals have started to turn higher.
This above-average 7%+ gain broke out above early September peaks as well as exceeded the mild downtrend which has been in place since June.
Silver had taken an early lead in turning up back on 9/12 with its big rise on heavy volume, and Monday’s volume should come in even heavier as prices likely close the day at the highest levels in more than a month.
As has been discussed, the CFTC commercials had turned positive on Silver for the first time in over three years. In addition, Large Speculators remain short. Thus, for the first time this year, we’ve seen some meaningful divergence in CFTC positioning that makes fighting this six-month downtrend quite appealing.
It’s thought that Gold will begin to move higher as well, but Silver remains a higher beta play, and should be overweighted among the pair for better outperformance from October into December of this year.
ETF’s like $SLV, or the leveraged $AGQ (for those whose risk tolerance allows for such) can help investors gain some exposure to Silver, while stocks like $AG, $PAAS, $SVM or $FSM might be some that investors should take some time to consider.
Gold Miners Bullish on Monday’s Strong breakout
Gold stocks look to be following suit on the above-average push higher of precious metals and the VanEck Gold Miners ETF (%GDX) has just exceeded its intermediate-term downtrend extending bac k since June of this year, over three months ago.
This looks important and positive for $GDX, and rallies up to initial resistance near $25.60-$25.85, then $27.50, then up to $29.20 without much trouble.
Reasons for technical optimism include: 1) Structural improvement 2) Positive momentum divergence 3) DeMark downside exhaustion on Gold and Silver on a daily/weekly basis.
Overall, this upward push looks to be starting as of today, Monday 10/3, and additional upside looks likely between now and end of year, and should follow-through more this week, despite Monday’s surge.
