The recent fairly steady and regular rise in the broad stock market was punctuated today by a sharp selloff with the DOW dropping nearly 400 points at the time of this writing. One reason being given for this drop is the recent selloff in the bond market. Of course this could be a trigger, but as we know, equity markets are way overdue for a correction. Is it starting now? Maybe, but all three market indices (DOW, S&P 500, NASDAQ) were not able to make a new weekly high yesterday or today so we do not have any intermarket bearish divergence, a signal we like to see before a significant correction. We are also not in a reversal zone, but we enter a new one on Friday (February 2 -12). If the market can recover from today's plunge, there is still time for it to make new highs into next week's reversal zone (perhaps with a bearish divergence signal) and give us more confidence in selling short. Interestingly, President Trump gives his State of the Union address tonight. His last address before a joint session of Congress in March 2017 seemed to have an uplifting effect on equities. Can Trump "talk up" the markets again or has "Trumphoria" run its course? We will have to wait until tomorrow to see.
If equity markets are starting a significant correction now, we could see a very rapid plunge into next week's reversal zone for a possible final bottom to the current medium-term cycle. As I mentioned in Sunday's blog, this correction could take the DOW down to 25,000 or lower. If this happens, we will abandon any plans to short sell and just wait to buy at the cycle bottom.