After looking over the charts of the broad stock market over the last few days, I can see two likely scenarios that could unfold going forward (one bearish and one bullish):
1) Our preferred scenario of the DOW and S&P 500 starting new medium-term cycles from their Oct. 29 lows. In this scenario, both indices have turned bearish because they have broken below the Oct. 29 lows that started their cycles. This means that they will likely continue lower over the next 6 - 14 weeks to their final bottoms, and we should be looking to sell short at the top of any short-term rallies (such as the one we are having now).
2) Because of the strength of last week's steep rally on Thursday and Friday, it's possible that last Wednesday's deep bottom (21,712 in the DOW and 2,346 in the S&P 500) was the start of new medium-term cycles in these two indices. In other words, the current medium-term cycle could have started then and not on Oct. 29 as described above. This scenario would be bullish, and the rally that started last week could continue for several more months (with corrective dips along the way). Such a rally could easily make new all-time highs in one or both indices, and our trading strategy now would be to look to go long on any short-term dips.
So how will we know which scenario is playing out? Well, if Scenario 1 is valid, then the current sub-cycle rally would be short-term and could get to the 24,500 level and possibly as high as 25,600 in the DOW before turning down.. If we get to those levels in a strong reversal zone and the market seems to be stalling, that may be a good spot to sell short. On the other hand, any break above the Nov. 28 high of 26,277 would suggest that Scenario 2 is playing out.
We are about to enter a very strong and long reversal period for equities that runs from Jan. 1 - 17 (and maybe even into Jan. 28). Likely turning points in this reversal zone would be Jan. 4, Jan. 14, and Jan. 23. If equities turn down now and move lower into the end of this week then that would be an argument for Scenario 1. But if they continue higher into any of these new reversal points then Scenario 1 or 2 is possible (and very likely Scenario 2 if the DOW can get above 26,277). I realize this is all a bit confusing, but I will post trade alerts when any trading opportunity arises. For now, let's plan on selling short if we see the market rise and stall somewhere in that 24,500 - 25,600 range (or maybe lower) with a stop loss based on a break above 26,277. On the sidelines of this market for now.
In last Thursday's blog on precious metals I wrote:
"...gold and silver are rallying strongly this week which is forcing me to reconsider the idea that gold started a new medium-term cycle on Nov. 13 (at $1197). If that is true then the cycle is still young and bullish and not moving to a final cycle bottom in a couple of weeks as I speculated in my last blog on these metals. Silver is breaking above its Nov. 2 high of $14.90 which may mean that, like gold, it too could have started a new medium-term cycle in mid -November (with the low of $13.89 on Nov. 14). Even if both metals are starting new (bullish) cycles, they are due for at least a sub-cycle correction right now. Let's wait and see if we get one and how low it will go."
All of this still applies as both metals edged even higher today. That Jan. 4 reversal date for equities might also be a turning point for a high in these metals. If not, a strong reversal zone specifically for gold and silver is coming up Jan. 9 - 17. Let's wait for a correction and a bottom to buy. If gold started a new cycle on Nov. 13, prices could move down to the $1243 area. But if gold is still completing an older cycle, it could go lower, say to the $1220 area. Both areas would be buy spots. Silver could drop back as low as $14.20. On the sidelines of gold and silver for now.
A belated MERRY CHRISTMAS and HAPPY NEW YEAR to all readers of the blog!