In last Thursday's blog on the broad stock market I wrote:
"We are also now in our new reversal zone (Jan. 22 - 29) so there is a good chance the broad stock market is going to turn down here....One bearish force on the markets over the last few days has also been from China - the news of a mysterious and deadly new corona virus that seems to be spreading rapidly in that country and has now been detected in the U.S. This alarming news story could linger and give the jitters to an already nervous and overbought stock market."
It looks like this is happening as news of the spreading coronavirus rattles Wall Street and the DOW takes a 454 point plunge today. Holding on to our short position in the NASDAQ is now paying off, and it looks like the steep correction we had been anticipating is in progress. This correction should be the final correction of the current medium-term cycle in all three market indices (DOW, S&P 500, and NASDAQ). As such, it could be steep and deep (assuming bullish forces don't truncate a "normal" correction). In the DOW, we should get at least down to 28,000, but it may drop a lot more. An 8% correction is a strong possibility which would bring the DOW down to the 27,000 area. There is even the possibility of testing the start of the cycle which was 25,743 on October 3.
A normal corrective drop to the final cycle low would take around 2 - 5 weeks (a bit longer if the market is really turning bearish), and this is the second week in the drop (from the Jan. 17 all-time high of 29,373). That means the correction could be over by the end of this week. We'll consider covering our short position this week and taking profits if a bottom appears to be forming, especially near one of the DOW targets mentioned above. But I think there's a good chance the correction may bottom in our next reversal zone coming up in the first two weeks of February. If it does, that's where we'll take our profit and most likely switch to a long position (as long as the correction stays above that 25,743 October low). For now, we will hold our short position in the broad stock market.