My last blog on the broad stock market made it obvious that we were contemplating selling short soon. We have a very strong bearish divergence signal as the DOW and S&P 500 have not exceeded their all-time highs from February while the NASDAQ did this in June and even made a new all-time high this week. That all-time NASDAQ high on Monday was inside a strong reversal zone as was the DOW's most recent weekly high on July 15. The S&P 500 made a new weekly high today (before falling), and even that high is within our extended reversal zone. All three indices fell heavily today and closed with significant losses. These are all bearish signals, and the timing is right for a final medium-term cycle correction in all three indices (with the possible exception of the DOW which could have started a new cycle on June 26).
Let's place a close stop loss on our short trade at today's high in the S&P 500 (3,280) and that July 15 high in the DOW 27,071). If we see those highs break tomorrow or even early next week, it could mean more rallying to a top in our next reversal zone July 28 - Aug. 4 (or even into another reversal zone coming up Aug. 12 - 19). But those reversal zones are not as strong as this week's and especially last week's reversal zones so it seems more likely the market is rolling over now.
As I mentioned in Monday's blog, a strong incentive for selling short here is the strong possibility that the recent NASDAQ all-time high and the February all-time highs in the DOW and S&P 500 represent the final tops in two long-term equity cycles (4 year and 6.5 year). If that's the case, a MAJOR correction in the broad stock market is starting which could last into 2021-2022 with a loss of 20% - 50% or even more. Even if the big correction did not start yet and we see another rally to new all-time highs into the fall, a final medium-term cycle low is still due soon in the S&P 500, NASDAQ, and most likely the DOW. We thus have good reasons to be short now (with a very tight stop loss).
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