The DOW, S&P 500, and NASDAQ all made new weekly highs on Tuesday (note no intermarket bearish divergence) and have been falling steeply from those highs over the last three days. Tuesday was the second day of our current reversal zone (Feb. 26 - March 13) so that top was significant; however, because this reversal period continues into March 13, there is plenty of time for this market to make a significant bottom as well (yes, we can have two reversals in a reversal zone). If we assume that the DOW and S&P 500 started new medium-term cycles on Feb. 9, then there are two major scenarios that could unfold here - one bullish and one bearish.
Scenario 1 (bullish): The DOW and S&P 500 will make "double-bottom" lows near their Feb. 9 lows by March 13 and then reverse back up to rally to new all-time highs over the next several months.
Scenario 2 (bearish): Both the DOW and S&P 500 will break below their Feb. 9 lows and continue downward for three to five more months to the end of their cycles.
I am favoring the first scenario, but there is a cycle pattern in the NASDAQ that is making me think twice about the second one. It's possible the NASDAQ started its current medium-term cycle with its low of 6,734 on Dec. 6, 2017. If that is the case then this index has already gone below that low (it dipped to 6,630 on Feb. 9) which means it will continue lower until the end of its cycle which could be one to two months from now. This suggests that the DOW and S&P 500 could fall with it. On the other hand, the lack of a bearish divergence signal with Tuesday's highs suggests that those tops may not be that important, and this would support the bullish Scenario 1.
I realize this cycle analysis is a bit confusing, but our trading strategy doesn't have to be. We will watch for signs of a double-bottom low in this reversal zone (for example, the DOW or S&P 500 -not both- dipping a bit below its Feb. 9 low which would be a bullish divergence signal). By the way, those Feb. 9 lows were 23,360 in the DOW and 2,532 in the S&P 500. If both those lows break, we may still get a bottom in this reversal zone, but instead of buying we would probably wait and try to sell short the top of any relief rally as the market would likely be turning bearish. Still on the sidelines of the broad stock market.
Our decision to take profits in our gold and silver long positions on Monday was a good one as both metals dropped significantly over the last four days. They are now falling into the center of our reversal zone for precious metals (Feb. 27 - March 8). As long as gold holds above $1236 and silver holds above $15.63, we should be looking to buy another sub-cycle low in this reversal period. Yesterday both gold and silver made new weekly lows so we have no bullish divergence signal this week. Let's wait and see if we get one early next week and look to go long again in both metals if we do. Out of both gold and silver for now.
The U.S. Dollar Index made another valiant attempt this week to break through a strong band of resistance in the 90 - 91 area but failed and now seems to be backing down again. As I've mentioned in numerous blogs recently, the U.S. dollar could be on the verge of a serious meltdown. This might be averted (or at least delayed), however, if the greenback could break cleanly above 91. I don't think it will. Right now it looks like the dollar's breakdown will help fuel a major rally in the precious metals. Interestingly, next week we enter a reversal zone specifically for currencies. If the dollar pushes a bit higher next week, it would be a good time for a top and a major reversal down. This could end up being a good turning point for the precious metals to reverse up. We will watch for it.
Crude oil made a top on Monday at $64.24 (April contract chart) on the first day of crude's reversal zone (Feb. 26 - March 6). It then fell steeply all week and seems to be finding support just above $60. As with the broad stock market, we could see two reversals for crude in the current reversal zone. Crude's cycle pattern is ambiguous right now which is why we are on the sidelines. If crude can find support in this $60 area and rally back up, we could still be on track for higher prices over the next few months (possibly in the $72 - $76 price range); however, we still need to see that Jan. 25 high of $66.39 exceeded before we get too bullish. If prices break below the Feb. 9 low of $57.90 (especially after next Tuesday) then this market could be turning very bearish. Still on the sidelines of crude oil.