Yesterday's plunge in the broad stock market was not a big surprise for us as we had been expecting this market to fall into our next reversal zone (which begins today and runs through April 2). The talk of pushing up the interest hike rate path in 2019 - 2020 at yesterday's Fed meeting combined with the widespread belief that the new Fed Chairman Jerome Powell will be a bit more hawkish than previous Chairwoman Janet Yellen was perhaps enough to spook this severely overbought market into a tumble. But there are also plenty of other things going on in the news these days (possible trade wars with China, a new cold war with Russia that could turn "hot" if Putin loses his patience with the West, instability in the Middle-East, etc.) to disrupt the stability of equities (as well as other financial markets). The big question right now is how far this "tumble" will go. Fortunately, our cycle and technical analysis can help us draw some parameters around this correction.
It is highly likely we will see this correction find at least a temporary bottom in this new reversal zone, most likely next week. The DOW and S&P 500 are now challenging the lows that should hold if this market is going to stay bullish (around 24,100 in the DOW and 2,650 in the S&P 500), but the real line in the sand for these indices would be their Feb. 9 lows ( 23,360 in the DOW and 2,532 in the S&P 500) because those are the lows that started the current medium-term cycle. If those lows are breached, the broad stock market will likely continue lower for many more weeks, if not months. (Note that even if that happens, there could still be a bottom in this reversal zone followed by a weak short-term rally and then a resumption of the correction.) Our trading strategy is still to buy a bottom, probably next week, above those Feb. 9 lows. I should mention here that it is always possible (but low probability) for a reversal zone to coincide with a breakdown (or breakout if the market is rising into it) where these indices would just "meltdown" and bypass any reversal. I don't think this will happen here, but given the highly volatile economic and geopolitical environment we are currently in, we should be aware of that possibility. The two things to watch are those Feb. 9 cycle lows in the DOW and S&P 500. If they break, the market could be in trouble. Still on the sidelines of the broad stock market.
Gold is continuing its strong rally today, which is good news for our long positions, and silver is also rallying, though not as strongly. One concern is that these metals are rallying into next week's reversal zone. Also, gold is now breaking above its high from last week while silver is not so we are getting an intermarket bearish divergence signal in a reversal zone. Both metals could take a dip here, but I don't think it will be that serious, especially for gold whose directional momentum just turned 100% bullish. If silver takes a correction next week and makes a new weekly low and gold stays above this week's low, that would be a very strong buy signal and a good opportunity for us to buy silver. Currently out of silver and holding my long position in gold.
This week's strong rally in crude oil is finding resistance at $66 (its high from Jan. 25), but crude is also most likely pausing because of yesterday's plunge in the broad stock market. Crude's strength right now is supporting our bullish view of the broad stock market; however, its strength may be coming from the recent increasingly aggressive rhetoric between the U.S. and Russia which exacerbates instability in the Middle-East (i.e Syria, and possibly Iran and Saudi Arabia). If that is the case then it would be possible for us to see the stock market crash and oil prices soar at the same time. Instability in the Middle-East is always a "wildcard' factor in analyzing the movement of crude prices. If equity markets stabilize now and start to rally again, crude would have two potentially bullish forces to push it higher. We may consider going long in crude oil next week if this happens. Out of crude oil for now.