In last Monday's blog on the broad stock market I wrote:
"...we are certainly seeing a move towards a bottom, but where will it stop? That is an important question because we are already well below our initial target for a low (26,600), and it is still early in the reversal zone (it ends Wednesday next week). If Wall Street's panic over "trade wars" subsides, we could see a bottom and a bounce back up, but if those fears persist, well, this market could be in trouble. A new target for a sub-cycle bottom could be around 24,900 - 26,200 (a wide range) in the DOW and 2,770 - 2,900 in the S&P 500 (we are in these ranges now). What we don't want to see is the DOW below 24,680 or the S&P 500 below 2,728 (the starting points of their current medium-term cycles) as that would be a sign the market is turning bearish. We will wait to see if markets stabilize or push lower over the next several days."
OK. The DOW did push a bit lower into last Wednesday (it got to 25,440) but the S&P 500's weekly low was on Monday (2,822). The market then rallied sharply into the end of the week to regain a bit of the previous week's large loss. Today, however, equities are falling sharply again. Last week's lows were near the center of the current reversal zone for all markets (Aug. 6 - 14) so that could be a significant sub-cycle bottom. But that reversal zone is in effect until Wednesday, so these indices could still make new lows by then and replace that sub-cycle bottom. If only one or two (not all three) market indices (DOW, S&P 500, NASDAQ) make new lows, we could also get a bullish divergence signal which might be a good place to go long for a short-term rally.
As mentioned above, the target for these lows could be as low as 24,900 in the DOW and 2,770 in the S&P 500. But if they go lower (especially below 24,680 in the DOW and 2,728 in the S&P 500) we will stay on the sidelines as the current medium-term cycle (and maybe even the longer-term equity cycle) could be turning very bearish. The lows of last week were already low enough to suggest that any rally now would probably be short-term and would not exceed the all-time highs of two weeks ago.
If we don't get new lows this week, and a rally continues into next week, we might get a good opportunity to sell short a top in our next reversal zone (Aug. 21 - 29), especially if that top stays below the all-time highs of these indices. The bottom line here is that if we don't make new all-time highs soon, it looks like we may be seeing the start of a very significant correction in the broad stock market, and we may have to give up our previously bulllish outlook into the summer and early fall. A disintegrating U.S. "trade deal" with China seems to be a major factor tanking these markets now. If Trump can turn this around quickly, equities might resume their bullish rally, but that doesn't seem likely at the moment. Still on the sidelines of the broad stock market.
Gold rallied to a new high ($1511) yesterday (Sunday) but silver remains well below its high from last week ($17.24). We are thus starting off the week with a strong intermarket bearish divergence signal, and it is happening within the current reversal zone (Aug. 6 - 14). Both metals have been rising sharply over the last two weeks and are due for a correction. We will watch for this. A good target for a silver correction could be around $16. A target for gold is a little more difficult to call, but it could be as low as $1400. Despite these potential corrections, both metals are still looking quite bullish so we are looking to buy these corrective bottoms. On the sidelines for now.
It looks like we were "whipsawed" out of our long position in crude oil last week when prices plunged and closed well below our stop loss point but then snapped right back up to rally above it. This is always a possibility when stop losses are established in volatile markets, and we can't be faulted for having the self discipline to follow through with our stop sale. After adjusting for intraday fluctuation, it looks like last Wednesday's bottom in crude at $52.25 (Sept. contract chart) was not lower (as I originally thought) than the start of the current medium-term cycle on June 12 ($51.43), but was very close. If this is a double bottom to the June 12 low, that could be very bullish, but this very low correction could also mean that the cycle is turning bearish. If that is the case then the current rally will be short-lived, and we will soon see new lows. As with the broad stock market, our previously bullish view of this market may be changing. This would not be surprising as crude often takes its cues from the broad stock market. We will stay on the sidelines of crude until a bullish or bearish pattern establishes itself.