The steep drop in the broad stock market on Friday was followed by another steep drop today. Unless this market can snap back strongly tomorrow, it looks like our chances for a "Santa Claus" rally are almost gone. Instead, we may be seeing a strong plunge into our next strong reversal zone (Dec. 21 - 31) and possibly the final bottom in the current medium-term cycles of all three indices (DOW, S&P 500, NASDAQ). Does this mean that the longer-term correction in equity markets that we have been discussing recently has already started? Very possibly - that is, if this market continues down tomorrow and into the end of the week. Some "lines in the sand" to watch now:
The DOW closing below 34,000, and especially below 33,613, would be very bearish.
The S&P 500 closing below 4,495, and especially below 4,278. would also be very bearish.
The NASDAQ is today already testing its Dec. 3 low of 14,931. If that breaks, the next support is down at 14,181, and if THAT breaks, the NASDAQ (and most likely the other two indices) will be well on their way to a longer-term serious correction.
If a major longer-term correction is starting now, we will most likely wait for the final medium-term cycle bottom (due soon) and short sell the top of a modest rally that follows from that significant bottom. We are still on the sidelines of this market.
Last week gold probably completed its medium-term cycle with Wednesday's low at $1759 while silver likely made a significant mid-sub-cycle low at $21.44 on that same day. Both metals have rallied from there, but they are facing a headwind as they rise into a reversal zone specifically for the precious metals Dec. 14 - 22. We are also entering a general reversal zone for all markets (Dec. 21 - 31). I am not keen to buy if a top forms inside these reversal zones, so let's stay on the sidelines of both metals for now.
In my last blog on crude oil (Dec. 13), I wrote:
"There are two possible scenarios for crude oil right now. One is bearish and the other could be very bullish.
The bearish scenario says that the deep low of $62.43 (Jan. contract chart) on Dec. 2 was a sub-cycle low near the end of an old medium-term cycle. This should be followed by a short and modest rally to a sub-cycle top and then a final plunge to the end of the medium-term cycle below $62.43.
But it is also possible that Dec. 2 low was the end of the old medium-term cycle and the start of a new one. Furthermore, it may also be the start of a new longer-term (17 month) cycle. If this is true, crude could be VERY bullish now with prices ready to surge above the $83.83 high of October 25."
It's starting to look like the first (bearish) scenario is playing out here as crude prices seem to be following the current steep drop in equity markets. If this is true, crude should be falling to test or break below the Dec. low at $62.26 (Feb. contract chart) to form the final cycle bottom. Wherever that bottom ends up, it could be a good spot to buy. For now, we remain on the sidelines of crude.