Over the last several months we have been seeing a strong rally in the broad stock market that has been driven by a combination of "Trumphoria" (i.e. Wall Street's approval of Trump's pro-business policies) and the end of a tax year where many aging baby boomers are making significant final deposits into their retirement plans. However, we are now in a strong reversal zone. Last Thursday I wrote:
"This rally may be running out of steam. We should be looking for a top to sell short now, but we have to be careful because we have the potential for a "blow-off" top within this reversal zone which could extend through March 7. If we get a case of bearish intermarket divergence next week (where one or two of these indices, but not all three, make(s) a new high), that may be a good signal to sell short."
We are now (today and tomorrow) at the dead center of this strong reversal zone for equities where the probability of a top followed by a reversal down is high. The DOW and S&P 500 are making new weekly (all-time) highs today while the NASDAQ (at the time of this writing - 3:30 pm EST) is still below its high from last week (but is quickly approaching it). If the NASDAQ also breaks to a new high, we will lose this potential intermarket bearish divergence signal. Considering the strong bullish forces driving this market (mentioned above), I am staying on the sidelines today. It is going to be hard to call a top in this reversal zone, but one signal we can watch for is in the March contract chart of the S&P 500 index. If this index starts closing below 2,354, and especially below 2,325, it may be a good time to sell short. Longer-term, it is starting to look like once we get this correction, equity markets could start another strong rally (a new medium-term cycle) to yet new all-time highs over the next several months. If that happens, we will be especially interested in selling short the top of that rally as it could be followed by a very severe correction in these markets. For now, we will watch for a less dramatic (but significant) reversal that could start any day this week or early next week. Still on the sidelines of the broad stock market.
As usual, gold and silver charts are giving us mixed signals and making it hard to call this market for short-term trading. Both metals have been rallying into this current reversal zone (which is valid for several markets), and so we are looking for a top to sell short in this market too. Today the contract charts for gold silver are showing new weekly highs for both, but the spot price charts (which are what we normally follow) are showing a new high for gold but not for silver (i.e. intermarket bearish divergence). These mixed signals are making me reluctant to sell short, especially as gold has not yet touched our upward minimal price target of $1,270. If a correction starts now, gold prices may only pull back to a support level around $1,220. We will watch price movements carefully this week. On the sidelines of gold and silver for now.
Crude oil prices rallied to $54.60 early in the day but then backed down and are closing near $54. It is still possible to see prices spike up into the $55 - $57 range for the top of this current sub-cycle, but they have to do this over the next several days. Otherwise, we will have to consider last Tuesday's high at $55.03 (April contract chart) to be the top for this sub-cycle with lower prices ahead as the sub-cycle bottoms. Holding my long position in crude oil for now. We are using a close below $52 as our stop loss, but more conservative traders may wish to raise that to a close below $53.