After mulling over the charts of equity markets this week-end and reading the interpretations of several analysts, it seems to me that there are three scenarios that could play out now which I outline below. They are presented in order of probability with 1 or 2 being the most likely and 3 being the least likely.
Scenario 1 : This assumes that the DOW, S&P 500 and NASDAQ all completed a medium-term cycle with last week's lows on June 27 following the "Brexit crash" and are now starting new cycles. If this is the correct cycle interpretation then the broad stock market is now bullish and will likely rally for at least eight weeks and make new all-time highs. Because these indices are rising sharply into a strong reversal zone (now and most of this week), however, we may see a pullback this week from the current rally that will stay above last Monday's lows. This could give us a good opportunity to go long in the broad stock market.
Scenario 2 : Essentially the same as Scenario 1 but without a pullback this week. Occasionally a "reversal" zone can be a point in time when a market breaks out (or breaks down) dramatically instead of reversing. This is not common but can happen when markets are unstable and volatile (as they are now). If this scenario plays out, we will see the DOW, S&P 500 and NASDAQ continue their rallies this week and beyond on their way to making new all-time highs soon.
Scenario 3 : This assumes that the S&P 500, NASDAQ, and possibly the DOW did not yet make medium-term cycle bottoms and will do so soon at levels beneath last week's "crash" lows. I have been favoring this scenario and it has been my main reason for holding a short position in the broad stock market. Last week's strong rally, however, suggests that these indices bottomed last week and are starting new cycles.
I am currently favoring Scenario 1 with Scenario 2 a close second and Scenario 3 being the least likely (but still possible). Some conservative traders may have already covered their short position in the broad stock market based on suggestions in my recent blogs, but if you are still short (as I am) you may want to cover this position now.
Based on the likelihood of a pullback this week, however, it may be best to hold short positions (with a stop loss based on the S&P 500 closing above 2,130) and wait for a better exit point. (That 2,130 level is just slightly above our entry point for our short position and would produce a minor loss if triggered.) We need to be very alert and nimble this week as we could be covering short positions and going long around the same time. Stay tuned.
Holding my short position in the broad stock market for now (with a stop loss based on the S&P 500 closing above 2,130) but looking to cover and reverse to the long side soon.
In last Thursday's blog on gold and silver I wrote:
"...gold and silver's medium-term (and maybe long-term) cycles seem to be turning very bullish. This means we should be looking for opportunities to buy. Right at the moment, though, gold and silver are rising into a very strong reversal zone so it is likely that some sort of correction is imminent. This is especially true for silver because silver's medium-term cycle has not bottomed yet (it is due soon) so it's correction may be steep. (Gold's cycle probably bottomed - and a new one started- on May 31.) "
On Sunday silver prices rallied to $21 but then started to fall. Today (Monday) prices were down a bit further (to $19.82), but U.S. markets were closed because of the holiday (4th of July). This could be the start of a significant correction. Let's see how prices move when U.S markets open tomorrow. I may go short in silver early in the day if the technical data supports it. If we miss the opportunity to go short in silver, we will just wait for the cycle bottom and then look to go long in both gold silver. Good target prices to buy would be around $1,300 in gold and $18 in silver. On the sidelines of gold and silver for now.