The broad stock market continues to be tricky to call. In my last blog (Dec. 31) I wrote:
"All three indices are now approaching and testing their Dec. 20 lows. If those lows hold in the DOW and S&P 500, we may see a double-bottom formation that would support the idea of new medium-term cycles starting now. Furthermore, if the NASDAQ makes a lower low, that would suggest that it too is ending an old medium-term cycle and starting a new one as this index has now fallen the minimum 2 weeks from its Dec. 16 high that we like to see at the end of a cycle."
Well, all of this happened, but the rally off last week's lows could be short-lived. The NASDAQ's rally was strong today as it closed above both its 15-day and 45-day moving averages. The S&P 500 also closed above those averages. The DOW, however, did not, and all three indices lost much of their day's gains by the closing bell as they encountered strong resistance lines. Both the S&P 500 and NASDAQ made "gap-ups" today which created "bullish island reversal" patterns in their charts, but strong resistance could turn these indices back down and negate that pattern (or not).
There are two possible ways to label the current medium-term cycles in the the DOW and S&P 500:
Scenario 1: The medium-term cycle is old, peaked in early December, and is now falling to its final bottom which is due anytime over the next several weeks. If this is the case, a "double-bottom" could already be in for both indices on Dec. 20 and Jan. 2, or a lower bottom could be coming over the next few weeks. If the former, this market could be very bullish and ready to rally strongly to new highs.
Scenario 2: A new medium-term cycle could have started with the lows on Nov. 4. In this scenario, those recent lows on Dec. 20 (DOW) and Jan. 2 (S&P 500) could be the first sub-cycle lows in the medium-term cycle. This could be bullish if these two indices can now rally above their early Dec. highs, but if they roll over before doing that, the medium-term cycle could turn bearish and be pointed down for at least another month (and probably longer).
The movement of these indices over the next week or two should make it more clear which scenario will prevail. Right now, the DOW looks the most bearish, and the NASDAQ looks the most bullish, but once a trend is established, all three indices should fall in suit and either rise or fall as this new year gets underway. I am staying on the sidelines for now.