UPDATE ON THE BROAD STOCK MARKET (11:30 pm EDST)
In last Wednesday's blog on the broad stock market I wrote:
"It is late in the medium-term cycles of all three market indices (DOW, S&P 500, NASDAQ), and because we are in the middle of our reversal zone, there is a good chance we will get a final top over the next several trading days (if it didn't happen today) followed by a sharp correction down to the final cycle bottom where we will be looking to buy. But if this market continues to rally past next Tuesday, we will have to consider the possibility of this reversal zone being a "break-out" which could lead to a "blow-off" final cycle top and then a very sharp correction down. I don't think that will happen, but I don't want to underestimate the bullish potential of this market now, so it is a possibility."
Well, tomorrow is Tuesday and technically the end of the current reversal zone; however, I am going to extend this reversal period into Thursday as there is a strong short-term reversal signal on Wednesday. Today the S&P 500 and especially the NASDAQ were up strongly, but not so much the DOW. The S&P 500 made a new weekly high, but the DOW and NASDAQ did not, and both the DOW and S&P 500 are still below their all-time highs from February. This means we still have strong intermarket bearish divergence and the strong likelihood of a cycle top now to be followed by a sharp correction to a final medium-term cycle bottom to buy. This is our most likely ideal scenario at the moment, but there have been two new developments in our cycle studies that we need to consider now.
First, the longer-term cycle analysis of this market is suggesting the possibility that two long-term cycles (4 year and 6.5 year) could be topping out NOW and could be followed by a MAJOR long-term correction in the broad stock market (i.e. 20%-50% or even more) into 2021-2022. Yes, this could be the "big one". Up until now I had been thinking that after a modest correction in the markets, we would probably see another rally into late summer or fall that would make new all-time highs (well, the NASDAQ is actually doing that now, albeit a bit early) and then see the big correction. Although this is still a possibility, there are some bearish technical and cycle signals suggesting we could be seeing the big top this month (or perhaps by early August). If that is the case, we may be interested in selling this market short soon instead of waiting for the bottom of a medium-term cycle to buy.
A second new development in our analysis is the possibility that a new medium-term cycle in the DOW might have started with the low on June 26 at 24,971. If that is the case, the DOW could rally for many more weeks before topping out. This would actually support my original idea of another strong rally into late summer.
OK, I know these cycles are confusing, but that's why I'm here - to sort them out and turn that into trading advice.
If the market shows strong signs of topping out this week, we will consider going short with a tight stop loss. On the other hand, if all three indices continue to make new highs into Friday and next week, we will hold off trading and see how the market moves into early August. And we are certainly still open to our original scenario of a sharp but modest correction down to the end of old medium-term cycles in all three indices in which we look to buy in the target areas of 23,400 in the DOW and 2,700 in the S&P 500. A correction that breaks significantly below these targets would suggest that the longer-term tops are in and a more serious correction is in progress. Stay-tuned for updates.
We are still on the sidelines of the broad stock market.
In last Wednesday's blog on the broad stock market I wrote:
"It is late in the medium-term cycles of all three market indices (DOW, S&P 500, NASDAQ), and because we are in the middle of our reversal zone, there is a good chance we will get a final top over the next several trading days (if it didn't happen today) followed by a sharp correction down to the final cycle bottom where we will be looking to buy. But if this market continues to rally past next Tuesday, we will have to consider the possibility of this reversal zone being a "break-out" which could lead to a "blow-off" final cycle top and then a very sharp correction down. I don't think that will happen, but I don't want to underestimate the bullish potential of this market now, so it is a possibility."
Well, tomorrow is Tuesday and technically the end of the current reversal zone; however, I am going to extend this reversal period into Thursday as there is a strong short-term reversal signal on Wednesday. Today the S&P 500 and especially the NASDAQ were up strongly, but not so much the DOW. The S&P 500 made a new weekly high, but the DOW and NASDAQ did not, and both the DOW and S&P 500 are still below their all-time highs from February. This means we still have strong intermarket bearish divergence and the strong likelihood of a cycle top now to be followed by a sharp correction to a final medium-term cycle bottom to buy. This is our most likely ideal scenario at the moment, but there have been two new developments in our cycle studies that we need to consider now.
First, the longer-term cycle analysis of this market is suggesting the possibility that two long-term cycles (4 year and 6.5 year) could be topping out NOW and could be followed by a MAJOR long-term correction in the broad stock market (i.e. 20%-50% or even more) into 2021-2022. Yes, this could be the "big one". Up until now I had been thinking that after a modest correction in the markets, we would probably see another rally into late summer or fall that would make new all-time highs (well, the NASDAQ is actually doing that now, albeit a bit early) and then see the big correction. Although this is still a possibility, there are some bearish technical and cycle signals suggesting we could be seeing the big top this month (or perhaps by early August). If that is the case, we may be interested in selling this market short soon instead of waiting for the bottom of a medium-term cycle to buy.
A second new development in our analysis is the possibility that a new medium-term cycle in the DOW might have started with the low on June 26 at 24,971. If that is the case, the DOW could rally for many more weeks before topping out. This would actually support my original idea of another strong rally into late summer.
OK, I know these cycles are confusing, but that's why I'm here - to sort them out and turn that into trading advice.
If the market shows strong signs of topping out this week, we will consider going short with a tight stop loss. On the other hand, if all three indices continue to make new highs into Friday and next week, we will hold off trading and see how the market moves into early August. And we are certainly still open to our original scenario of a sharp but modest correction down to the end of old medium-term cycles in all three indices in which we look to buy in the target areas of 23,400 in the DOW and 2,700 in the S&P 500. A correction that breaks significantly below these targets would suggest that the longer-term tops are in and a more serious correction is in progress. Stay-tuned for updates.
We are still on the sidelines of the broad stock market.
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