We are now at the end of a timing window for a reversal in the broad stock market and the DOW, S&P 500 and NASDAQ are all making new lows today. If this market is going to turn up it needs to do so within the next day or two or we could start seeing a serious breakdown. The DOW breached an important support zone at 16,600 on Friday, but there is more support all the way down to 16,333. If this index closes below the 16,333 area, equity markets will likely continue lower for at least three more weeks and probably longer as the current cycle makes its final bottom. That said, there is still the possibility of a reversal here and a brief but sharp rally into late October/early November. Ideally this is what I would like to see as it could present us with an excellent opportunity to sell short what could be a major correction in the broad stock market. Unfortunately, that correction may already be in progress if the DOW continues to fall past Wednesday. Directional momentum in the S&P 500 and NASDAQ are now 100% bearish, but the DOW remains mixed bullish and bearish which leaves some hope for a reversal and rally now. Remaining on the sidelines for now.
(UPDATE @ 4:45 pm EST):
Nervous investors in the last hour of today's trading triggered a major sell-off and the DOW closed the day with a 223 point loss. More importantly, the market closed below 16,333 ( i.e. the start of the current cycle) and directional momentum for the DOW has now switched to 100% bearish. This means that the broad stock market will probably be trending down for at least 3-4 more weeks. Nevertheless, we could still get a brief bounce here. Our trading strategy is still bearish (i.e. looking to short sell at the top of significant rallies).
Gold has been rallying quite strongly from its low on Oct. 5, and a new bullish momentum signal appeared on Sunday in gold metal charts. This makes directional momentum in gold now mixed bullish and bearish. Silver's momentum, however, remains mostly bearish, and silver's rally from Oct. 5 has been weak compared to gold's. This divergence between gold and silver supports the idea that the current rally in precious metals is not a breakout and could turn down again soon. Gold is now close to my first price target of $1240, but it is possible this rally could go as high as $1260 or even $1290. Silver could rise to the $18 - $18.50 area. (I am avoiding trading silver right now because all markets are extremely volatile this month and silver can be especially erratic under such conditions). Ideally, this rally will peak into late October or early November and then turn down for another correction into the final cycle bottom for both gold and silver. I am going to stay with my long position in gold for now, but if prices rise into the $1240 - $1260 area I will consider taking profits and will start to look for an opportunity to sell short. Holding my long position in gold and on the sidelines of silver for now.
Crude oil prices are remaining above $84 and cycle studies still point to a bottom now. A rally from this bottom should be imminent so I am still holding on to my (modest) long position. Crude could be taking a bearish cue from the broad stock market, and a rally in equities now might help kick start a new cycle in crude. We don't want to see crude make a new low past Wednesday of this week as this could mean the cycle pattern is distorting and the bottom could go significantly lower. Holding my long position in crude for now.