After last week's severe plunge, the DOW is finding support at the 25,000 level, and the big question on the minds of traders and investors is whether or not this correction in the broad stock market is over. I would say that it probably is not. Although there's a chance that last Thursday's lows were the final bottom of a medium-term cycle, the lows were not in a reversal zone, and the correction from the peak on Oct. 3 to those lows only lasted a week. Final cycle corrections almost always take 2-5 weeks so last Thursday was a bit early for a bottom. There are no major reversal zones until the month of November (but there are some minor potential reversal points Oct. 18, 22, and 24 - we will watch these carefully). Ideally we would like to see the final bottom to the medium-term cycle in November. In the meantime, however, we could get a significant bounce or relief rally from the current support around 25,000 in the DOW and 2,700 in the S&P 500. We won't get too concerned for our short position until any rally gets above say 26,100 in the DOW and 2,840 in the S&P 500. If instead of rallying, the market continues to fall this week, we may take profits and cover our short position around 24,500 in the DOW (if it gets that low). If the S&P 500 breaks below 2,692 while the DOW stays well above 23,997 (these were the lows that started the current medium-term cycles) then that would also be a good signal (bullish divergence) to cover our shorts and possibly go long. So far we have an excellent profit on our short position. Let's hold our short position for now as we watch the direction the market takes this week.
We got our predicted sharp rally in gold (and silver) last week, but that rally is due to top out sometime this week and could be followed by a sharp correction. The depth of that correction will tell us whether or not the precious metals have turned bullish. There is strong evidence that the $1161 Aug. 15 low in gold was not only a medium-term cycle bottom but also a longer-term cycle bottom. If so, gold may be starting a longer-term rally that could take prices as high as $1500 next year. But that long-term cycle is not confirmed yet. For now, we are concerned with a short-term top this week in the $1240 area. Let's hold our long positions in both gold and silver and see if prices can push higher over the next few days.
Two important recent developments in the precious metals market:
1) Readers of this blog may recall that in the summer months I pointed out the formation of giant "inverted head and shoulders" chart patterns that had been forming in the charts of both gold and silver since 2013 and were near completion and signaling a strong bullish trend about to manifest in this market. I also pointed out that it was possible for these chart patterns to abort if the trend suddenly turned bearish. Well, it looks like the "inverted head and shoulders" in silver has aborted; however, it has morphed into what looks like a giant "double bottom" pattern which is also very bullish. Gold's giant "inverted head and shoulders" bottom has remained intact so it, of course, remains bullish (for now).
2) The recent plunge in the broad stock market did not seem to adversely affect the precious metals (they rallied strongly). This is significant because many investors (myself included) have been fearing that a general stock market crash could initially take down the precious metals as it did in 2008-2009 when panicking investors liquidated equities and commodities and fled to the perceived safety of the U.S. dollar. The strength of gold and silver during this recent equity plunge suggests that the U.S. dollar may have lost some of its appeal as a safe haven, and we may not have to worry about the precious metals initially falling with any significant broad stock market correction.