It is early in the medium-term cycle of the broad stock market as all three major market indices (DOW, S&P 500, NASDAQ) started their new cycle on Oct. 3. Once we reach the peak of this cycle, a rather severe correction to the final cycle bottom will commence. That correction could be around 10-15% (no, this isn't the "big one") off the peak so we want to watch carefully now for this peak as a good opportunity to sell short. Note that it seems likely the Trump administration will keep putting pressure on the Fed to keep equity markets buoyant into next year's election. Nevertheless, markets are very overbought now, and even the Fed rolling out a "QE4" plan (see my Oct. 21 Trading Blog) will not be able to keep markets rallying unchecked over the next twelve months without a significant correction. A 10-15% corrective drop in the broad stock market would do much to ease any bearish pressure and perhaps set the stage for more rallying into next November's presidential election.
So when can we expect the current cycle's peak and that deep correction? Well, a high could be forming now in our current reversal zone that ends this Friday. Could this be the top of the medium-term cycle already? It's possible, but I think it's more likely any correction now will be minor and followed by another high over the next several weeks. We already have a case of intermarket bearish divergence from last week as the S&P 500 and NASDAQ both made new all-time highs while the DOW did not. The DOW did come close, however, and closed the week very bullish so that bearish divergence signal could be negated this week if the DOW exceeds 27,399. If that happens, we might see a top near the end of the week or even early the following week. Whether we see a top now or near the end of this week, we will wait for a subsequent corrective dip to buy for another multi-week rally (possibly to that final peak). A good target to go long would be around 27,000 in the DOW and around 3,000 in the S&P 500. If any correction plunges much lower than those levels, we will put off our buying strategy as the market could turn bearish. On the sidelines of the broad stock market for now and looking to buy soon.
Gold and silver markets are presenting mixed signals right now. There is the potential for a strong rally in both metals now, but there are also signals suggesting a corrective downturn. It still looks like both metals started new medium-term cycles on Oct. 1 and are young and therefore likely bullish. We will continue to watch for a corrective dip to buy in both gold and silver, but we don't want to see gold fall below $1456 or silver fall below $16.93 as that could mean the cycles are turning bearish. Still on the sidelines of gold and silver.
In last Sunday's blog on crude oil I wrote:
"It looks like crude oil started a new medium-term cycle with its low of $51.40 on Oct. 9 (Dec. contract chart). That means a sub-cycle top is due now to be followed by a sub-cycle correction. That top could easily peak in this upcoming reversal zone (Oct. 29 - Nov. 8) in the $57 - $58 area (it's almost there now)."
Well, last week crude prices dropped sharply Monday - Thursday to a low of $54.07. At first it looked like the Oct. 27 high at $56.85 was the sub-cycle peak, but then prices shot back up on Friday to $56.43 so that peak could still be forming in the $57 - $58 range. There is a reversal zone specifically for crude oil Nov. 5 - 14 so a peak in this time frame would be ideal. We may look for a spot to sell short if prices push higher into late this week. If instead prices fall and do not make a new high, we will assume the sub-cycle peak is in and look for a corrective dip and a buy spot in the $53 area ideally around Nov. 24 +/- 3 trading days. Still on the sidelines of crude oil.