After last week's carnage in equity markets (which included some of the biggest intraday ups and downs in the history of the stock market) many investors and traders are understandably in a state of "shell shock". Despite many mainstream media financial pundits now encouraging people to "buy the dip", we have to wonder if investor's fears will subside enough this week to make an enthusiastic rebound rally possible. Several important support levels were broken last week, but both the DOW and S&P 500 closed with healthy gains on Friday after plunging to new weekly lows earlier in the day, which is a bullish sign.
As I mentioned in last week's blog posts, we are ending a reversal zone for equities tomorrow (Monday) so it is possible Friday's low was a significant bottom and end to the selloff (or we could see a lower low tomorrow and a reversal up from there). This reversal zone, however, is not a strong one. There is another coming up Feb. 26 - March 6 which is considerably stronger. If investor's fears linger, we could easily see the selloff continue into this next reversal zone which would technically be a better place for a final bottom to the current medium-term cycle in the DOW and S&P 500. If the DOW and S&P 500 both fall below their Friday lows (23,360 and 2,532, respectively) after Monday then there's a good chance we'll see that selloff for another two or three weeks. On the other hand, any close in the DOW above 25,200, and especially 25,500 would suggest that the bottom is in and we are starting a new medium-term cycle.
The bottom line here is that we are waiting to go long once we are reasonably certain of a final low and end to the current medium-term cycle in the DOW and S&P 500. That low is now overdue and could have happened Friday, but it could also come in the next strong reversal zone Feb. 26 - March 6.
I should mention here that an argument could be made that the recent all-time high in the S&P 500 (2,873 on Jan. 26) was a type of "blow-off top" (technically a "three-arc fan ascent" - curious readers can google this term to see what it looks like) that will now be followed by a major bear market for some time. If that is the case, then we won't expect the next medium-term cycle rally to get above that top. But even if it does (or just makes a double-top), we are looking to sell short the top of the next medium-term cycle later this year. The correction from there could end up being very serious with the market possibly dropping as much as 30 - 50%. But I am getting ahead of myself. For now we will watch for a medium-term cycle low and a spot to buy. Still on the sidelines of the broad stock market.