In yesterday's blog I wrote:
"Unless we see a "sell on the news" effect here with the market taking a correction now, I suspect we will see more rallying into next week as the Fed is making sure people understand that they are now dovish and will do all they can to prop up these markets."
Well, "sell on the news" may be a factor here, but today's massive plunge in equities seems more related to the Fed's pessimistic view of the economy that they articulated yesterday to justify their dovish policy of more bond buying and keeping interest rates near zero into 2022. Usually bad news about the economy is bullish for the broad stock market as it encourages dovish policy from the Fed (as it did yesterday), but more bad news about a second wave of COVID-19 today was enough to trigger a big sell-off on Wall Street. Furthermore, our technical analysis showed a very strong bearish divergence signal early this week as the NASDAQ made new all-time highs with the DOW and S&P 500 well below their all-time highs from February. Yeah, I know I was predicting more rallying into next week, but hey, at least we were wise enough not to chase and buy into the recent rally! (I have no regrets in being on the sidelines of ALL markets now in this EXTREMELY VOLATILE financial marketplace!)
So where do we stand now? If we look at the chart of the DOW, we will notice a "gap up" in prices on June 4. Today, June 11, prices made a "gap down" in that same range. This creates what is known as a "bearish island reversal" (trading on June 5 -10 appear like an "island" floating above the gap areas on the chart). This is an extremely bearish sign and usually means the market has turned bearish until it rises back above the gap areas (and there is much resistance at those gaps - now around 26,300 - 26,800 in the DOW). This market is now most likely falling to a deep sub-cycle corrective bottom or maybe even a final medium-term cycle bottom. A sub-cycle correction would be completed either this week or next, but a full cycle bottom would likely be longer and bottom sometime in the last two weeks of June. Either bottom may be a good spot to buy for a short-term rally (assuming the correction doesn't go too low). We will watch for this now.
Longer-term, if any rallying now cannot get back above this new "gap zone", it would mean that the final longer-term tops are already in (that would be this week's all-time high in the NASDAQ and the February all-time highs in the DOW and S&P 500). In that scenario, the market has already started what will become a VERY big long-term correction, and our main focus would be to sell short at the top of any significant rally. I know these cycles can be a bit confusing, but I will clarify them in more detail whenever I make any trade recommendations.
For now, we will remain on the sidelines of the broad stock market.