(2:30 pm EDST)
Today the DOW is surging up in a dramatic rally and is now breaking above its all -time high of 26,617 from January. This negates the strong bearish divergence it had against the S&P 500 and NASDAQ. The S&P 500 is also making a new all-time high today. The only bearish divergence signal we have now is coming from the NASDAQ which is a bit below its all-time high of 8,133 from August 30, and even that could easily be negated as this market turns very bullish. Because the DOW is making a double top to its high from January, it is possible the market could reverse down now, but we are not in a reversal zone for equities, and this sudden bullish surge suggests that these indices are going higher. Unfortunately, we now need to cover our short position in the DOW with a small loss (about 2%). Covering (unloading) my short DOW position today.
I realize how discouraging it has been to bail out of crude and now the DOW with some losses, but our trading strategy is valid. Both these markets are near the end of significant longer-term cycles which means that their final cycle tops are due (or overdue) to be followed by what should be very substantial corrections. We are trying to identify and sell short at those tops, but calling the final cycle top in a strong rally is not always easy as an accelerating bullish trend often pushes indices beyond their normal projected targets. Is it still worth chasing these tops now? Yes, I would say so. The final 3 year cycle bottom price we're expecting in crude oil could be in the low $50's. Crude's current price is a bit above $70. A short sell from $70 to $50 would produce a very substantial profit.
What about the broad stock market? Well, this situation is a bit more complicated. There are two cycles playing out in this market : a 4 year cycle and a 6 year cycle. We are in a time period now when the final peak of both cycles is due (this time period has a wide window that could extend into next year, especially since bubble (yes, this is a bubble) markets often peak late as their bullish momentum is hard to stop and can lead to a "blow-off" top and subsequent crash late in the cycle). Once that final top is in, a substantial correction will follow. Because we are dealing with two cycles (4 and 6 years) we could have a two part correction. The first wave down will be substantial (at least 15% but possibly more), but the second wave down could be even more substantial with a correction as large as 50%. The final bottoms for these cycles are expected to happen over the next several years (2019 - 2023), but the top(s) will occur before the bottom(s) and are expected by the end of this year or at the latest sometime next year. In my opinion it is worth chasing these tops (with tight stop losses on our trades) right now as the profit potential for short selling is enormous with a favorable risk/reward ratio.