In last Friday's blog I re-posted the two likely scenarios I think the broad stock market could take from here. One has the DOW, S&P 500 and NASDAQ starting new medium-term cycles from their lows on Oct. 29. That scenario is bearish with these indices pointed down for at least four more weeks as they move to their final cycle bottoms. The second scenario has these three indices starting new medium-term cycles from their Dec. 26 lows (21,712 in the DOW and 2,346 in the S&P 500). This scenario is bullish and could see equities rally for several more months and easily make new highs. On Friday I was favoring the first (bearish) scenario, but after looking over the charts and reviewing the cycles, I am now favoring the second (bullish) scenario. Regardless of which is correct, this market is due to make a top and some sort of correction in our current reversal zone (Jan. 16 - 28), and that may be starting now as all three indices are down strongly today from Friday's highs. In our favored bullish scenario, this correction should be modest and not break below those Dec. 26 lows. In that case, a good target for the correction would be around 23,100 - 23,400 in the DOW and around 2,500 in the S&P 500. We will watch for these areas to cover our current short position and possibly go long. If these indices break significantly below those targets, however, we will either stay short or stand aside as the bearish scenario could still unfold. Holding my short position for now.
Please note that even in the bullish scenario described above, which could see a very strong rally (possibly a "blow-off") for several months, the final top to that new cycle will most likely be followed by a very severe correction (possibly 50% or more) so equity markets are not "out of the woods" yet. I will discuss more on this longer-term picture soon.
A strong short-term bearish signal appeared in the charts of both gold and silver yesterday suggesting that the significant correction we've been waiting for in these metals is in progress. A good target for this correction would be around $1245 in gold and $14.50 in silver. We will watch for these targets to go long. Currently on the sidelines of gold and silver.
Crude oil prices seem to be edging down from a high of $54.17 on Sunday (Feb. contract chart). That was pretty much in the center of the current reversal zone for crude (Jan. 14 - 25), but the reversal extends through this Friday so prices could still push higher before turning down. It still looks like crude started a new medium-term cycle and possibly a new longer-term 3 year cycle with its low of $42.36 on Dec. 24. If so, this market could be very bullish and pointed up for at least the rest of this year. We are therefore looking for a good buy spot now. A corrective dip to the $48 - $50 area might give us a good opportunity to buy. On the sidelines of crude oil for now.