I entered short positions in the broad stock market last Thursday with the idea of a reversal in this market to start by the end of this week. It looks like that reversal had already started from last Tuesday's high in the DOW at 17,154 and is now continuing down. The big question is how far can this correction go? Based on technical, cycle, and timing data it could and it should take a steep fall of 10% or more (this is why we are selling short here). However, as I discussed in my August 22nd blog, the broad stock market has been unusually bullish recently and may be receiving extra support from investment capital fleeing a collapsing European economy as well as manipulation from a "plunge protection team" of powerful people who do not want the markets to collapse right now. If these influences are present they could stunt normal corrective forces in the market and result in truncated corrections (as we've seen in the past). It also appears that we are starting new cycles in the DOW and S&P 500 and this points to a more modest correction of 300 to 400 points in the DOW. We therefore want to see a correction down to at least the 16,800 area in the DOW (and the 1950 area in the S&P 500). If the correction stalls in those areas I will consider taking profits and covering my short positions. If the DOW breaks below 16,786 we may be on track for a 10% or more correction.
I would like to point out here that when overdue corrections are delayed (whether through unusual market forces or direct manipulation) markets can become more volatile and unstable and are more susceptible to abrupt and severe downturns during the next corrective cycle. Holding my short positions in the broad stock market for now and waiting to see the extent of the current correction.
After two weeks of "basing" and threatening to "breakout", gold and silver prices have instead decided to break lower. Gold plunged $19 today while silver dropped an equivalent 1.45% . Ambiguous signals in the precious metals market have been keeping me mostly on the sidelines recently, but it looks like we could be seeing a good buying opportunity setting up now. The first target for this correction appears to be the $1,250 area, but there is also the possibility of a lower target around $1,164. If we see prices in those ranges this week it may present a good low to buy as other technical and timing indicators point to the possibility of a strong gold and silver rally in the second week of September. As with the broad stock market, we will now watch to see how low this correction will go. On the sidelines and watching for a possible buy spot this week.
Gold and silver's plunge today is not that surprising considering the recent extraordinary bullishness of the U.S. Dollar Index (also being fueled by Europe's economic mess). The dollar reached a new high today slightly above 83, but this rally is looking a little long in the tooth and is entitled to take some sort of correction soon. If it does so this week it could be in sync with a bounce in gold and silver. We will watch for this as another potential signal to buy the metals.
Crude oil today is reminding us of just how volatile this commodity can be as crude prices dropped over $2 on continued news of ample oil supplies in the U.S. as well as a strong U.S. dollar. Last week it looked as if crude was starting a new cycle from its August 21 bottom and was going to move higher before correcting, but today's plunge negates that and suggests that the bottom of the old cycle is still forming. The final price may go lower than the August 21 low of $92.50 or it may just end up being a double bottom to that. The extent of today's drop means it is probably too late to go short and we may have to just wait for the final bottom of this cycle before contemplating any trades. Still out of this market.