UPDATES ON THE BROAD STOCK MARKET and CRUDE OIL (8:00 pm EDT)
Both the DOW and S&P 500 made new weekly highs yesterday and are sharply down today. Our preferred labeling right now is that both indices started new medium-term cycles with their August lows (the DOW's low of 34,029 on Aug. 25 and the S&P's low of 4,336 on Aug. 18). Because both have now moved well below those starting points, their medium-term cycles are technically bearish and pointed down until the end of the cycle, which is not due for at least another month. In this scenario, the DOW made its first sub-cycle low on Oct. 6 at 32,847 and the S&P 500 made its first sub-cycle low on Oct. 3 at 4,216. The current modest rally from those lows should be peaking this week (yesterday may have been the peak) or next week as we then anticipate another leg down in these cycles.
There is a possible alternative (but less likely) scenario to the one described above. The Oct. 3 and Oct. 6 lows in the S&P 500 and DOW, respectively, might be the start of new medium-term cycles (meaning the previous cycles were longer than we thought). If this is the case, both indices could be very bullish now. If this market rallies past next week, we will have to consider this possibility. For now, we will stick with the bearish view and continue to hold our short position in the broad stock market. In this bearish scenario the DOW could move down to around 31,400 and the S&P 500 down to 4,100 or even lower.
Crude oil's medium-term cycle labeling is still unclear. I think we will abandon the idea of an older cycle forming its final bottom now, and rather, go with the view that a new medium-term cycle started with the Oct. 6 low at $81.50 (Nov. contract chart). This would mean the cycle is very young and probably bullish. A second possibility is that a new medium-term cycle began on Aug. 24 at $77.32. This would make the cycle a little older but certainly bullish as it has already gone well above the top of the previous cycle. In both cases, we are only a week and a half into a rally off that Oct. 6 low, so we should be watching for the next sub-cycle top. Next week we enter a new reversal zone specifically for crude Oct. 26 - Nov.3. That could be a good time frame for a top followed by another correction down. Let's wait and see how far this current rally can go. To stay bullish, prices need to close above $95. Our trading strategy now will be to buy any significant corrective lows, but we may have to wait at least another week to see that. In the meantime, we remain on the sidelines of crude. We note that the Israel/Palestine conflict is driving crude prices up right now, but this kind of volatility in price movement can quickly and easily turn in the other direction, so we need to be careful in trading crude oil under these conditions.
Both the DOW and S&P 500 made new weekly highs yesterday and are sharply down today. Our preferred labeling right now is that both indices started new medium-term cycles with their August lows (the DOW's low of 34,029 on Aug. 25 and the S&P's low of 4,336 on Aug. 18). Because both have now moved well below those starting points, their medium-term cycles are technically bearish and pointed down until the end of the cycle, which is not due for at least another month. In this scenario, the DOW made its first sub-cycle low on Oct. 6 at 32,847 and the S&P 500 made its first sub-cycle low on Oct. 3 at 4,216. The current modest rally from those lows should be peaking this week (yesterday may have been the peak) or next week as we then anticipate another leg down in these cycles.
There is a possible alternative (but less likely) scenario to the one described above. The Oct. 3 and Oct. 6 lows in the S&P 500 and DOW, respectively, might be the start of new medium-term cycles (meaning the previous cycles were longer than we thought). If this is the case, both indices could be very bullish now. If this market rallies past next week, we will have to consider this possibility. For now, we will stick with the bearish view and continue to hold our short position in the broad stock market. In this bearish scenario the DOW could move down to around 31,400 and the S&P 500 down to 4,100 or even lower.
Crude oil's medium-term cycle labeling is still unclear. I think we will abandon the idea of an older cycle forming its final bottom now, and rather, go with the view that a new medium-term cycle started with the Oct. 6 low at $81.50 (Nov. contract chart). This would mean the cycle is very young and probably bullish. A second possibility is that a new medium-term cycle began on Aug. 24 at $77.32. This would make the cycle a little older but certainly bullish as it has already gone well above the top of the previous cycle. In both cases, we are only a week and a half into a rally off that Oct. 6 low, so we should be watching for the next sub-cycle top. Next week we enter a new reversal zone specifically for crude Oct. 26 - Nov.3. That could be a good time frame for a top followed by another correction down. Let's wait and see how far this current rally can go. To stay bullish, prices need to close above $95. Our trading strategy now will be to buy any significant corrective lows, but we may have to wait at least another week to see that. In the meantime, we remain on the sidelines of crude. We note that the Israel/Palestine conflict is driving crude prices up right now, but this kind of volatility in price movement can quickly and easily turn in the other direction, so we need to be careful in trading crude oil under these conditions.
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