In Monday's blog I wrote that the broad stock market:
"...gave us a bearish divergence signal as the NASDAQ made a new all-time high unaccompanied by the S&P 500 and DOW. However, all three indices snapped back up to the top of their day's range after an intraday dip, which is a bullish sign. I am still reluctant to sell short just yet. We are in a reversal zone for the rest of the week (and actually next week too as another reversal zone overlaps our current one - Jan. 27 - Feb. 5). This means there is plenty of time for this market to make new highs before a significant correction down. if the DOW starts closing below 30,750, it may mean the top is in already."
Well, the S&P 500 did manage to make a new all-time high yesterday, but the DOW did not, so our bearish divergence signal remains intact. Not only that, the market fell dramatically today suggesting a significant correction could have started. The DOW closed the day at 30,303, which is well below 30,750 and suggests the DOW's top was in with last week's high of 31,272. And all of this is happening in a strong reversal zone ( January 12 - Feb. 5). If the tops to the medium-term cycles in these indices are in, we should now see a significant correction to the final bottoms of these cycles. This gives us a good opportunity to sell short.
The risk here is if the market pushes higher before this reversal zone is over (at the end of next week). What we can do now is enter a short position with a stop loss based on these indices making new highs. (But note, if only one or two of them -not all three- make new highs, we will still have a bearish divergence signal). I am going to short the S&P 500 this time because that index has currently fallen the least distance from its recent high (attained just yesterday), and it's stop loss point should give us the least loss (about 2%) if triggered. I am going to place the short sell order tonight to be executed at tomorrow's market open. Traders could also wait for tomorrow's market to open before placing a trade as we could see a bounce or brief relief rally after today's drop before it heads south again. (The risk there, of course, is missing a good short spot if the market continues to plunge).
I am entering a short position in the S&P 500 (with an index fund tied to this index) tonight for tomorrow's open. Let's make our stop loss based on a close above 3,842 or if the DOW makes a new high (above 31,273).