New Short-Term Uptrend: Strong In Price, Weak In Volume

We finally got a new short-term uptrend after a very lengthy short-term downtrend. You might say that the uptrend actually started on Tuesday.

I am trying to incorporate volume into my analysis, and I did notice that in Friday's rally there was a decrease in volume on the NASDAQ, NYSE, and SPX. So, the uptrend is starting off strong in price, but weak in volume.

I am bearish on this market and a weak volume counter-rally fits with that view. But I am not going to be someone who refuses to admit when he is wrong, so if this market proves itself then I will admit my mistake and jump on board with the bulls. For now, though, I remain a skeptic.

In support of the bulls is the ultra-sensitive Package Index which has performed quite well. This strength has surprised me, but it shouldn't have because it responds favorably to lower rates. It never broke down below the 200-day, and the volume has been very strong this week.

The short-term price momentum indicator favors a rally.

However, the weekly price momentum indicator favors a decline or consolidation. Based on these charts, the short-term uptrend is a counter-trend within a larger medium-term downtrend.

Here is the chart that keeps me bearish. The number of new 52-week lows remains elevated, particularly on the NASDAQ. There is an improvement, but when there are over 100 new lows I know that selling pressure remains high behind the scenes. So, at the moment, I am inclined to sell into this rally. But let's keep an open mind and watch the market internals next week.

I am not sure what I did with the chart that I showed last week which labeled a cluster of Hindenburg Omens in late May. But I am not forgetting it. A cluster of Hindenburgs is very bearish and worth paying attention to.

One more short-term chart for the bears. The small caps still look weak which is consistent with an elevated level of new 52-week lows.

Mark Minervini recommends following the Value Line Index and I would say that it indicates a weak general market. 2018 shows a classic double top, and since then it looks like a lower low, lower high price pattern with price momentum pointing lower.

Yields continue to fall which means the demand for Treasuries remains strong.

This chart makes a strong case for the bulls. Junk bonds continue to show strength. Small Caps and Junk Bonds usually trade with a close correlation. The two are currently trading in opposite directions which I think means that junk bonds will eventually start to trade down as well. But I am going to follow the charts rather than predict.

That's it for charts. In my opinion, we have a short-term counter-rally, but I will switch to a bull if the evidence mounts in their favor.

There is a lot of green showing in this spreadsheet which indicates broad participation in this week's market rally. I see a lot more green than I expected to see.

Bonds, gold stocks and defensive sectors continue to be the leaders while small caps and transportation are weak which is a bear indication. However, the optimists would point out that technology and consumer stocks are coming on strong.

 

 

Outlook Summary

The long-term outlook is cautious as of May-18. 

The medium-term trend is down as of May-7. 

The short-term trend is up as of Jun-08.

The medium-term trend for bond prices is up as of Nov-16 (prices higher yields lower).  

Investing Themes:

Treasuries, Cash, Technology

Strategy During a Bull Market:

• Buy large-cap stocks and ETFs at the lows of the medium or short-term market trends.
• Buy small-cap growth stocks on breaks to new highs in the early stages of market trends.
• Reduce buying when the market trend is at the top of the range.
• Take partial profits when the market uptrend starts to struggle at the highs.
• The cardinal rule is never invest based on personal politics. The stock market can do well regardless of which political party is in control.