The Short-Term Downtrend Continues Amid Bottoming Price Action

It certainly was a wild week. The short-term downtrend continues, although there was considerable bottoming price action this week and the last few hours of trading on Friday felt like the beginning of a new rally.

The PMO index finally reached its lowest level on Thursday, which means the weak market finally pulled down even the most defensive stocks, leaving almost no one left to sell.

The good news is that the major indexes are now above their 5-days and closed bullishly at the highs. This could mean that a new short-term uptrend is developing.

Bullish percents haven't turned upwards yet, but they look like they are done going down. Of course, there isn't much further to fall. 

The SPX equal-weight found a support zone and held near the October low. Its oversold momentum indicator is just starting to turn higher. This index looks ready to bounce higher.

New 52-week lows have been huge, which is what we want to see when we are looking for a wash-out bottom in the general market. Next, we are looking for a dramatic drop in the number of new lows which would confirm the next uptrend.

On Friday, we finally saw the NDX volatility index close below the late November high, which is another early signal that the bottom may be in for this short-term downtrend. Closes below the mid-December highs would help confirm a new short-term uptrend.

The US dollar surged this week. It was a big story that I didn't hear mentioned much. I assume this dollar surge is primarily related to the Fed comments about short-term rates.

I generally think of a strong dollar as bullish for US stocks and bonds at least in the short-term, but it can also indicate global economic and/or geopolitical risk.

Here is a look at the bigger picture of the two major indexes. Both are under their 200-day averages, which is the best definition of a market in correction.

It looks to me as though we probably have an opportunity to make money in the stock market over the next few weeks by owning stocks that will ride higher along with the next short-term uptrend.

The severely oversold condition of the market limits the downside and makes the upside the better probability. However, the risks of playing this next up-cycle seem to be so much higher than usual. Global political tensions and a potential economic slowdown have me worried.

Bottom line: I moved about 10% of my cash out of the trading account and into savings. I am about 60% long stocks, which is about the maximum percentage long that I think that I want to be, considering the risks. My stock holdings are concentrated in a smaller number of stocks which will allow for an easier exit if necessary, and I plan to take profits aggressively and not worry about leaving money on the table.

Outlook Summary

• The short-term trend is down for stock prices as of Jan. 5.
• The economy is in expansion as of Sept. 19, 2020.
• The medium-term trend is down for treasury bond prices as of Jan. 3 (prices down, yields up).