Image Source: Pixabay

The short-term downtrend looks set to continue, at least according to the market indicators that I follow. Still, you would never know that it is a downtrend after experiencing the market strength revealed in Friday's trading session.

The chart below of the SPX shows how the has index found very important support a number of times at around the 5870 level. Holding above this level has kept me in the market, and it allowed me to profit from Friday's session.

I drew a resistance line at about the 6070 level of the SPX to show the top of the range established on Dec. 18, when the market had a truly awful sell-off. Investors.com pointed out that, in their view, the general market's condition remains tenuous until there is a solid close above this resistance level.

The lower panel of the chart provided shows the NYSE new lows. In a strong session like what was seen on Friday, I would expect new 52-week lows to drop way down below the 50 level, but they did not, which says to me that the risk of further selling still exists.

The PMO index continues to sit at the bottom of its range, and it has been stuck there for a number of days. With the PMO at this level and for this long, you should be looking carefully for the next short-term uptrend. This indicator is sure to start ticking higher soon, and when it does, I want to take advantage of the opportunity it gives me as a trader to jump in and buy stocks that are on the rise.

Usually, the first sign of a new uptrend is seeing the major indexes close above their five-day averages and near the highs of the session. We saw this occur on Friday, which means that the table is set for a short-term rally starting sometime next week.

Further evidence that the market is starting to perk up a bit can be seen by the tiny ticks higher in the two bullish percents which represent the market's two major exchanges. This doesn't really look like much, but we are just looking for hints and clues that the market wants to rally.

I'm disappointed to see that none of the major summation indexes closed above their moving averages, but they do look like they are bottoming out short-term, and that's a good sign.

This junk bond ETF rallied nicely over a number of days, and it has now popped up above resistance in a bullish fashion. This chart of the ETF looks good, and when junk prices look good, this seems to favor owning common stock. This is a bullish indicator.

Last week, we took a look at this chart of the NYSE common-stock-only advance-decline line. It broke the uptrend for the first time in a year, revealing that the current short-term correction is more severe than any we had seen in all of 2024.

Now, we need to see the red horizontal level hold in order to continue to hold stocks aggressively. If the line slices severely below this horizontal level, I would be forced to play defense by selling a good percentage of my holdings.

I like the chances that this line will hold above support for now and rally higher, but I'm not so confident that it will exceed the prior highs anytime soon. I think it means that when the market does rally, then I will be raising more cash than usual in order to protect my capital.

Here is the chart of the new 52-week lows. The somewhat perplexing condition still exists in which the Nasdaq new lows are fewer than the NYSE new lows. I'm not complaining because I can't think of any reason why this would be a negative for the market, but I just don't know why it would be happening.

When I look for evidence that the market has started a cycle that moves stock prices higher, I expect to see NYSE new lows drop down below the 50 level for sure, and preferably down below the 30 level.

Bottom Line

I have been saying for several weeks that I expect to see a new short-term rally soon. I was expecting a rally way too early, and I deployed my cash too soon. So, during Friday's session, I sold a few of my laggards so that there would be cash available to be deployed next week if there is a short-term cycle upturn.

I'm bullish in the short-term, but I'm much more cautious in the intermediate-term as a result of the indicator shown below. The indicator in this chart issued an intermediate-term sell signal a few weeks ago. I haven't made too much of it yet because I want to see what happens to the indicator when the market rallies. If the market rallies and this indicator remains on a sell signal, then I will be an aggressive seller.

The lower panel in this chart has been modified from last week in order to draw the uptrend line below the most recent weeks. I did that because the semiconductor ETF is not budging either up or down, and while it holds the current levels, I think it has to be interpreted favorably and seen as a sideways consolidation. If it breaks below the trendline, then we have a major sell signal for semiconductors, and probably for the general market as well.

The technology ETF in the upper panel continues to trade well, and this reflects well on the general stock market.

Here is the chart of the semiconductors with the notations about a potential head-and-shoulders pattern. So far, this ETF has been holding above the red neckline. 

The blue trendline in this chart is inconsistent with the trendline drawn in the chart above, and I'm having trouble reconciling the difference. For now, I'm going to just leave the chart notations as they are.

Treasury yields continue to look like they are headed higher. Of course, you never know, so remain open-minded. But as these yields push upwards it puts downward pressure on stocks, and the downward pressure is particularly strong for stocks selling at high PE ratios, such as technology.

Here is the same chart as above, only with a weekly timeframe instead of a daily timeframe. From this point of view, yields look to be moving in a sideways cycle between the highs and lows of a really well-defined range. I'll start posting this chart weekly so it can be more closely monitored.

The price of oil perked up a bit this past week, and as a result, some of the oil-related stocks rallied in price.

Sentiment has remained in the fear zone. Strong stock market rallies can often develop from this level.

Outlook Summary

• The short-term trend is down for stock prices as of Dec. 6
• The ECRI Weekly Leading Index points to economic recovery as of July 2023
• The medium-term trend is neutral for Treasury bond prices 

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