Approaching A New Short-Term Uptrend

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The market is just starting, or is very near to starting, a new short-term uptrend. Early last week, the PMO touched the bottom of its range and then bounced upwards, indicating just a tiny bit of strength. Something similar happened in December with the PMO, but then it reversed lower, so we need to be careful and to be prepared for any outcome.

However, this hint at strength, combined with the favorable market action seen as we headed into the weekend, is making me optimistic that we are going to encounter a new rally.

Late in the session on Thursday, the market bottomed and then bounced higher. Thursday's late strength carried over to Friday which resulted in a solid day in the market, as shown in the chart below. All three major indexes have shown very nice action above their 5-day averages. It's a very convincing look for the bulls.

The bullish percents are not yet quite as convincing as the chart above. This chart will be a good one to watch on Monday, and we will want to see a nice move higher in the chart for both exchanges.

The buy-write indexes looked really good by the end of the day on Friday. These indexes can be surprisingly helpful when you are looking for a short-term trend in the market. They are often the last to drop when the short-term is peaking and often the first to pop up higher when the short-trend is transitioning upwards. This chart is certainly favorable for stock prices in the short-term. This is bullish.

Here is a chart showing a nice price pattern. The index shot higher to start the year, pulled back by about a third, and now appears to be bouncing off critical support in a classic, bullish technical pattern. This is very nice. A minor negative is that I would prefer to see the momentum indicator pull back to its zero line before the market rallies, but I wouldn't make too much of it.

The reversal in junk bonds is also very nice, and the momentum indicator looks ready to turn higher off of its pullback. Junk bonds appear to be confirming the strength that we currently see in stocks.

NYSE new 52-week lows are down to harmless levels, which also confirms the strength in stocks in the short-term. Nasdaq new 52-week lows improved considerably, although it would be nice to see them continue to trend lower early next week.

This next chart hinted at a tiny bit of strength brewing in the market on Tuesday.

The VIX indicated subdued market volatility, which was a bullish sign for stocks and a good setup for a short-term rally. Some people want the VIX to spike as a signal to get back into stocks. I disagree. Instead, I think this chart is indicating an improved outlook for stocks.

The summation indexes are usually the last to confirm a new short-term uptrend. When they pop up above the moving averages, perhaps combined with a rally in the PMO indexes, then we'll have a confirmed short-term uptrend.

I have shorted the Europe stock indexes twice so far this year, and I was stopped out both times. Based on the chart below, I would say that the next move for Europe is higher and coming out of a bullish base that has been formed over the past two months. Perhaps my next attempt will be long.

By the end of the day on Thursday, there was talk about how the market rallied late in the day despite a sharp rise in yields. Then on Friday, yields abruptly turned lower and that fueled stocks to move even higher. That is bullish stock price action.

Obviously, if yields remain below the Thursday peak, it favors stock prices. But what if these yields start to tick higher again, perhaps up to the highs of October? I don't know, but I'm in favor of watching the behavior of the yields every day, and I'd be just a little less bullish toward stocks with every tick above Thursday's highs.

This is a daily, logarithmic, one-and-a-half-year chart of the 10-year yield. Carter Worth on CNBC has been advocating for using log charts for yields, the same we do for stock prices. So I thought I would check it out, and I think he is on to something good. If this were a chart of a stock, I'd be a strong buyer which tells me that there is higher to go for the 10-year yield.

Here is my guess, and keep in mind that it is only a guess. The 10-year yield may struggle a bit at this level and chop sideways for some time, perhaps for a few months, while it forms a significant high base, and then eventually it will break out above with a very strong move higher.

I'm making this guess based on this chart pattern, as that is what I would guess for a stock with the same pattern. What happens to stock prices if my guess is correct? It wouldn't be good, but I'm thinking we have a few months to go before we need to worry.

The price of oil looked like it was in a downtrend since the summer of 2022. However, starting in November or so, it seemed to bottom out and move sideways. I had been thinking that this was a positive development for the market in general, although not particularly favorable for energy stocks.

Now, this chart has the look of an index that may be ready to rally, but it is hard to say for certain yet. If this were a stock, I would say it is too early to buy, but I'd be inclined to be an early buyer on rallies above the 80-level.

If oil prices rally higher from here, what does that mean for the general market? I have an old-school approach to the price of oil. It is almost always higher oil prices that undermine a bull market. We all know what happens. Higher oil prices push all prices higher, including gasoline, which restricts retail spending and forces the Fed to raise rates -- and almost all of the general market suffers, except for energy stocks.

The question is, how high do oil prices go before it seriously undermines the stock market? I don't know for certain, but it is probably above 100 or so.

In the last few years, I've been watching the behavior of leading stocks to help tell me where the stock market is headed in the short-term. I don't mention it too often because I don't really have a good way to describe or show it in a chart.

I have a chart list that has about 200 stocks, and they are almost all stocks with the highest scores for earnings and relative strength. Earlier in the week, about half of the stocks had daily momentum sell signals (using the KST indicator). However, by the close on Friday, only about a quarter of the stocks had momentum sell signals. That is a decent improvement which points to short-term market strength.

What is interesting is that when I look at my chart list, I find that the stocks that are performing the best are small-caps, or are generally associated with the group of industrial building and construction. I found this ETF that represents the group (although I'm not sure about the market cap of the holdings), and the chart pattern is interesting to me. Would you buy this ETF based on this pattern?

I personally wouldn't buy, not yet anyway, although I'm quite intrigued. There is huge resistance at 47, so with the price just under 47 and with the general market showing strength, I would be a buyer if it popped up above with a strong move higher. Then I would stop out under 47.

Bottom Line

I am still a bear, but I am positioning my accounts to follow the market higher. I consider almost all of the positions to be short-term holdings that will be quickly sold to protect profits and capital. At the moment, I have no short positions, and I am long about 80% and ready to deploy the remaining cash into long positions when the short-term uptrend is confirmed.

Why am I long stocks? Because I don't fight the market, and if it wants to go higher in the short-term, then I will follow along with it. 

Why am I a bear? I've had such good fortune in my accounts over the years by being a devoted follower of the ECRI index that I just can't get past that the index is under the zero level and is pointing lower.

Outlook Summary

  • The short-term trend is down for stock prices as of Feb. 9.
  • The economy is at risk of recession as of March 2022.
  • The medium-term trend is uncertain for Treasury bond prices as of Feb. 4.

More By This Author:

Is It Too Late To Profit From The Short-Term Downtrend?
A Short-Term Downtrend Or A Market Rest?
A New Short-Term Downtrend Began On Thursday

Disclaimer: I am not a registered investment adviser. My comments reflect my view of the market, and what I am doing with my accounts. The analysis is not a recommendation to buy, sell, ...

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