Short-Term Downtrend Begins

A short-term downtrend started on Jan. 23. This short-term downtrend has been confirmed by an increase in the NYSE new 52-week lows, a dip in the NYSE bullish percents and a decline in the NYSE cumulative net advance/decline line.

If you are a regular reader, you are probably wondering what happened to the short-term downtrend that I labeled in early January. 

I did a review of the last 12 months in order to try and improve my labels of the short-term trends, and I realized that I was relying too much on this PMO Index and that I wasn't getting confirmation from the other breadth indicators. So, I removed the early January labels, and now I set out to do a better job in 2020.

Here is a look at the NYSE bullish percent and it has turned lower. This indicator usually turns lower after the other breadth indicators, so it works well as a final confirmation but it isn't the best as an early warning.

The number of new lows is at a level on the NYSE that indicates something negative for stocks is brewing. It could be the virus spreading in China, but I don't really know and I don't think it matters. All I know is that an increase in new 52-week lows while the market is near the top of a rally is often an excellent signal to raise cash and suspend any new purchases.

You probably noticed that there isn't a corresponding increase in new lows for the NASDAQ. That could easily change early next week so let's watch for it, but it makes the current market warning signal less significant. Maybe it means a yellow flag has been raised instead of a red flag.

As a side note, I should mention that a large number of new lows isn't always bearish. While the market is near the low of a price pullback, it is often a good sign that the market is flushing out the last sellers and that the market could be near a point where we should be buying stocks. In this case, instead of a sell signal, it is a buy signal.

So, the point is, and this matters a lot, you need to know where prices are in the market cycle when you see new lows. New lows at the top of a cycle are potentially bearish. New lows at the bottom of a cycle are potentially bullish... and, of course, because the market likes to keep us guessing, there will always be exceptions to this.

Another side note, paying attention to the number of new 52-week lows has for years been one of my important trading tools. But, in recent years, it hasn't worked as well as I expected. I think this started in 2018 when there were tons of new lows but the market kept marching higher. I haven't lost faith in this indicator, though, and I suspect it will start working again. So now I feel the need to remind myself how to use it effectively.

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

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