The Short-Term Downtrend Continues Despite The Rise

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The short-term downtrend continues despite the rise in the PMO index starting last Wednesday. Following my usual trading strategy, I made a few stock purchases early in the week thinking that I was buying the market dip, but by the end of the week, most of those purchases had been stopped out. Obviously, this is a difficult time to be trying to make money in the stock market.

Last week started well with strong rallies on Monday and Tuesday, and on strong volume. But on Thursday, the market reversed lower, anticipating the Friday morning jobs report, and then there was the big sell-off on Friday with the SPX down by nearly 3% and the Nasdaq down by almost 4%. summed it up well with this comment.

"The nascent rally attempt is still intact as indexes hold above their Sept. 30 lows. But the prospect of higher interest rates, a strong U.S. dollar, pressure on corporate earnings and worries about a hard landing for the economy are still major impediments for the stock market.", Oct. 7.

In other words, they are saying that despite all the terrible news, there is still a possibility that the market will hold above the Sept. 30 low and resume the short-term uptrend that looked like it was starting this past Monday and Tuesday. I agree with their statement, and I will add that we've all seen the market retest a low before it reverses higher, creating a short-term "W" bottom.

So, despite the terrible action on Friday and the likelihood of a scary gap down open on Monday, we have to be open to the possibility that the market is putting in a short-term bottom that sets us up for the traditional Fall rally.

I follow this junk bond ETF closely because I think that if stocks are going to really fall hard, then the price of this ETF will at least confirm to the downside, if not lead the market lower. At the moment, it looks like this ETF is trying to find a bottom after being rejected at its downtrend line. If this chart pattern is going to turn bullish by breaking above the downtrend line, I think it needs several more days.

As mentioned, the Nasdaq was down almost 4% on Friday, and I think that this chart was a major contributor to the Nasdaq weakness. Higher oil prices mean higher yields, and higher yields are very bad for tech stocks. This is a decisive-looking break of the short-term downtrend. This is bearish for stocks.

Speaking of yields, to my surprise the 30-year yield has pushed to new highs. I had thought that by now investors would be buying the 30-year as a capital preservation strategy. These continue to move higher, and as long as they do, stocks will be under pressure.

This was a bad week for Tesla. The price is still above an important support level, but it broke below this critical longer-term uptrend line. I don't like the look of this.

Here is the chart for Apple, which has a look similar to Tesla.

This is a look at the Schwab dividend ETF with a yield of about 3.35%. I've been parking money in this ETF for its safety and dividend, but as Treasury yields continue to rise, this ETF continues to get hurt. Also, after breaking the June low, it has the potential for a substantial decline. I'm not sure what I am going to do with this position.

Every market participant can clearly see the longer-term downtrend of the market. The only question at the moment is whether it is worth the risk to buy stocks in anticipation of a short-term, counter-trend rally. For me, the answer is yes, but I'm not sure if it is because the reward is worth the risk or whether it is because I can't stop myself. 

I don't have too much else to add to a discussion about the short-term trend of the market. Here are some additional charts.

This chart shows that there is plenty of room for a spike higher in the VIX if the market really falls apart, but during more normal market declines, the VIX tops around 35 or so. So unless the bottom really falls out from under the market, then the VIX appears to show that a short-term bottom is near.

There has been a lot of discussion about how well earnings have held up in the early stages of this bear. Looking at this chart, it seems to me that earnings have the potential for a large drop after such a huge run in 2021.

Outlook Summary

  • The short-term trend is down for stock prices as of Aug. 19.
  • The economy is at risk of recession as of March 2022.
  • The medium-term trend is lower for treasury bond prices as of Sept. 13.

More By This Author:

The Market Is Gripped By A Bear
A Significant Shift In Sentiment Was Seen
The August Downtrend Is Still Intact

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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