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What in the world is going on with the stock market? This was certainly a rough week for traders. First, there was strength on Tuesday, then weakness on Wednesday, followed by strength on Thursday, and finally weakness on Friday. 

For the SPX, this zig-zag resulted in a bearish pattern of lower highs and lower lows. On the other hand, for the NDX, the zig-zag moved the index in a more promising sideways pattern, and Friday's close held above a support level that goes back a number of weeks.

I still can't say with much certainty what is happening with the market's short-term trend, but the medium-term trend looks like it has topped out. The NDX was the stronger index this past week, but that is probably because its medium-term trend topped in March, whereas the SPX trend topped early this month. Also, the NDX is dominated by the mega-cap stocks which have become defensive holdings for portfolios during market corrections, so it isn't too surprising to see buyers of these stocks during the past week.

There was an interesting conversation about the tensions in the Middle East causing Friday's selling, and I would agree with that point of view - but with the reminder that the market tends to look for reasons to sell when traders are nervous about a pullback and are ready to raise cash.

The two government inflation reports and the increase in Treasury yields also rattled traders and helped to bring down stock prices. Of course, these reports also indicate that the world economy is stronger than expected, so it is hard to sort out exactly how much these reports help and/or hurt stock prices.

So, where does this leave us? Should we buy our favorite stocks on the pullbacks now? I raised some cash early in the week, and I'm already itching to buy. I like to start the trading week with a trading plan, so I'm going to look at some charts and make some decisions.

But one last thing before I start. This is an election year and I like to be mostly on the sidelines with plenty of cash going into a Presidential election. So if I buy stocks now, I know for sure that I'll be trimming my holdings in the coming months. That means that if I buy now, I'm expecting price appreciation between now and when it is time to move to cash.

This following chart shows what used to be my favorite indicator, the PMO index, in the lower panel, and because it is near the low of its range, it is telling me that most stocks are currently experiencing short-term momentum sell signals. That is usually, in the short-term, a signal to start looking for short-term opportunities to buy on the assumption that I had raised cash while the PMO index was at the high of its range.

The upper panel is the momentum of the A/D line, and it is showing a solid sell signal. It looks closer to the beginning of its move lower than it does to a point in which it starts to rise, which means that is probably too early to be buying based on this indicator alone.

In other words, this chart shows a recent sell signal in the upper panel but a well-established sell signal in the lower panel. This is not that helpful, although I'm more inclined to believe the momentum indicator at the moment.

The NYSE Summation also shows a solid and recently established stock market sell signal. This indicator will usually agree with the previous chart's top panel because it is, for the most part, looking at the same information.

This chart is a bit surprising because it shows that the two major indexes are holding above their 50-day averages. I would have thought they would have broken down by now. You can't get too bearish towards stocks as long as these indexes hold the 50-day averages. I should add though that the equal-weighted indexes have broken down below the 50-day averages.

This next chart shows how the larger medium-term trend broke its uptrend, and then followed through to the downside with a confirming outside day. And there is plenty of stock distribution taking place, as revealed by the red volume spikes.

I've drawn support levels in this chart to show how far down to expect the indexes to reach. The SPY has already broken down below the short-term support level that I showed last week. However, it hasn't broken below the 50-day average shown in the previous chart.

I'm guessing a bit here, but I would be surprised if the SPY doesn't break below the 50-day and decline to about the 500-level. That would be a moderate and healthy correction, and the market could start to heal at this level and begin to move higher again.

However, if the SPY breaks through the 500 mark, then we have a more serious correction, which would be much more difficult for me because it would probably take the market longer to recover, and the timing for a recovery could easily be just after the election in early November.

Investors.com seems to confirm that there is significant distribution. 

So, now what? In the short-term, it is too early to deploy cash back into stocks. And in the medium-term, I'm thinking the best opportunity to add to longer-term holdings will be in October before the election. That is still a long way off, and it is going to be really hard to resist buying between now and then, so the plan will be to only buy stocks for short-term swing trades with tight stops.

Bottom line: I have about 50% cash, and the rest is in stocks. I'll allow stocks to be stopped out if they fall in price under the 50-day average of the individual stocks. Thanks again for the nice comments I've received.

Outlook Summary

• The short-term trend is uncertain for stock prices.
• The ECRI Weekly Leading Index points to economic recovery as of July 2023.
• The medium-term trend is down for Treasury bond prices as of Feb. 1 (yields up, prices down).

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