Image Source: Pixabay

A short-term uptrend began on Thursday, Aug. 8. The uptrend was led higher by technology stocks, which bottomed out and started to move higher several days before the general market. Now, after a strong move higher, it is probably a bit late to buy technology stocks, but the opportunity is still there for the rest of the market.

Even though it isn't too late to be a buyer, I should note that the best time to buy stocks is usually when the PMO index, as shown in the chart below, has been at the bottom of its range for several days. Buying when the PMO is at its lows not only gets buyers into stocks at better prices, but it is also when general market risk is lower because excessive short-term over-confidence among stock traders has been washed out.

Among the early market indicators to watch are the simple five-day averages of the major indexes, because the first indication of a new short-term uptrend is seeing the major indexes close above their five-day averages, preferably with a close at the high of the day.

The price action on Aug. 8 looked promising, and, as shown in the chart above, the PMO index had been at the low of its range for several days, meaning there was a decent chance that a new uptrend was beginning.

The bullish percents can also be good, early indicators that help spot turns in the short-term market trend. After the early-August sharp declines, these two indicators abruptly stopped their declines, bottomed, and turned higher. Now, they look to be confirming the market's new short-term uptrend.

The three charts that I've shown so far make the case that the market is in an uptrend in the short-term. However, July was truly a brutal month for stocks, so should we really be in the market and buying now? This is where I think we have to step back and look at the other charts.

Junk bond prices are a good place to start when you are looking for signals to tell you whether or not you should be in stocks. The price chart of this Junk Bond ETF couldn't look more favorable, and it is generally a green light to hold stocks while this ETF is in a strong uptrend.

The Summation Indexes have turned higher, confirming the short-term uptrend. These indicators are frustratingly slow-moving and often lag far behind the other more sensitive indicators, so when they turn higher, it provides added confidence to own stocks.

As market indicators go, the number of new 52-week lows on the NYSE is one of the most reliable. The thinking is that if there is real trouble brewing in the market, it will reveal itself early on with an elevated number of new lows.

In July, with the market selling off dramatically, the number of NYSE 52-week lows remained at harmless levels. This said to me that the market was correcting its excesses rather than starting a major decline. As it turns out, the peak-to-trough price decline of the SPX was just under 10%, and even though that is a really painful percentage decline, it is a fairly common and healthy part of bull markets.

In the final days of the decline, the number of new 52-week lows spiked dramatically higher. This type of spike in new lows while the market is already oversold is typically an indication of capitulation, meaning that the most stubborn stockholders just couldn't stand it any longer and threw in the towel. After a day or so, this is when there aren't enough sellers to push the indexes any lower, so the buyers start to come back into stocks.

What is the chart telling us now? The number of NYSE new 52-week lows has dipped back down to harmless levels, and at the moment, the NYSE new 52-week lows are saying to hold stocks.

Bottom Line

My accounts are about 90% invested in stocks. When the PMO index, as shown in the first chart, reaches up to the top of its range, then I will start to get more defensive by trimming holdings and raising cash so that my accounts are ready for the next inevitable short-term downtrend.

Meanwhile, this longer-term indicator still points to holding stocks.

Yields have been declining since the peak in April. The decline in yields favored higher stock prices until they declined so sharply that it indicated that there was a serious problem that pushed stock prices lower.

This chart continues to favor higher prices for software stocks, and a significant break to new highs for this ETF. The price action in 2024 is a bit too volatile and a little worrisome. Tighter price action would have been more bullish -- however, I'm still optimistic.

The significant pullback in prices this month gives this chart the look of a failed run at former price highs. However, similar to the chart above, I'm still optimistic that it will result in new price highs.

These Defense and Financials ETFs have been looking very good as they have pushed to new price highs. This is a bullish indicator.

This is the most important chart of them all. Last week, it looked as though all had been lost as these prices sliced sharply below their multi-year uptrend lines. I had been saying that if these trends broke, then they would lead the general market lower.

However, the bounce-back looks impressive, with strong support at this past week's lows. It certainly isn't going out on a limb to decide to hold stocks unless prices have a weekly close below the horizontal support lines.

This chart is certainly worrisome. We really need to see this leading index of economic growth bottom and turn higher, similar to what was seen in November 2023.

Below is a look back at the market action that started in early July. The chart below of the QQQ is what most market technicians are watching right now, and the price action has definitely been worth noting. The first thing is that the decline from the July-peak to the August-low is three waves down, with a significant gap lower during each wave. Often, the third wave marks the completion of the decline, at least temporarily.

The first wave down stopped at the 50-day where there was a bounce. The second wave gapped lower, slicing below the 50-day, which was a strong short-term sell signal. After the failed bounce up to and under the 50-day, the third wave was a decline to the 200-day. At this critical support level, the QQQ bullishly found support and rallied back up to the 50-day average.

What now? The QQQ is just under strong resistance near the 50-day line. It's a convincing bounce off the 200-day, but with the price just under significant resistance, it is easy to imagine profit-taking and some back-and-forth before the former highs are challenged. So, this spot in the chart makes it a difficult time to add to QQQ holdings.

The SPY looks much better to me, with the recent price solidly above the 50-day. Even though the SPY price is also at resistance, it looks less formidable, and if you were to take a SPY position here, you could aggressively sell should the price fall back below the 50-day line.

Outlook Summary

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

More By This Author: