Caution Is Called For In This Short-Term Uptrend

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The general market turned higher this week, and we are now in another short-term uptrend. The PMO index has not yet posted a white candle, so I would consider it to be an unconfirmed uptrend for now, and this means that a little caution is called for until the PMO confirms it.

Here is a detailed look at the past six trading sessions, showing a classic, technical short-term transition from downtrend to uptrend. This price action looks good, although the Friday session rallied on lower volume.

This chart shows the past six months of the NYSE. The strong rally in August took the index to a level just under the May highs and the downward sloping 200-day average. The index pulled back as expected and then formed a higher low at the support created by a very nice short-term double bottom base formed in June and July. Friday's session pushed the index above its 50-day, which is starting to slope upwards. That's nice-looking price action.

The bullish percents were showing a nice turn in their trends higher late in the week. I should also mention that these bullish percents have been ticking in an orderly fashion since the big breakout mid-July. It is a subtle change, but it looks like the panic is gone from the market. That appears bullish to me.

This chart shows the stochastic of the inverted VIX in the top panel and SPX in the lower. Except for the terribly bad signal in May, the turns in the stochastic correspond well with the turns in the short-term trend of the SPX. Now we are getting a very nice turn higher in the VIX corresponding with a turn higher in the SPX. This is short-term bullish action.

I often mention that new 52-week lows reveal a lot about the health and direction of the market. New lows spiked higher as the market sold off in late August, and as the market started to change trend last week, new lows began to diminish. That is the behavior to be expected and what we want to see.

There is a disappointment though, because the level of new lows on Thursday, when the short-term rally began, is too high for both exchanges, and the level on Friday, although quite good for the NYSE, is still too high for the Nasdaq. If this short-term rally is to be believed, then we need to see new lows continue to behave on the NYSE and trend lower for the Nasdaq early next week.

Let's review what we have seen so far. The market experienced short-term bullish price action late last week, and the price action was confirmed by the bullish percents, the inverted VIX stochastic, and the harmless level of new lows for the NYSE. The short-term uptrend is unconfirmed though, because the PMO index hasn't turned higher, volume is disappointing, and the Nasdaq new lows are still too high.

Okay, now let's look at this chart showing us what the market faces in the coming week. If the rally continues for a few more days, all three of these indexes will be up against overhead resistance and their downward-sloping 200-day averages. I think that if the rally is going to be able to push above these levels, then we need some better volume and a tick higher in the PMO indicating broader market participation.

I have some extra time, so I'm adding a few more charts. This inverted 10-day put/call chart shows a nice upward trend. This is encouraging.

This junk bond ETF is also encouraging. It is still in a larger downtrend, but after the severe selling in June, the selling eased off.

The European markets were surprisingly strong last week, and a number of people have noticed and commented on it. Speculation is that the news has been so bad for so long that there aren't any sellers left, for now anyway. Also, the US dollar has been so strong and became so extended that it reversed off the highs last week, helping Europe's stocks.

Treasury yields have been moving higher at a steady pace since Aug. 1, but they are still below the June highs. I thought we would see a turn lower in yields for the 30-year by now as a signal towards the preservation of capital. The strength in yields along with the bottoming of stocks and junk bonds point to stubborn strength in the economy.

Bottom Line: I am still a bear, but the market is holding up well and I can't ignore it, so there is a little bit of doubt creeping into my bearishness. But it doesn't really matter because I am sticking to my trading plan to deploy cash with the PMO at the lows, and raise cash with the PMO at the highs. 

At the moment, I am about 45% long and 55% cash. Most of the longs are in health care, alternate energy stocks, and 3x bull ETFs. I'm always quick to sell the 3x ETFs, but I have more conviction towards the stocks. When it comes time to raise cash again, I will likely sell half the individual stock holdings, but if the market starts to look really bad, I'll sell the stocks and move into 3x bear funds.

Outlook Summary

  • The short-term trend is up for stock prices as of Sept. 8.
  • The economy is at risk of recession as of March 2022.
  • The medium-term trend is uncertain for treasury bond prices as of Aug. 13.

More By This Author:

The Short-Term Market Downtrend Continues
A New Short-Term Downtrend May Have Started On Friday
Still In A Short-Term Uptrend

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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