What a week, and what a Friday. It looks like we had an oversold key reversal on Friday, but we need to wait at least until the end-of-day Monday to get some confirmation signals that a new uptrend is beginning. I made a few initial purchases on Friday, but I won't get aggressive or use margin until there is a white candle posted on this chart. 

These are the buy-write indexes. All three had strong closes on Friday with only the NASDAQ still below its 10-day. I don't think we can have a new uptrend until all three close above their 10-day averages. 

Notice that when the market is selling off these buy-write indexes become much more volatile. When the uptrend resumes, the volatility settles way down and the buy-write indexes start to trade in a tight daily range. Early February is a good example of a transition from a volatile downtrend to an orderly uptrend, and I'm sure we'll see something similar happen again when the market is ready to trend higher.

A side note about these buy-write indexes, because they get volatile while the market is selling off, they can give false signals if you don't pay close attention. The buy signal occurs when the volatility is gone, but also the best buy signals from the buy-write indexes come when the PMO is at the bottom of the range rather than as the PMO is declining.

These are the stock indexes and I think they all need to close above their 5-day averages before we can declare a new uptrend. Similar to the chart above, we are still waiting on the NASDAQ to close above the 5-day.

The 52-week new lows will settle way down to harmless levels when the new uptrend begins. If on Monday after the close, the level of the new lows on the NASDAQ is below 50 (and preferably even lower), then I would consider it to be a data point that helps confirm a new uptrend.

Here is a look at the end-of-day calculation of new lows (the symbols in the chart below are different than the symbols in the chart above). You'll notice that there were never enough new lows within the NYSE common stocks to indicate the recent selling was a serious decline for the general market. (Common-stock-only seems much more relevant to me because it excludes ETFs and closed-end funds that trade on the NYSE.)

I certainly think we are very close to the beginning of another short-term uptrend. But this downtrend has snapped us all back to reality. The easy money has been made and it is now time to focus more on preserving profits and respecting risk.

For me, respecting risk means that I have to stick to my trading game plan. Raise cash when the PMO is at the top of the range, deploy cash when the PMO is at the bottom of the range. Dedication to this plan will be the key to a successful year in the stock market.

The Longer-Term Outlook

The ECRI index continues to tick higher. As long as this index is ticking higher I believe that the economy is in decent shape and stocks will move higher in price over the longer-term (although with the occasional, scary pull backs).

Here is a look at the ECRI index during and after the 2008 bear market. The index shot up in 2009 like a rocket after it had collapsed in 2008 below the -5 level which is where I exit the stock market altogether and wait for the index to bottom out. 

The reason I am looking at this chart now is to remind myself of what can happen to the economy and the stock market when the ECRI index is so extended. This chart shows that in 2010 after the index had peaked, it then went back below -5 and the stock market sold off hard. Then the ECRI and stock market repeated the cycle of rally and collapse in 2011.  Will this happen again when the ECRI peaks sometime in 2021? I don't think so but I don't want to be caught wrong-footed in case it does. So, I will be watching the ECRI index carefully and also listening to Laksman Achuthan to hear what he has to say about the prospects for the economic cycle.

I should point out that the stock indexes can rally nicely while the ECRI is moving lower as shown from Oct-2009 thru Apr-2010, but if the ECRI moves lower too far, then the stock indexes will follow lower too.

I haven't posted any charts about the growth of M2 for awhile because for some reason the data isn't being updated by Stockcharts.com. I will send them a note to see if they can get it fixed.

My favorite group of stocks right now is the semiconductors. They got hit a bit harder than I was expecting, but now after looking at this chart I don't think it was too bad particularly after running up so far since the early November election.

I probably won't add to holdings until this index can rally above its 50-day because I already own the leaders.

I was scrolling through my chartlist of ETFs and this ETF really impressed me. At the moment, its top holdings are cruise ships, banks, airlines and energy companies. 

The oil and gas stocks are making quite the comeback and this chart looks to me like it has plenty of room to run higher.

Another impressive chart. The top holdings here are Facebook, Google, Twitter, Netflix, Disney.

One last sector chart. This is the Industrials and it looks very strong me. I like the companies in this ETF such as Honeywell, Raytheon, Deere, Caterpillar, 3M.

Outlook Summary

The short-term trend is down for stock prices as of Feb.18. 

Contrarian sentiment is unfavorable for stock prices as of Nov.14.

The economy is in expansion as of Sept.19.

The medium-term trend for treasury bonds is down as of Oct.10 (prices lower, yields higher).

Strategy During a Bull Market

• Buy large-cap stocks and ETFs at the lows of the medium or short-term market trends
• Buy small-cap growth-stocks on breaks to new highs in the early stages of market trends
• Reduce buying when the market trend is at the top of the range
• Take partial profits when the market uptrend starts to struggle at the highs

Trader Discipline

• Don't be afraid of corrections because they are opportunities
• Never invest based on personal politics
• Take pride in sticking to the trading plan
• Don't give in to fear, greed, or anger