It Is Time To Look For The Next Downtrend

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The short-term uptrend continues. With the PMO at the top of the range, it is time to be looking for signs of the next downtrend. If you like to buy the dips and sell into the rallies using the PMO index as I do, then this is the time to be taking partial profits and raising some cash to be used in the next dip.

We have seen a strong Monday, a weak Wednesday, a very strong Thursday, and a weak Friday this past week. There have been some crazy swings, but not much progress up or down.

The week ended with the indexes under their 5-day averages, which is the first thing you have to see in order for the next downtrend to begin. So the stage is set. A close under this past week's low might be the next technical signal to look for. A close above last week's high probably means the indexes will continue to move higher over the short-term.

The market was up and down, but the bullish percents just kept ticking higher, supporting the uptrend. The market isn't going to move significantly lower while these bullish percents tick higher. Look for some weakness in this chart for a hint of the next downtrend.

While the market made wide swings but only moved sideways, junk bonds just ticked lower in a sign of short-term market weakness. So junk bonds suggest the market might be ready to roll over again.

Don't get too bearish though, because this chart pattern has the potential to be a bull flag and there was a bull flag pattern in mid-March. (Note to self, don't get too bearish before the charts confirm).

The big S&P 1500 index rallied up under its resistance, but it couldn't break higher. The top panel looks bearish to me with the index under major resistance, but the bottom panel is certainly bullish-looking. 

The major indexes are having trouble getting past resistance, and that resistance includes the 50-day averages. This chart reassures me that the larger trend is lower, but I wouldn't be surprised to see the indexes at least test their 50-day averages before turning lower.

This chart shows huge overhead resistance. The index has rallied for a couple weeks, but only right up to where you would expect it to rally and then falter.

You can see the same thing here. The transports are under huge resistance.

These are two of the best retail operators. If you are looking for signs that the general market is starting to improve, this is a chart worth watching. When the market is ready for a sustained uptrend, I would expect these two stocks to show improvement.

Bottom Line: I am about 6% long stocks. My percentage of short positions is way too large and I'm too embarrassed to reveal the actual number. I don't see anything in these charts to justify being bullish, but I jumped the gun getting so short and I haven't given the market enough time to transition from uptrend to downtrend.

Recession Watch

"The economy is close to entering a recession, perhaps as soon as this year." 

- Lakshman Achuthan, ECRI Institute, May 26, 2022.

This is roughly the same information I posted last weekend. The ECRI index has fallen below -5, or is at least very close. 

In my experience, when this index is below the zero level, the economy is struggling, the risk of recession is high, and it is time to be very cautious as a stock trader. But when this indicator falls below the -5 level as it is now, a recession is almost certain and it is best to be out of the stock market. 

Here is a great chart from the blog 

The dollars and data blog post doesn't show a chart of the current bear market, so I am showing one below. I'm not sure if the rally in early February should be included. 

My first thought is that the four bears shown in the blog lasted at least two to three years, and the current bear is only six months old. Second, the blog shows two bears with three major rallies and two bears with six major rallies, but he doesn't really define a major rally within a bear. 

The main points that he makes are that declines of seven weeks or more mark a low for about six months, and high upside volatility is often a warning of downside volatility to come. The thought of treading water for six months is not reassuring. It's a very interesting blog, but I have to think about this a bit more.

Outlook Summary

  • The short-term trend is up for stock prices as of May 25.
  • The economy is at risk of recession as of March 2022.
  • The medium-term trend is down for treasury bond prices as of Jan. 3 (prices down, yields up).

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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