The August Downtrend Is Still Intact

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Last week I thought we might be seeing the beginning of a new short-term uptrend, but it turned out to be a bad call, so the downtrend that began on Aug. 19 is still intact. However, in this weak market environment, I don't think it surprised too many people to see the market bounce for a few days and then reverse lower.

Besides, after such a strong rally off the June lows through the August highs, the market probably needed more time to consolidate before the next successful short-term rally.

Here is an annotated account of the stock market over the last two weeks. made the point on Friday that volume has been the key to successfully reading the market lately, with the poor volume on the rally two weeks ago and the increased volume on the sell-off this past week. 

Here is a look at the three-year weekly chart for the two major indexes. I noticed that if you draw these trendlines, both indexes are currently sitting right on them and look ready to break down below.

Friday's option expiration session started very weak, but it closed strong to my surprise. Participants just weren't quite ready to give up on stocks. However, the early morning selling knocked the bullish percents down quite a bit and now they are starting to look like they did in mid-June, showing some downside conviction.

Junk bonds are certainly in a long-term downtrend, but I'm not so sure in the short-term. It looks more like a five-month trading range. I won't short stocks too aggressively until this ETF starts to break down again.

There were a ton of new lows on Friday, which may be options expiration-related, but I tend to think that nothing really reveals the underlying strength or weakness of the market better than this chart -- and right now it says that the market is weak.

I've been out of town for a week and just got home late last night, so that is why this blog is posted a day later than usual. I was able to follow the market news and charts just enough to know that inflation was worse than expected, and that it is apparent now to just about everyone that the economy has to get worse before stock prices can get better. On Thursday morning, I sold half of my long holdings and bought modest positions in bear 3x ETFs.

I had a hard time selling my positions because they were mostly clean energy stocks, and I believe in them because of the climate news and because the charts are so good. But I decided this just isn't the time to look to make money holding stocks, and the way to make money will be by taking advantage of short-term market swings, and most of that will probably be to the downside.

Outlook Summary

  • The short-term trend is down for stock prices as of Aug. 19.
  • 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:

Caution Is Called For In This Short-Term Uptrend
The Short-Term Market Downtrend Continues
A New Short-Term Downtrend May Have Started On Friday

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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