The Short-Term Downtrend Continues To Point Lower

The short-term downtrend that started on April 8 continues to point lower. The PMO index is at the low of its range, which is where I ordinarily start looking for the next short-term uptrend. With the PMO at the lows, I usually would cover any shorts and start to deploy cash into promising stocks, but this market is so weak that I'm concerned it will ignore the oversold indicators and begin another significant leg lower. What to do?

This chart is a look at the short-term trends over the last four months or so. It shows us just how nicely the PMO index warns at the top and the bottom of its range that a change in the short-term trend is likely. 

At the moment, looking at this chart only and with the PMO at its lows for about two weeks, the chart suggests caution for the bears who continue to be short the market because a short-term rally is possible.

The charts of the bullish percents have a similar purpose to the PMO index, and they are near to the prior low level where I would expect the stock market to bottom out and start to rally. However, they aren't quite as oversold as they were in late February, and I could see them move a bit lower still and possibly remain at these lows levels for a period of time, similar to early March. 

I like to use the bullish percents because they confirm what the PMO is showing, and they also provide a more focused look at the major indexes and sectors. 

This chart shows that the bullish percents are at levels where a rally could develop, but these indicators are not as negative as they were just a couple months ago, meaning that there is still room for the market to move lower before bottoming. It is a judgment call, but I think this chart favors the bears who are still looking for lower prices.

A simple rule for traders is to trade in the direction of junk bond prices, so this chart suggests lower stock prices because junk bond prices have broken below support and are pointing decisively lower. 

The current price is well below the 50-day in red, which is a longer-term negative for the market, but it is also a signal that in the short-term there could be a rally back to the 50-day in order to close the wide gap.

I have been relying on this chart more and more in my trading because it gives good signals even on an intra-day basis. I was watching this chart on Friday early in the day when the market looked like it wanted to rally, but this ETF gapped down at the open and didn't show any sign of a rally. As it continued to decline in the morning, the market eventually followed it lower.

This ETF has potential to bounce off its lows, but at the moment, because of the break of support and the very weak close at the low, I believe this chart points to lower prices short-term. 

There are too many new 52-week lows, and there have been for some time. I'm not a buyer of stocks when new lows are at elevated levels. 

The level of new lows diminished a bit on Friday, which could be a bullish divergence and a good sign for stocks short-term. But I wouldn't make too much of it yet because a better signal for a short-term rally would have been a huge spike in new lows that would wash out any of the remaining bulls. I think that this chart continues to favor the bears.

Here is the chart that I think tips the balance towards maintaining a bearish portfolio over the weekend. Both of these major indexes have just started to break down below the really important February and March support levels.

The breakdown isn't decisive yet, but it is enough to suggest that the general market is ready for another significant leg lower. I'm certainly not buying stocks when the charts look like this, so the decision is between cash or short positions, and I chose to continue to be short.

Bottom Line: The PMO index is at the bottom of its range, which is where I generally cover shorts and look to go long. However, this time, the market feels like it isn't done moving lower. So, on Friday, I decided to cover only half of my shorts and go into the weekend looking for lower prices on Monday.

I'm vulnerable if there is a sharp rally when the market opens, but there is a decent chance that we'll see another significant leg lower for the market that will ignore all the oversold indicators.

Let's look at few more charts. The small-caps finally closed below the support that had lasted a really long time. Bears are definitely liking this chart.

The industrials look similar to the small-caps.

Financials are in trouble, too.

Outlook Summary

  • The short-term trend is down for stock prices as of April 8.
  • 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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