The Short-Term Downtrend Flipped Up

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The market's short-term trend flipped from down to up this past week. I have been following this short-term trend for as long as I can remember. It is amazing to me that at the bottom of each of these downtrends, it almost always feels like the market is falling off a cliff. But, of course, it very rarely actually falls off the cliff, and instead it is pulled back from the edge just when it feels the worst.

Here is a look at the chart I showed last week with the PMO index in the top panel and the momentum of the NYC A/D line in the bottom panel. This momentum indicator turns higher very nicely when the market starts to rally and often gives a very clean-looking confirmation of the new uptrend. Of course, it isn't a guarantee, so don't bet the house, but the turns in this indicator are great short-term timing signals.

I've been watching this chart closely for months. The rule of thumb is to trade stocks in the same direction as the trend in junk bond prices. In other words, when this junk bond ETF is rising, own common stocks. And when junk bonds are selling off, get defensive in your stock portfolio.

Here is a look at the weekly chart with the junk bond ETF listed in the top panel and the SPX illustrated in the bottom panel. The chart patterns are similar. How does this help? While stocks were struggling over the past few weeks, the price of the junk bond ETF was relatively stable and closing above its uptrend line, and that gave me the confidence to hang on to the better-performing stocks in my accounts.

I think that is enough about the short-term trend for now. My accounts are long stocks, and just because I am long doesn't mean that I'm not nervous that something could cause stocks to sell off. There are plenty of worries, as you know, and this is a traditionally difficult time of the year for stocks. 

I'll remain invested until there are some signs of significant market weakness, or, more likely, the current short-term uptrend starts to peak.

Oil prices are ticking upwards again, and on Friday, there was an important move above the August buy point. Even though I know that there will be higher oil prices along with a strong economy, I'm also just like everyone else; higher oil prices mean higher gasoline prices, and that rattles my confidence in the future.

However, I remember that there were a couple of significant oil production cuts in the spring as prices decreased. So as prices rise, I would expect Saudi oil production to increase, which should help to prevent prices from going much higher.

The chart below shows some very good-looking chart patterns for the most important areas of the stock market. Technology looks ready to break out, and this is terrific leadership for a bullish stock market.

Here is another chart with some great-looking price patterns. Home builders, construction, and suppliers are very strong and breaking out above their late 2022 highs. This is a bullish indicator.

Here is another chart for the bulls. I like this COWZ ETF, as it is invested in the stocks with the best cash flow. The top holdings are dominated by energy and industrial stocks.

Outlook Summary

  • The short-term trend is up for stock prices as of Aug. 29.
  • The ECRI Weekly Leading Index points to economic recovery as of July 2023.
  • The medium-term trend is uncertain for Treasury bond prices as of February 2023.

More By This Author:

Soon To See Signs Of The Short-Term Uptrend
Preparing For The Next Short-Term Rally Higher
Stock Price Trends Are Out Of Sync

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