The Short-Term Uptrend Continues With Large Price Swings

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The short-term uptrend looks set to continue, although with some large swings in price appearing for the major indexes. The PMO index reached the top of the range, then fell back just a bit, which looks similar to the previous cycle seen in November. With the PMO at its current level, it suggests that the best time to buy stocks in the short-term has passed, and it is important now to be more selective.

Also, if there are any stocks that you own that are looking extended, this is the time to be calculating appropriate sell stops in order to lock in partial profits. Although, I should note that the past two short-term term cycles lasted for a number of weeks, so it is a bit early for aggressive profit-taking.

The market was very weak on Wednesday and Thursday, but it snapped back nicely on Friday, although the Dow was still under its 5-day average. This type of price action is difficult to trade, to say the least.

Despite the large moves in the major indexes, the bullish percents have remained fairly stable. They aren't telling us much right now, other than that it was too soon on Thursday to write off the current rally.

On Thursday, the junk bond ETF pulled back down to its support level where the price rebounded. This is normal price action and this ETF continues to trend higher, indicating the market's willingness to accept a degree of risk. The goal is to buy or sell stocks in the same direction as the price of junk bonds, so this chart suggests it may be beneficial to own stocks (or cash) rather than to short stocks.

The new 52-week lows continue to behave well and are at harmless levels, which is another signal that favors owning stocks at the moment. You may want to watch this chart every day because the number of new 52-week lows can increase quickly, and this sometimes occurs while the major averages are performing fairly well.

Here is a chart with the 5-day average net new highs/lows displayed in the top panel, and it shows the index going blue at the start of 2023. That's a decent signal that the majority of stocks are performing better than they had been, although the SPX in the lower panel shows the index still below its 200-day line. The SPX has the look of a potentially bullish inverted head-and-shoulders price pattern.

I marked the SPX 3920 level as my line in the sand, but this past week it proved to be too aggressive a level because the index dipped below it for a day and then bounced back above. The downtrend line is obviously important here, and the behavior of the SPX as it tests this line will give us important market signals.

Speaking of important lines, this weekly logarithmic chart of the NDX shows the index to also be at a very important price level. Let's see if it holds.

Bottom Line

I had a rough week. I correctly anticipated the selling on Tuesday and had taken some profits, but I was mauled by the big sell-off on Thursday and was stopped out of a number of positions only to see them bounce back on Friday afternoon. But that is how it goes when you try to trade a bit too aggressively during a bear market.

I continue to see quite constructive market indicators, including a number of stocks that are setting up nicely for breakouts. The challenge for the indexes and stocks will be to hold above their break-out levels. That is the real test, and it has been disappointing so far.

I am about 30% long and 20% short. I doubt I will add to the short positions in the coming week, and I may add very selectively to the longs that are leading the market. I'm only buying stocks with the best earnings and chart patterns.

The ECRI Index took an unexpected tick higher, as shown in the chart below. However, the index continues to be unfavorable for both the economy and stocks.

Outlook Summary

  • The short-term trend is up for stock prices as of Jan. 6.
  • The economy is at risk of recession as of March 2022.
  • The medium-term trend is higher for Treasury bond prices as of Nov. 19 (prices higher, yields lower).

More By This Author:

Last Week's Short-Term Uptrend Continues With Surprising Strength
A New Short-Term Uptrend May Have Started On Friday
Keep Watch For The Next Short-Term Uptrend

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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