Time To Start Looking For A Bottom In This Downtrend

The short-term downtrend continues, as I am sure you know. The selling has been brutal, yet here we are, still waiting for the PMO index to reach all the way down to the bottom of its range. 

It is surprising that about 7% of stocks remain on PMO buy signals. It has been such a weak market that I would have expected all stocks to be on sell signals by now. I'm sure the stocks that remain on buy signals are the inflation-sensitive areas such as energy, and the defensive areas such as consumer staples. 

Even though the PMO isn't quite as low as it could be, I think it is time to start looking for a bottom to this short-term downtrend and to be ready to participate in the next rally.

The major indexes are all pointing decisively lower, but only the Nasdaq has fallen below its October low.

The Nasdaq has already declined about 15% off its peak. The next downside target is the May-2021 low, which is considerably lower, but the February 2021 through May 2021 period provides a decent support area. So it is possible to see a bottom here without reaching the lower target.

The bullish percents continue to point downward. The SPX still has plenty of room to move lower, but the NDX is at the point where the selling will probably lighten up and buyers will step in.

The SPX equal-weight had a rough week, but now it is near a support level and its momentum indicator has reached the low of its range.

This chart has been telling us for several months that there was a problem brewing for stocks. You shouldn't see a lot of new 52-week lows while the indexes are advancing to new highs.

Now, this chart is telling us something different with the market in serious decline and the number of new lows spiking dramatically on Friday. The chart is now giving us a signal that the market may be bottoming out. A lot of new lows when the major indexes are peaking is a very bad sign, but a lot of new lows when the market has been selling off is the signal that the market is washed out and ready to transition back to a short-term uptrend.

But, even though I paid attention to this chart and prepared my accounts for the sell-off, I'm still experiencing a bit of disbelief that stocks have sold off so badly.

This is the chart that really has people shaken. The selling of Netflix (NFLX) and a few other stocks was perhaps expected, but this reversal for a leader like Amazon (AMZN) means that any stock can succumb.

And what happens to this stock now? A bounce back to the 40-week? Or a total collapse down to pre-COVID-19 levels? There is a lot of room below the current price and very little support.

Small-caps broke down this week in a big way. The small-caps are showing room to run lower with very little support.

This is the chart at the center of the market turmoil right now. The strong rise in the CRB is pushing stocks and bonds lower. However, the index looks to me like it is a bit extended and ready to pause for a bit, which will help stocks find their footing for a while.

Bottom line: I sold my bear 3x funds on Friday morning and I still am about 10% long stocks.

Outlook Summary

  • The short-term trend is down for stock prices as of Jan. 5.
  • The economy is in expansion as of Sept. 19, 2020.
  • 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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