The Short-Term Trend

The short-term downtrend continues.

Here is a look at the NYSE bullish percent, which peaked at a very high level in June after bottoming at a very low level in March. The indicator has pulled back nicely, which is a signal for me to start looking for signs of the next short-term uptrend.

The stochastic is at the bottom of the range, which is another good signal to be looking for signs of the next short-term uptrend.

The major indexes continue to look healthy to me. They are all still above their 50-day averages, which is a good sign after two or more weeks of a short-term downtrend.

This chart helps to put the best-case and the worst-case scenarios into perspective for the short-term trend. 

The selling on Friday, June 26 pulled the market down to the first level of support around 3000 on the SPX. If the selling begins to pick up, the next important support will be around the 2800-level on the SPX, which corresponds with the May lows.

Bottom Line 

The short-term downtrend accelerated towards the end of the week, but even with that move, selling the indexes look healthy. So, my guess is that the market is washing out the excessive bullishness before setting up for a summer rally in July. But, I won't trade based on my guess. If the selling continues, then I'll let the market take out positions as they hit stops.

The Longer-Term Outlook

Here is a look at the chart that I am using to show the medium-term. It is still on a downtrend, although the indicator has now turned up.

So far I am happy with this indicator. After such a strong run off the March lows, you might think that the indicator hasn't done its job, but a big part of the run higher is due to the snapback caused by such extreme selling. I think this type of market behavior is emotional and represents the short-term. A medium-term trend is more sustainable and stable, like the rallies in 2017 and 2019.

How do you use the indicator? For me, with medium-term in a downtrend, it means that I need to be more cautious and to sell positions more aggressively at the start of market pullbacks. But once the indicator turns positive, I can give positions more flexibility. 

Outlook Summary

• The medium-term trend is down as of February 26.
• The short-term trend is down as of June 11.
• The economy is in recession as of March 28.
• Contrarian Sentiment favors lower prices as of June 6.
• The medium-term trend for Treasury bonds is up as of January 25 (prices higher, yields lower).