The Short-Term Trend Is Pointing Lower

The market's short-term trend is now pointing lower, although not all the charts agree. The broader market is clearly suffering, but the large-cap market leaders continue to behave well.

The PMO index has turned decisively lower, as shown above, but the SPX is still trading above its 5-day average and it is hard to declare a downtrend while the SPX is above its 5-day. Maybe instead of the SPX cap-weighted index, I should be looking at the SPX equal-weighted index? After all, the trend that I'm looking for relates to the broad market represented in the equal-weight, not the large-cap leaders that dominate the SPX.

The chart below shows that the SPX equal-weight started trading down below its 5-day average on Wednesday, which is the same day that the red candle showed up in the PMO index. 

The bullish percents of the two major exchanges are a very good representation of the broader market, and both are now pointing lower. The NYSE bullish percent broke down on Wednesday, the same day as the PMO index and the SPX equal-weight.

The two major exchanges were headed in opposite directions this past week. This is a negative divergence.

Junk bonds are pointing lower, although it isn't too bad so far and they are holding at support.

This chart makes a fairly strong case for a very weak broad market (said with understatement). On Thursday, there were over 400 new 52-week lows. That is a lot, and is a bearish indication.

I think I have made the case that the broader market is weak even if the SPX and NDX are maintaining their strength. So will the SPX and NDX pull the rest of the market up with them, or will they turn down with the broader market?

Based on the two charts below of the SPX and NDX summation indexes, breadth in the indexes is weakening, so I think they will turn lower. 

If the two major indexes turn lower, there is some risk that they could experience sizable pullbacks before the short-term downtrend bottoms out. This chart shows that the indexes struggle when they extend too far above their uptrend lines, although they don't necessarily have to pull all the way back to the lower uptrend, as shown by the SPX in May. I don't like the risk.

Needless to say, I am not optimistic about the short-term prospects for the market. I have a decent amount of cash in my accounts along with some 3x bear ETFs which I decided to purchase on Thursday when I saw the number of new 52-week lows spike.

Outlook Summary

  • The short-term trend is down for stock prices as of Nov. 17. 
  • The economy is in expansion as of Sept. 19, 2020.
  • The medium-term trend is down for treasury bond prices as of Sept. 23 (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, ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.