Regarding the short-term cycle, the PMO index of stocks showing price momentum has been at the bottom of its range for several days. With this indicator at this level and for this many days, you have to start looking for a new short-term market rally.

The first place to look for signs of a rally is this chart of the major indexes and their 5-day averages. If there is a session close above the 5-day, then there is a chance that a short-term uptrend is starting. It is interesting to see that there were three solid rally attempts over the last six trading sessions. Two of the rallies closed at the highs but were sold the next session. At some point, obviously, the short-term selling will become exhausted and the buyers will take control even if the larger trend eventually pushes the market even lower.

The bullish percents are not yet showing any indication of strength, so there really is no hint of a new short-term uptrend. However, The bullish percents are definitely showing an oversold condition for the general stock market, and strong market rallies begin at these levels. 

The summations are weak but I wouldn't overthink these indicators. When they start to curl upwards, that is the signal that an uptrend has started and that it is time to be a buyer at least to capture the profit from a short-term rally.

Bottom Line: These indicators are in position for a new short-term rally to begin, so we need to be ready to jump in when the time comes.

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How bad has this market correction been? Should we buy when the market bottoms out or stand aside? I'm going to run through these charts quickly.

The advance/decline line is currently weak, but not extremely oversold because it is holding above the horizontal support line. I like the chances for the market if this indicator holds above this support level.

Junk bonds JNK showed just a bit of weakness late last week, but overall, there is not too much to worry about based on this chart. Not yet anyway. Stocks are very weak, but as long as this ETF respects the uptrend line, I'll continue to believe that the bull market in stocks will resume.

I want to see these Treasury yields remain within a range. At the moment, yields have pulled back from their short-term highs in a way that I think favors higher stock prices.

The number of new 52-week lows has dropped off quite nicely. This is what we want to see as a market tries to bottom out during a price correction.

The NASDAQ-100 QQQ broke its uptrend line, but not too badly, and it is holding above a short-term support level for now. This chart definitely shows weakness, but I won't throw in the towel as long as the Friday session close is above the horizontal line.

The buy write indexes have broken down and are pointing lower. I wouldn't be a strong stock buyer until these indexes trade above the moving averages.

The needle for this fear-greed index has been at an extreme fear level for quite some time. From a contrarian's point of view, this is a good sign because it means a lot of the excessive bullishness is being washed out of the market. It is from this general level that major rallies begin.

This longer-term indicator went to a second sell signal recently. I took this signal very seriously and raised quite a bit of cash as a result. This is my go-to longer-term indicator. I'll have a sizable amount of cash in my accounts as long as this indicator is negative.

The chart below shows us that not every indicator is in the extremely oversold level. The percentage of NASDAQ stocks above the 50-day is quite oversold, but the percentage of NYSE stocks isn't at an extremely oversold level. 

This is one of my favorite indicators at the moment regarding the health of the general market. My thinking is that the general market cannot move significantly higher without Technology stocks XLK participating, so with both these technology ETFs well below their 200-day averages, the outlook for the general market is negative. 

Outlook Summary

The short-term trend is DOWN for stock prices as of Feb-11

The medium-term trend is Neutral for Treasury bond prices 

Strategy 

• Deploy cash by adding to stocks while the market is near its short-term cycle lows.
• Raise cash by partial sales of stocks while the market is near its short-term cycle highs.

Trader Discipline

• Corrections are opportunities
• Never invest based on personal politics
• Stick to the trading plan and don't give in to fear, greed, or anger
• Don't allow success to lead to overconfidence

More By This Author:

The Odds Favor Higher Prices
Big Market Movement In A Wild Week
The Short-Term Uptrend Continues; The SPX Reaches New Price High