Looking ahead to 2021, there are a number of factors to be concerned about.

Stocks are overvalued. Unemployment remains elevated, especially among lower-wage workers. The economy continues to demonstrate characteristics of a K-shaped recovery, which is one where different parts of the economy recover at different rates. (I outlined how this works, and why it’s a concern, in this piece.)

For now, the short-term outlook remains bullish based on the price action. The SPDR S&P 500 ETF (NYSE: SPY) ended the year at a new all-time high on a closing basis.

What My Indicators Are Telling Us

My Profit Amplifier Momentum (PAM) indicator for SPY is shown at the bottom of the chart.

PAM is specifically designed to slowly change from bearish to bullish. This reduces whipsaw signals, which are signals that end quickly reversing. Conversely, PAM focuses on the longer-term trend. This means that while it is unlikely to signal an exact top or bottom, it is likely to be on the right side of significant trends.

As I noted recently, PAM is very close to the neutral level of zero and has been for the past three months. The pattern in PAM is similar to the pattern seen at the beginning of the bear market when a narrow range in the indicator was followed by a large move in the stock market. At the time the bear market began, PAM was slightly bearish. Its range increased as the decline began.

PAM has now stayed between -1 and 1 for seven consecutive weeks. There aren’t many examples of this. In fact, I found just 24 instances using 120 years of history on the Dow Jones Industrial Average and just five with SPY. However, after this signal, there is a tendency toward high volatility — about three times the average level of volatility. The probability of decline over the next month is twice as high as average.

In other words, PAM is decisively pointing toward a decline.

So is my Income Trader Volatility (ITV) indicator, which is shown in the next chart.

ITV is designed to mirror the behavior of the volatility index (or VIX). One way it differs from VIX is the fact that ITV offers precise “buy” and “sell” signals. “Buy” signals come when the indicator falls below its moving average (MA). In the chart, ITV is the solid line, and the dashed line is the MA.

ITV is based solely on the price action. I published the formula for ITV and details on how to use the indicator in 2015. I started using it to help my subscribers profit two years before that. Over the years, it has proven to be an excellent tool for determining the direction of the trend.

At Friday’s close, ITV moved above its MA, giving a “sell” signal. This indicates volatility is likely to rise, which should coincide with a price decline.

Closing Thoughts

Last week’s move was strong, and short-term momentum could push prices higher in the first few days of the week. However, a decline should begin before the end of next week. I’ll be watching my indicators to determine if this is a pullback or a significant decline and should have more on that question next week.

Remember to stay on your toes in this market. You’ll need to be selective with the stocks you buy, which is why I encourage you to check out the latest report from my colleague Jimmy Butts…

You see, for the past few years, Jimmy has been quietly sending a personal “best of” list for the coming year to a select group of investors…

In past years, this select group of stocks has delivered extraordinary gains of 72%, 75%, 107%, 117%, and more…

This year, he’s found 5 stocks that he believes will unlock mega-gains in 2021 and beyond. To get the details, go here now.