BOND ETF TESTS NECKLINE BREAKOUT -- INFLATION-INDEXED BOND ETF FOLLOWS OIL -- CALCULATING THE NET NEW HIGHS RATIOS -- NYSE NET NEW HIGHS REMAIN BULLISH -- NASDAQ NET NEW HIGHS DIP AND RECOVER
BOND ETF TESTS NECKLINE BREAKOUT... Link for todays video. The 20+ year Bond ETF (TLT) surged above neckline resistance in mid March, but pulled back as stocks rallied over the last several days. The inverse head-and-shoulders breakout remains in play as broken resistance turns into the first support level to watch around 92. Notice that the right half of this pattern looks like a potential rising flag or wedge. While such patterns could turn out bearish, the seven week trend is clearly up as long as the flag/wedge rises. A move below the lower trendline would be the first sign of trouble and a break below the early March low would be outright bearish. The indicator window shows the 20+ year Bond ETF along with the S&P 500 ETF. These two have been negatively correlated for sometime now. TLT rose as stocks fell from late February to mid March. TLT then pulled back as stocks recovered. The next move in stocks could help define the next move in bonds. Chart 2 shows the 7-10 year Bond ETF (IEF) for reference.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
INFLATION-INDEXED BOND ETF FOLLOWS OIL... Even though surging oil prices increase inflationary pressures, money moved into bonds as oil surged in late February and early March. Bonds attracted money in a flight to safety and on the prospects of weaker economic growth due to surging energy prices. Inflationary pressures are definitely building as commodity prices rise and the Dollar falls. These pressures increase the chances of tighter monetary policy and higher interest rates. The Inflation Indexed Bond ETF (TIP) is the canary in the coalmine for inflationary pressures. Chart 3 shows TIP surging above resistance in late February as the West Texas Intermediate Continuous Futures ($WTIC) surged to $105. Oil remains at lofty levels and this bond ETF is holding its breakout. TIP pulled back the last seven days as oil stabilized and stocks rebounded. As a bond, TIP will also be influenced by the employment report because the Fed has a dual mandate: price stability and employment growth. As far as employment is concerned, non-farm payrolls were strong last month and more numbers will come to light this week with Fridays employment report. An upside surprise or strong number would likely weigh on bonds. Strength in employment would put pressure on the Fed to tighten monetary policy.
(click to view a live version of this chart)
Chart 3
CALCULATING THE NET NEW HIGHS RATIOS... Even though indicators based on Net New Highs are lagging in nature, they can help define the medium-term to long-term trend for the broad market. First, Net New Highs is simply the number of new highs less the number of new lows. Chartists can use the raw number or divide by the total exchange issues to view it as a percentage. NYSE Net New Highs ($NYHL) and Nasdaq Net New Highs ($NYHL) are raw numbers. The $NYHL:$NYTOT ratio shows NYSE Net New Highs as a percentage of total NYSE issues. The $NAHL:$NATOT ratio shows Nasdaq Net New Highs as a percentage of total Nasdaq issues. Net New Highs is a lagging indicator because it takes 52-weeks to forge an initial new high or new low. Subsequent new highs or lows take less time, but this long lead time makes Net New Highs a lagging indicator. This means it will not lead the market low, but rather turn alongside the market or lag. Chart 4 shows these versions along with a 10-day SMA.
(click to view a live version of this chart)
Chart 4
NYSE NET NEW HIGHS REMAIN BULLISH... There are three basic conditions for the Net New Highs indicators. Stocks are in bull mode when Net New Highs are positive and the Cumulative Net New Highs Line is rising. Stocks are in bear mode when Net New Highs are negative and the Cumulative Line is falling. Stocks are range bound when Net New Highs fluctuate around the zero line and the Cumulative Line moves sideways. The cumulative Net New Highs Lines are simply running totals for daily Net New Highs. Chart 5 shows the Cumulative Net New Highs Line and the Net New Highs Ratio for the NYSE. Stocks were in corrective mode as Net New Highs fluctuated around the zero line and the Cumulative Line flattened from May to mid July. The line turned up and broke above its May high in late July as Net New Highs expanded in the second half of July. This put the market in bull mode. Net New Highs dipped into negative territory in late August, mid November and mid March, but the Cumulative Line never broke its 10-day EMA. Technically, this indicator is still in bull mode. Corrective mode would be in force should the Cumulative Line break its mid March low and move below the 10-day EMA.
(click to view a live version of this chart)
Chart 5
NASDAQ NET NEW HIGHS DIP AND RECOVER... Chart 6 shows these same indicators for the Nasdaq. Notice that the Cumulative Net New Highs Line moved lower from mid May to late August and Net New Highs dipped deep into negative territory several times. This corresponded with a correction in the Nasdaq. The Cumulative Line turned up in mid September as the Net New Highs Ratio expanded into positive territory. The line remained above its 10-day EMA until mid March. Relative to the NYSE, Nasdaq Net New Highs dipped deeper into negative territory in mid March. However, Net New Highs rebounded with the recent rally. We now have a support low to watch on the Cumulative Line. A move below this low would be negative and suggest a correction for the Nasdaq.
