Commodities Facing a Bull Market Test of their Manhood

• US Equity market trend is still positive but more cracks appearing.
• Bond rally may well be over, but confirmation is needed.
• Dollar Index rally likely to extend.
• More base building in the gold market is likely.

(Click here for the narrated video version of this article)

US Equities

Last week I took “the line of least resistance is higher” approach, based on solid breath and a bullish end of  the month seasonal.  That seasonal ended Wednesday and some cracks in the technical picture are beginning to appear.  But not quite enough yet to turn short-term bearish.

The NYSE A/D Line has confirmed the latest S&P high, has lost a bit of momentum as it is struggling to remain above its 2014 up trendline.  (See Chart 1 below.)  In the meantime, the S&P has managed to hold above its green breakout trendline. In a couple of weeks or so, the red and green lines will merge and it will then be of paramount importance that they hold. The red line is currently around 1870.

Chart 1

Momentum in the form of the daily KST(read about it here)is still rising, and the indicator is not particularly overstretched, so it continues to leave room for higher prices.

Chart 2

That’s also the impression we get from the Dow Diffusion Indicator, which monitors a basket of Dow stocks above their 40-day MA because it is currently in a bullish mode. The arrows show that when it reverses direction from a high level the equity market typically experiences a correction, some very minor, others more serious.  As long as it continues to advance I am treating it as a bullish factor. The symbol is !PRDIFDOW if you want to watch it.

Chart 3

The S&P 500 may have registered a new high, but the number of NYSE stocks above their 200-day MA has been slowly deteriorating. This is indicated on chart 4 below by the large solid red arrows starting several years ago. The small dashed ones emphasize  more recent weakness in the face of a rising S&P to the extent that the Index is at a new bull market high, but nearly 1/3 of traded issues are below their 200-day MA’s.

Chart 4

In conclusion, for stocks the line of least resistance remains an upward one, but the indicators are growing progressively weaker.  The uptrend has been quite robust, so there are no great trendlines in the immediate vicinity that can be drawn for the purpose of calling a decline.  The best we can come up with in the way of useful benchmarks is the NYSE Composite (chart 5 below), which is also near the 200-day MA at 10157.  Note also that the in the lower panel of the chart, is also extremely close to a major sell signal.  What that means is that if we do get a short- term decline, it is likely to be the first domino in a  chain effect of lower prices.

Chart 5

US Credit Markets

The bond market looks ripe for a turn as the Bond Net New high Indicator (read about it here) has started to hook down.  Recent price action has been pretty sharp on the downside and may well experience a very short-term bounce.  However, it now seems likely that the red up trendline I referred to last week will, in one way or another, succumb to the overbought nature of the market.

Chart 6

The Inverted 10-year Yield, in Chart 7 below, has experienced a false move to the upside.  This type of action is usually very bearish because those who bought on the breakout are forced to re-position themselves.  Alternatively, if the rally was fueled by short-covering that buying power is no longer available.  The sell signal from the KST also adds weight to the view that prices are headed lower.  We continue to look at a break below the red trendline as confirming the  whipsaw, but the sharp decline in the last week suggests a small bounce may take place first.

Chart 7

The Dollar Index

The Dollar Index has now managed to move above its green down trendline and the 200-day MA, though it is technically still confined in a major trading range.  However, it continues to build technical strength because the KST is not only bullish but has violated a 1-year down trendline.  That suggests to me that, after some possible digestion of recent gains, an attack on the green dashed horizontal line at 81.50 is now likely

Chart 8

Precious Metals

Last week we saw that the price of the Gold Trust, the GLD, had broken below an important support trendline.  The KST has now  violated  a 1-year up trendline.  This emphasizes the bearishness of the recent sell signal. Very short-term measures of momentum indicate an oversold condition, so a rally back to resistance just above $124 is possible.  However, at this point the price is below its 12-month MA and the series of declining peaks and troughs that began in 2011 are still intact.  Consequently, until we can see evidence to the contrary the primary bear market case remains intact.

Chart 9

Commodities

Last week I was hopeful that the commodity decline was over but that did not prove to be the case.  I qualified my remarks by saying that we would need some confirmation with a break above a green down trendline at around $40.  That break did not come, and I have re-dawn the line (on chart 10 below), which now stands at around $39.50.  At the moment, both diffusion indicators are declining (read about them here), but  are close to an extreme oversold condition.  Bull markets are very sensitive to such developments, so if this is a bull market I would expect to see a rally develop once the green trendline has been violated.

Chart 10

Good luck and good charting!
Martin J. Pring