Gold Shares Break to the Upside

• Brokers are leading the market lower
• NASDAQ Composite leaves a lot to be desired
• The balance of evidence suggests lower near-term bond prices
• Commodities complete a short-term top

US Equities

The correction we have been talking about in the last couple of Market Roundups is likely to continue.

As Art pointed out earlier this week in his market message , July and August have not exactly been great months for equities since 1995.  In addition, since 1800, in August, September and October, I count 6,9 and 6 occasions respectively, that have either registered primary trend peaks or “right shoulder”  rally highs, prior to a primary bear. We are approaching aperiod ofseasonally risk at a time when the long-term trend is extremely overstretched.

You can see this from Chart 1, which features the NYSE Composite and its Special K.  Special K trendline violations, for lines in excess of  9-months, are usually followed by primary bear moves of some kind.  I use 9-months, as that is a minimum expectation for a primary bull market.  Two intermediate reversals, one bearish and one bullish are shown in the chart. The current trendline in Chart 1 is particularly significant because it is long and has been touched or approached on numerous occasions. It also closely intersects with the MA, which to me, better reflects the underlying trend than say connecting it to the actual 2009 low.  Right now, the uptrend in both the NYA and the SPK are intact, so we should not jump the bearish gun. However, if the anticipated short-term correction results in a daily NYA close much below 10,300, I’ll be looking for a much more serious decline to follow. My best guess, and it really is a guess, is that it will happen, but not at least for a few weeks.

Chart 1

This is partly based on the fact that we usually see at least one divergence between the NYSE A/D Line and the S&P at major peaks. The 1994 peaks was one of the few exceptions. Chart 2 shows that that both the A/D and upside/downside volume lines have been in gear with the S&P.

Chart 2

In the meantime, there are a few things that I do not like the look of.  Let’s start with our friendly brokers. The stock market discounts the economy by generally peaking prior to recessions and bottoming before recoveries get underway. Brokers, on the other hand, have a tendency to be a leading indicator for the stock market itself. That’s because their profits are derived, among other things, from commissions from stock transactions and fees from IPO’s; both of which at their most active states in bull markets. During the late 2012-March 2014 period, brokers confirmed all new highs registered by the S&P.  However, Chart 4 shows how things started to change in March as brokers again started to play a leading role, but this time on the downside. The IAI peaked then, unlike the S&P, which saw a new high last week. More to the point, the RS line for brokers in the bottom window touched a new low on Wednesday. In my experience, where the RS line goes, the absolute price usually follows.  That suggests that the IAI itself is headed lower. It does not tell us when the overall market will peak, but certainly points out the weak technical underpinnings.  Note the potential head and shoulders to in the IAI.

Chart 3

The NASDAQ Composite, recently touched a new high, which on the surface, looked pretty good. However, Chart 4 shows that the number of NASDAQ stocks above their 200-day MA’s diverged very negatively with the $COMP. Indeed, at  last week’s high, barely half the stocks on the exchange were in such a positive position.  That can always be cleared up, of course, but like Brazil being 5-0 down at half time in the World Cup semi-finals, it’s not the kind of odds anyone wants to bet on.

Chart 4

Chart 5 also shows that the RS of the $Comp to the S&P also failed by a wide margin to confirm the latest bull market high. That’s normally a sign of a serious loss of upside momentum.  That’s why I am looking for some confirmation and I believe that would happen with a break below the trendline at 4,200 and the 200-day MA, which is currently at 4,120. Of course, the really big support lies at the brown trendline at around 4,000.

Chart 5

US Credit Markets.

Last week I concluded that bonds were likely headed lower because of a bearish KST and the violation of the solid red up trendline. I also said that  the sharp slide that had developed at that point would probably be followed by a bounce. Chart 6 shows that we had the bounce. Frankly, it was stronger than I had expected, as it has taken the price back above the dashed head and shoulders neckline. Now the price is below resistance in the form of the extended red line and the declining brown one. To make matters more complicated, the KST has gone flat and could easily move in either direction.

Chart 6

I think Chart 7 sets us straight because my net new high bond indicator remains overbought and bearish and looks as though it’s going to violate its up trendline.  That view would be confirmed if the Barclay’s 7-10-year Trust, the IEF, falls below a potential head and shoulders neckline at the $102 leve

Chart 7

US Dollar Index

The Index remains between two important trendlines at 79 and 80.75, and is currently being supported by a rising Dollar Diffusion Indicator featured in the lower window of the chart. That series though is moderately overbought, so it is questionable as to whether it has the power to push the Index through the trendline resistance and hold it there during the next short-term decline.

Chart 8

Chart 8 says we may well soon find out, since the more sensitive 20,10,10 stochastic is about to trigger a buy signal. The arrows show that a reasonable rally has followed such reversals in recent instances. The dashed one shows the only failed signal on the chart, suggesting there is a good chance of a breakout; whether it would hold is another matter. Stay tuned.

Chart 9

Precious Metals

The Gold Trust (GLD) looks as if it’s about to break above the key $131-132 area. Supporting this idea is the fact that the intermediate and long-term KSTs in the lower two windows of the charts have tentatively reversed to the upside.

Chart 10

It’s a positive factor to see gold being led by the shares during rallies, and that appears to be what is happening now as the GDX has just  broken above a reverse head and shoulders neckline. One troubling sign is the overextended KST. However, at the beginning of a bull market, prices are not usually very sensitive to overstretched conditions such as this. With gold itself above its 12-month MA and the shares breaking to the upside, it smells like a bull market to me.

Commodities

The  Dow Jones UBS Commodity ETN is in a confirmed bull market because the Special K has violated its bear market trendline and the price remains above its 12-month (not shown) and 200-day MA’s.  The problem is that the price recently completed a small head and shoulders top. That suggests a further probing of the lows.

Chart 11

The downside objective, as shown in Chart 12, is for prices to slip to the $37 area. However, by that time, the two net new high indicators will probably be oversold and therefore be in a position to mount a rally. In short, the current breakdown probably indicates some re-accumulation rather than the beginning of a move to new bear market.

Chart 12

Looking forward to seeing you at Chart Con 2014!

Good luck and good charting,
Martin J Pring