Equities Continue to Show Long-term Deterioration

• Value Line Arithmetic violates key uptrend line.
• Introducing the Bottom Fisher, but unfortunately not the bottom!
• Stock/bond ratio at the brink.
• 5-year yield between two key converging trend lines.
• Gold/stock ratio on the verge of an upside breakout.

US Equities

The bullish seasonal end of the month period I cited in last week’s  issue terminated at the close of business on Tuesday. If that was a “bullish” seasonal I would hate to think what a bearish one might do! However, its failure to stimulate prices raises a key point.

In the latest edition of Technical Analysis Explained (P520) I cite the following quote from the late great Edson Gould  who observed that: “If a market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say”. Well combine that observation with the fact that the Special K (SPK) for the NYSE Composite has violated its bull market trendline and we are starting to put together a bearish case. It’s true that the SPK is still above its MA and more importantly, the NYSE Composite itself is above its bull market trendline, but less than 300-points separate the two, so there is not much margin for error.

Chart 1

If my idea of lower prices comes to pass there should be something leading the S&P lower. That’s where  the Value Line Arithmetic, a broad market messenger comes in. Notice that two previous turning points developed from a reversal in the rising or falling peak trough progression in the SPK. In this case that was signaled by a head and shoulders or reverse head and shoulders break. Forward to the present and we see another reversal signaled by the letters A,B,C and the actual signal at D. Note also that the SPK recently violated an up trendline and completed another top. Sell signals don’t get more unequivocal than that! The price itself has also violated a key up trendline. Now it may go on to test its recent high and form a top of its own, but the SPK is telling us, that for all intents and purposes, the game for the VLE is over.

Chart 2

While the long-term technical picture looks troubled there are always short-term rallies to look forward to. That’s where my Bottom Fisher comes in. It is an indicator that has been designed purely for identifying bottoms not tops. It gives a buy signals when it falls below the green dashed fishing line. You can read about it here. Right now it’s still falling and has yet to reach the line. You can monitor its progress yourself using the symbol !PRBIFISH

Chart 3

Stocks are also struggling against bonds, as the SPX/TLT ratio in Chart 4 shows. This one features three momentum indicators that reflect the short, intermediate and long-term trends. The long-term KST reflects the primary trend context and it’s just crossed below its MA and gone bearish, the intermediate series is flat but the declining short-term momentum suggests enough downside pressure to push the intermediate into a bearish mode.  The ratio itself is right at the neckline of a giant head and shoulders top, so all that negative momentum argues for a decisive break of the neckline and a major drop in the ratio. This of course, tells us nothing about the absolute trend of stocks or bonds, merely that the better performer going forward is likely to be bonds.

Chart 4

Last week I reported that the Nikkei had completed and broken out from a reverse head and shoulders and was also bullishly supported by a falling yen. What a difference a couple of days makes, because Chart 5 indicates that the breakout, with the benefit of hindsight, looks to have been a false one. I usually like to see the trendline joining the head with the right shoulder violated before concluding in favor of a whipsaw. In this case the dashed brown up trendline would qualify. However, I am going to use the red trendline, joining several “right shoulder” lows as my benchmark as it’s a better trendline. A violation would require a decisive break below 15,200. Such action would also result in the KST failing to cross above its MA. That too would re-enforce the idea of a false break. Because false breaks attract traders who are subsequently on the wrong side of the trend and therefore have to unwind those positions, whipsaws are typically followed by above average price moves. In this case that would be down.

Chart 5

US Credit

We have had a situation in the last few months where yields at the short- end have been in an uptrend and those on 10-30-year maturities have been falling. Chart 6 shows both the 3- and 10-year yield. The former looks as though it wants to break to the upside and the latter to the downside. As a result the treasury yield curve has been flattening as short maturities gain on their long-term counterparts. Normally the early flattening stage is characterized by yields rising for pretty well all maturities, not the kind of congressional disarray that we see now.

Chart 6

Apart from studying Chart 7 for a clue as to the true direction of yields you might consider the 5-year yield which falls in the middle of the spectrum and has been moving in a tighter and tighter directionless range recently.  Once again we see a fine balance between 1.8% and 1.58%, accompanied by a very finely balanced short- and intermediate KST. This one is too close to call, but whichever way the yield breaks decisively will likely signal the course of rates for the next few months.

Chart 7

US Dollar Index

Chart 8 shows that the Dollar Index has the potential to experience a major bull market, provided it can rally and hold above the green trendline.

Chart 8

Short- and intermediate momentum in the bottom two panels of  Chart 9 say it stands a good chance, because they are both bullish and neither is overextended. Also, the upside objective suggests a price of 83.3, which would take the Index decisively above the month-end 82.5 breakout point in the previous chart.

Chart 9

Precious Metals

The Gold Trust, GLD, remains in its recent trading range as it continues to work off a recent overbought condition. Chart 10 offers two pieces of information that suggests an upward breakout will materialize. First, the long-term KST for the price itself in the second panel has gone bullish. Second, it has been joined by its relative counterpart in the bottom panel, as it is also in the early phase of a bull market. That trend would be confirmed with a response from the RS line itself and that would happen with a break above the green trendline for the RS itself. You can see when this happens by clicking on that chart in the coming days.

Chart 10

Commodities

This week I am focusing on oil as it has reached key support in the form of the up trendline in Chart 11. Also, the relative strength line against stocks has fallen back to support again. The KST for the absolute price in the second panel and that for the RS line in the bottom one, are both extremely finely balanced and could easily move in either direction. Currently both the price itself and the RS line are oversold on a short-term basis, so some kind of a bounce is the most likely outcome. However, until we see a break above $110 or a drop below $95, doubt as to the true direction of the primary trend will reign.

Chart 11

Good Luck and good charting... and keep your eye out for that Bottom Fisher!

See you in Seattle!

Martin Pring