That Was Probably It....For The Time Being
- Short-term indicators continue to decline, but Wednesday’s price action may cause them to go bullish.
- Small caps starting to emerge as leaders on the upside (At least for the short-term).
- Quality bonds experience probable upside blow-off and high yield exhaustion on the downside .
Earlier in the week I pointed out the obvious, that we were due for a relief rally. However, the three indicators I was looking to signal it, while close, had not yet gone bullish. They still haven’t, but Wednesday’s market action has the potential to reverse the downtrend both for equity price and yields.
Charts 1-3 feature the three short term indicators we looked at earlier in the week.
- First my Global Breadth Oscillator (!PRGLADO) has sunk to an even lower level but has not yet started to reverse.
- The same thing is true of thePring Bottom Fisher (!PRBFISH) in Chart 2. It has now dropped to the green “fishing line” and merely requires an upside reversal to trigger a signal.
- We saw tremendous volume on Wednesday in several key ETF’s. That has enabled the Percentage Volume Oscillator (PVO) in Chart 3 to register a really high reading.
- As you can see, reversals from such elevated readings have typically signalled a rally, not a bull market but a tradable rally nonetheless. So why is it likely that these indicators will soon reverse to the upside? First, the lower they go the more the downside pressure required to keep them dropping, and they are pretty low right now. Second, Wednesday’s action looks positive to me, and in many cases smacks of downside exhaustion.
Chart 1
Below is thePring Bottom Fisher (!PRBFISH) in Chart 2. It identifies significant reversal points. It has now dropped to the green “fishing line” and merely requires an upside reversal to trigger a signal.
Chart 2
There was tremendous volume on Wednesday in several key ETF’s. The Percentage Volume Oscillator (PVO) shown in Chart 3 has registered a really high reading which can help to identify a tradable bottom.
Chart 3
Below is Chart 4 and this example shows that the MSCI World Stock ETF, (the ACWI) experienced a very wide trading range, which took the form of a bullish giant hammer. Despite all the selling that took place that day, the price of this ETF was able to close higher than it opened, telling us that the buyer/seller balance had moved in favor of the buyers by the close. Note also the huge volume that took place. Lots of activity on a turn- around day such as this is usually a bullish factor, since it suggests that the bulk of the urgent selling has already taken place and stocks are being accumulated by strong hands.
Chart 4
Emerging rallies are often spearheaded by a change in leadership. In this respect I am looking at the small caps as included in the Russell 2000 ETF, (the IWM). That’s because small caps have recently merited the attention of many commentators due to their weak performance. That focused attention by itself lends itself to the contrary observation that a reversal could be at hand. In this respect the lower window of Chart 5 shows the declining trend in relative action. However, the RS line has now reached the intermediate down trendline. If it goes through that would be a very positive sign. Once again volume on Wednesday expanded to a huge level as prices actually closed up on the day. Indeed, Wednesday’s candle engulfed the two previous candles. I am not sure what you call it, a piercing white line, belt hold, engulfing candle;. perhaps none of the above. The key though, is that this price action is bullish as buyers had gained the upper hand by the end of the session, whereas the rest of the market remained under pressure. When stocks that were leading the market lower fail to lead and become resilient to downward pressure that's usually a bullish sign
These positive one-day technical characteristics under normal conditions should at worst hold the line for a few sessions but more likely, will result in some kind of rally. In either situation we could look for the indicators in the first three charts to reverse from their extremes and therefore turn bullish. Think of it a a reverse domino. My best guess is that if there is an advance it will turn out to a rally that forms part of an overall topping out process, rather than the start of a new up leg in the 2009-201?? Bull market. I don’t want to be too adamant about this because we are just about to begin the bullish seasonal November/April period which also encompasses the third usually bullish year of the presidential cycle. Finally, next year ends in a “5” and the last time a year ending in that digit went down was 1885.
Nevertheless its worth noting that a lot of technical damage has been done in the last couple of weeks and until the major averages can move back above key up trendlines and MA’s we need to be careful.
Chart 5
Chart 6 below shows that while stocks were gaining composure bonds were losing theirs as the Barclay’s 20-year Trust, the TLT exploded on Wednesday morning, yet closed well down from its opening level. This action suggests exhaustion to me, especially as volume expanded to huge levels. That means that many traders went home Wednesday with a loss. Since bonds are very overbought Wednesday’s extreme of $127.68 is likely to be the high water mark for some time to come.
Chart 6
The weakest area of the bond market has been high yield corporates, as represented by the iBoxx High Yield ETF, the HYG. This ETF has been weak for some time as you can see in Chart 7. However, just as it had been the mirror image of governments on the way down, Wednesday saw the HYG close near to the high of its trading range as it formed a hammer. That further suggests that a short-term rally for the HYG has begun and supports the idea that the panic towards quality is over for the time being. Usually when the HYG rallies so does the equity market.
Chart 7
Good luck and good charting,
Martin Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.
