A couple of Chinese Equity Sector ETF's break to the Upside

• Stock/bond ratio challenges overhead resistance.
• Watch $120 on the GLD.
• Commodities may be set for short-term rally.

US Equities

For some time I have been pointing to several discrepancies in the market that have been troubling. My conclusion was that as long as the uptrend since mid-October was intact we should not pay too much attention to them. Unfortunately, from an analytical point of view, the uptrend has been so sharp that it has not been possible to construct a meaningful trendline, the violation of which would confirm these divergences.  In the meantime, several S&P breadth measures like the S&P 500 Advance /decline line ($SPXAD) have confirmed the price by registering new highs, and that’s a definite positive.  Bearing in mind the strong end-of-the year seasonal, forthcoming third year of the presidential cycle (the most bullish of the four), not to mention the fact that years ending in a “5” like 2015 have not declined since 1885, and you have the ingredients for a meaningful cyclical and seasonal extension of the rally.

Chart 1

The Russell 2000 ETF,  (IWM)  has essentially been confined to a trading range as the S&P 500 ($SPX) and Dow Jones Industrial Average ($INDU) have been working their way higher. It’s now at the upper end of the range and has therefore reached critical resistance.  Note that the RS line ($IWM:$SPX)  in the center panel has been in a sharp downtrend for quite a while. However, it looks as though it may be in the process of forming an inverse head and shoulders pattern. If it does, and if the price of the IWM also breaks to new highs this would be a very positive sign for the general market. Note though, that the KST in the bottom panel is in a bearish mode. However, it has now fallen close to the zero level, meaning that it would only take a small amount of strength to result in a reversal. You can follow this chart, of course, by just clicking on it.

Chart 2

The other area worth focusing on is the relationship between stocks (the SPY) and bonds (the TLT).  The ratio recently broke down from a trading range which indicated that bonds had begun a period of superior performance over stocks. However, it has now pulled back into the body of the pattern and is in the process of challenging the green down trendline. The problem is that the KST, while not bearish, is overextended and looks as though it may be in the process of peaking. The two levels to watch are 1.65, below the red trendline, or a move above 1.80 as that would result in an upside breakout favoring stocks.

In the event that both the IWM and ratio both break to the upside this should be looked at as a very positive market development. Since such action would also develop at a seasonally propitious time 2015 could open up very positively.

Chart 3

The Chinese market appears to be coming to life after being under pressure since 2009. Chart 4 shows that the Chinese ETF (FXI) recently violated a long-term trendline, pulled back to that line a couple of times and now appears to be headed higher again. The technical position is also boosted by the fact that the long-term KST is bullish.

The RS line against the MSCI World Stock ETF (ACWI) has been in a downtrend for the last 5 years and has also violated its bear market trendline. Relative momentum is bullish, so a break above the solid green trendline appears very likely.

Chart 4

Global X sponsor several Chinese sector funds. Two of the ones that are showing positive sings are the Industrials (CHII) and the Financials (CHIX). The industrials have been plotted in Chart 5, where you can see that they have broken above a key resistance trendline. The relative KST in the bottom window has gone bullish, which strongly suggests that the RS line itself will complete a potential 3-year base.

Chart 5

Price wise, the Global X Chinese Financials (CHIX) look even better. That’s because they have experienced both an absolute and relative breakout. The KSTs are not quite bullish but are moving in the right direction. In most situations we have to wait for the price to confirm momentum. When price leads, as is the case in this instance, it suggests that a very powerful move lies ahead.

Chart 6

US Credit Markets

Chart 7 shows that the short term KST for the Barclays 20-year Trust (TLT) has tentatively gone bullish and the price is just below key resistance in the form of the horizontal green trendline. Since the long-term and intermediate KSTs are also above their respective MA’s chances are that the price will be registering new recovery highs before long.

Chart 7

US Dollar Index

The KST has triggered a second sell signal for the US Dollar Index (UUP) since the rally began in July. That throws up the possibility of a more extended correction as it peaked at a lower level this time. The price itself may, and we emphasize the may, be in the process of tracing out a small broadening pattern with a flat bottom. That would happen if it continued to drop without forming a “right shoulder” rally. The difference is important because broadening formations pack a lot of punch relative to their size.  I am not predicting this will happen but if it does, it’s likely that the Index will experience a sharp counter-cyclical correction. This should be looked upon more as a buying opportunity than as a signal that this young bull market is over.

Chart 8

Precious Metals

The Gold Trust (GLD) is still trying to punch through resistance in the form of the trendline joining recent lows. The price is tentatively above the line but really needs some more decisive action. If so, that would suggest that the recent break was a whipsaw. Bearing in mind that whipsaws are typically followed by above average moves in the opposite direction to the whipsaw, that would imply that a break above $120 is certainly in the cards. The $120 area is important because that is where the two dashed trendlines are currently converging. A positive short-term KST sets the scene, so now let’s see what the yellow metal is made of!

Chart 9

Commodities

The Bloomberg Commodity ETN, the DJP, remains in its trading range of the last few months. The net new commodity high indicator (!PRNNHCO10) has already diverged positively with the price (see the dashed green arrows) and has now broken to the upside. That should be a good omen for the price, which needs to experience a daily close above $34.30 in order to achieve a decisive upside breakout.

Chart 10

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.