US Equity Upside Breakout So Far So Good

• -NASDAQ Composite offers quality upside leadership.
• -Watch the 5-year yield for a clue as to future rate movements.
• -Gold starting to show bull market characteristics but can it confirm with some positive trend action?

In last week’s article I drew your attention to the fact that the technical picture for the NYSE Composite ($NYA) offered two possibilities, an upside breakout from a consolidation pattern or the completion of a major top formation. These are shown in Chart 1. I also concluded that if an upside breakout was to develop it would likely happen sooner rather than later because the vast majority of the short-term breadth and momentum indicators were rising. As it turned out we got the upside breakout but ironically, not in the NYSE Composite.  New highs were seen in several other averages, namely the S&P 500 ETF (SPY), NASDAQ Composite ($COMPQ) and The Russell 2000 ETF (IWM). My benchmark of 11,100 for the NYSE was never reached. As a result this broadly based index remains in its trading range. The short-term oscillators continue in their upward trajectories, so an NYSE breakout is still in the cards.

Chart 1

Chart 2

Chart 3 for instance shows that the daily A/D line for the NYSE ($NYAD) has broken to new highs; however, the S&P in Chart 4 has not, even though the S&P itself has been stronger than the NYSE. Today that S&P A/D Line does appear to be confirming but we can't put it in the bag until the end of the day. In technical analysis we never expect to see everything in gear, but to see a breadth indicator for an average that has not registered a new high at a new high, whereas the average which has, is not confirmed by breadth is very unusual. In such cases it is better to give the benefit of the doubt to the lagging indicator by giving it time to confirm. That would be a break by the $NYA above the 11,100 area and an EOD move to new highs by the S&P A/D Line.

Chart 3

Chart 4

In the meantime one indicator that is fairly consistent in calling declines and which is currently overstretched is the 10-day MA of the Arms Index ($TRIN). It is featured in Chart 5, where the red vertical lines show that reversals from the lower horizontal line have usually been followed by a correction of some kind. Occasionally the correction takes the form of a small trading range, and at others by an actual decline. Unfortunately there is no way of knowing ahead of time which outcome will materialize. However, if this indicator is able to maintain its recent consistency that would suggest  near-term upside potential is fairly limited.

Chart 5

Offsetting that to some extent is the KST for the S&P Composite, which is still rising and not particularly overstretched. As long as it continues to rise it continues to paint a bullish picture.

Chart 6

The indicator in the lower window of Chart 7 monitors the number of S&P stocks above their 20-day EMA (!GT20SPX). The plotted series is actually a 10-day moving average of the raw data. When the MA reverses from an extreme reading it gives us an indication that the prevailing trend is about to reverse. Recent sell signals are indicated by the red arrows. Right now the indicator is in a moderately overstretched condition but is still rising. Until it reverses we should assume that the short-term rally is intact.  This indicator and the KST indicate that the S&P is a hold but the bearish reading in the Arms Index tells us that on a 3-4-week time horizon it’s probably too late to buy.

Chart 7

The NASDAQ

The NASDAQ Composite ($COMPQ) is one of the strongest areas of the market. In this respect Chart 8 shows that its relative action has just broken out from a trading range. This is also being supported by a bullish KST for relative action, which is featured in the bottom window of the Chart. The price itself has also broken to the upside. The only negative lies in the fact that the long-term KST for the price remains below its EMA, but the KST itself has started to rally and that suggests higher prices.

Chart 8

US Credit Markets

Chart 9 compares the performance of a short ($UST2Y), intermediate - Five year ($FVX ) and long-term - 10 year ($TYX) yield. On an overall trend basis we see the 2-year yield in an uptrend, the 5-year in a trading range and the 10-year in a declining trend. The big question is which one is telling the truth. I think the 5-year series will probably hold the key.

Chart 9

Chart 10 shows that this series recently broke down from a trading range but has moved back into it again in the last couple of weeks. It also indicates that the yield is short-term overbought since the 12-day ROC has reached an extreme reading above +20%. The ellipse and dashed arrows show that high momentum readings do not always result in a decline but the red arrows indicate that such extreme reversals normally do.

Chart 10

Chart 11 shows that the KST for the 5-year yield is in a bullish mode but an examination of the price action itself suggests  that this could change. The reason is that the yield formed a bearish two bar reversal on Tuesday and Wednesday . These patterns are often quite powerful but only have an influence for between 5-10-days., which could be sufficient to reverse the KST to the downside. Given the pivotal role of the 5-year maturity in the total credit market spectrum, I think it’s worthy monitoring in the period directly ahead.

Chart 11

Gold

The last time we looked at gold, the price of the yellow metal looked vulnerable because the KST was overbought and declining. I also pointed out that the price of the Gold Trust ETF, the GLD had been tracing out a series of declining peaks and troughs.  For this exercise I used the zig zag retracement tool with a parameter of 7.5%. Chart 12 shows that the negative progression is still intact. It would be reversed with a rally above the previous high, say at $126. What is interesting is that recent prices retraced exactly 66% or two thirds of the previous advance. Arguably more important is the fact that volume patterns have turned bullish. Note how the previous declines were associated with selling climaxes. This is pointed up by the percent volume oscillator in the bottom panel.

However, in January things began to change as that rally was associated with rising volume culminating with a buying climax. The subsequent February decline took place under the cover of declining activity. Right now the oscillator is oversold, which suggests that volume will soon expand.  If it does, and prices begin to firm that would be quite positive.

Chart 12

Finally, Chart 13 shows that while the KST for GLD is still in a declining mode the price itself formed a bullish hammer on Wednesday. These patterns of course, only have an effect for the short-term but that may be enough to permit a bottoming in the KST and the signaling of a new rally. Straws in the wind perhaps, but worth close scrutiny as the character of gold’s technical position appears to have changed for the better. A good starting point to confirm all this would be a move above the dashed down trendline at $117.

Chart 13

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.