Can the Stock Market Hold its Breakout?

• NYSE Composite and MSCI World Stock ETF could be in the process of cancelling their recent breakouts.
• Stock/bond ratio at a critical juncture.
• Junk bonds violate up trend line.
• Dollar Index breaks to the upside.
• Gold and gold shares face important technical test.

Equities

Chart 1 suggests  that the MSCI World stock ETF (ACWI) has experienced a false upside breakout. I use the word “suggests” because we have not seen any confirmation of that with a breach of a support level such as a key moving average or trendline. In this instance I would be looking at the shallow up trendline, which is currently around the $58 area. It would be possible to use the red 200-day MA, but you can see that the recent trading range environment has taken away its ability to offer trustworthy signals in either direction.  One factor that weighs on the overall situation lies in the fact that the upside breakout was not confirmed by my Global A/D Line (!PRGLAD), which is calculated from the cumulative plurality of a basket of country ETF’s.  The KST is also getting overextended.

Chart 1

Also, Chart 2 indicates that the Global Diffusion indicator (!PRGLODIF) which measures that same country ETF basket in positive trends, while still bullish, is definitely overstretched and in need of some corrective activity.  The solid red arrows show that downside reversals have usually been followed by a correction of some kind. The dashed arrows indicate failed signals.

Chart 2

In the US we see that the NYSE Composite ($NYA) has also pulled back below its breakout trendline and the McClellan Volume Oscillator (!VMCOSINYC) model has gone bearish. This is a short-term indicator that triggers a sell signal when the 10-day EMA of the raw McClellan Volume Oscillator crosses below its 20-day counterpart. The arrows once again flag the sell signals.

Chart 3

Some indexes, such as the NASDAQ 100 tracking ETF (QQQ) represented in Chart 4, experienced a stronger breakout, which hints that any correction will be limited to the two converging trendlines, which offer good support. Note that the KST is still rising, but is at an extended reading. That suggests that it will likely soon roll over.

Chart 4

Stocks versus Bonds

Chart 5 compares the KST action of bonds (TLT) and stocks ($SPX). Notice how they have been moving in opposite directions in recent months. Currently the KST for stocks is bullish and that for bonds is negative. However, both series are very overstretched and due to converge once again.

Chart 5

If the above converge, that would push the Stock/bond ratio ($SPX:TLT) in Chart 6 to the downside. That type of action is also suggested by the short-term KST for the ratio itself. Notice how it completed a top some time ago which favored bonds. However, in recent weeks there has been a sharp snap-back rally and the ratio now finds itself just below important resistance at the two trendlines. Since the long-term KST, which is designed to monitor the primary trend, is still declining a drop to the downside, possibly taking out the February low is a strong possibility.

Chart 6

Emerging Markets

The MSCI Emerging Markets ETF, the EEM, looks as though it might be in the process of completing a head and shoulders bottom or top. Sound confusing? The neckline for the potential inverse head and shoulders is represented in green and that for the possible top by a dashed red trendline. A breakout in either direction is possible but the downside alternative appears to be the more likely. That’s because the diffusion indicator (!PRDIFEM) in the center panel has started to decline from an extended level, thereby signaling the probability of a short-term correction. The KST remains in a bullish mode, but has also begun to roll over, a sell signal being likely any day.

Chart 7

Chart 8 features a zig zag retracement tool on EEM that monitors price moves of 7.5% or greater. I use it to objectively identify peaks and toughs. So, we see a series of rising peaks and troughs starting at A, B and C and running through until the current day. Note that even though peak X was below that of its predecessor the series of rising peaks and troughs, was never interrupted. However, if the price takes out the early December low at $37.79 this weekly chart would turn bearish so far as this particular indicator is concerned. Note that the relative action, shown in the lower window, has been bearish all the way through and is giving no hint of a reversal in fortunes at this point.

Chart 8

High Yield Bonds

Normally the trend of high yield bond prices in the form of the iBoxx High Yield ETF, the HYG, moves in tandem with equity prices as traders move into riskier bonds and equities when their confidence is growing and vice versa. However, it’s at turning points that we often see the HYG lead the S&P. Recent examples have been flagged with the red and green arrows in Chart 8. Note that this relationship is usually more pronounced at market tops than at bottoms. Recently the HYG ran into resistance in the form of the green trendline joining the various peaks and has now violated its 2015 up trendline. The KST is very close to crossing its MA, so the trendline break is likely to result in a clear-cut sell signal. In turn, this suggests equity market vulnerability, but given the leading characteristics of the HYG we could see a new high in the interim. In any event it looks as if the rally in junk bonds is over for the time being.

Chart 9

Gold and Silver

Gold and Silver will face an important test in the next few days. Chart 10 shows that the Dollar Index ($USB) has already broken to the upside. The price action looks good. However, the KST, though reversing to the upside, is still below its MA. I think the breakout is valid but would feel more comfortable if the KST went bullish as well.

Chart 10

Remembering that gold (GLD) and gold shares (GDX) usually move in the opposite direction to the dollar, Chart 11 indicates that the gold share ETF, the GDX, has tentatively completed a bearish head and shoulders. Moreover, its KST is not yet oversold, so further downside price movement is likely in the period ahead. As for the Gold Trust, the GLD, we see the potential for a much larger bearish head and shoulders, which would be completed with a break below the red trendline at $114. One factor arguing against a breakdown lies in the fact that the right shoulder for the GDX and the potential right shoulder for the GLD are not very well developed  as they only consist of a few days of consolidation. That throws open the possibility of a break above the previous minor highs, which would also result in a couple of (green) trendline violations. Those chart points are at $21.75  and $117.60 for the GDX and GLD respectively.

Chart 10

We see the same kind of action for the silver share ETF, the SLV, where a potentially large head and shoulder consolidation pattern is forming. It’s also possible that the pattern will not be completed and the price rallies above the green down trendline at $16.05. In that case a spirited rally would likely follow.

Chart 11

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.