Global Stocks And The NYSE Composite Are In Focus At The Top Of A Major Trading Range

• The NYSE Composite breaks out against the S&P 500.
• The SPY/EFA (US against the world) ratio completes a top.
• The S&P Europe 350 (IEV) breaks out against the S&P 500.
• The DB Commodity ETF is close to an important down trend line violation.

Key Message

Global stocks and the NYSE Composite are at the top of a major trading range. Will the bullish month-end seasonal trend be strong enough to result in a breakout?

Global Equities

The MSCI World Stock ETF, the ACWI broke out from a major consolidation pattern in February and then pulled back into the pattern again. When false breakouts of this nature develop one of two things usually happens. First, the whipsaw nature of the break is confirmed if we see further weak price action such as the violation of a previous low, an MA crossover or a trendline violation and so forth. The second alternative is for the price to consolidate below the breakout point, subsequently regaining sufficient momentum that enables a successful breakout. In the current situation there was no consolidation but the price reversed back above the breakout point anyway.  Now, if it can take out the previous high there would be a good chance that the 8-month trading range will turn out to be a consolidation which could act as a springboard to further gains. The situation is very finely balanced because the KST for the ACWI has started to turn up but is not yet bullish. Second, the A/D Line  is just below extremely critical resistance in the form of the two converging trendlines. A break above that resistance combined with a new high in the ACWI itself would be a very positive development.

Chart 1

Chart 2 shows that this may not be as easy as it sounds. That’s because the global diffusion indicator (!PRDIFGLO) in the bottom panel has recently signaled a sell signal. This series calculates a basket of country ETF’s in a positive trend. The arrows show that downside reversals in the diffusion indicator have usually been followed by some form of corrective activity. Note also that when we construct a trendline for the World ETF joining the intraday highs there is no breakout unlike one constructed from the daily closes in Chart 1. This observation adds to the importance of the overhead supply, further undermining the critical nature of the current technical structure. One positive note is starting next Monday where the equity markets will experience five days of the positive end of the month seasonal effect. That might be a better time to anticipate such a breakout if in fact, one is to materialize.

Chart 2

In the US we see a similar pattern to the broadly based NYSE Composite ($NYA) with a giant trading range having been established over the last year. The KST has turned up but not quite enough for a positive 10-day MA crossover. The Index nonetheless is positioned to take advantage of any breakout that might develop, either now or next week in the seasonally bullish window.

Chart 3

I am focusing on the NYSE Composite ($NYA) rather than the S&P, which is shown with the S&P 500 Tracking ETF (SPY) in Chart 4, because it is already in an established uptrend and because a signal from the NYSE, with its broad trading range would be far more significant than just the S&P 500 registering a new high. A solid breakout from the NYSE trading range would represent a far more powerful sign that a new bull market up leg was underway.

Chart 4

Also, Chart 5 shows that the ratio between the NYSE Composite ($NYA) and the S&P 500 ($SPX) has broken above a 6-month down trendline and the KST for this relationship has just gone bullish. That suggests that if we are to see some upside action it will be led by the NYSE rather than the S&P.

Chart 5

US versus the Rest of the World

Chart 6 shows that the ratio between the S&P 500 ($SPX) and MSCI Europe Australia Far East Index (Rest of the world) - (SPY/EFA) has dropped below the support trendline cited in last week’s article. That suggests that the US will continue to deteriorate against the rest of the world in the near-term. That view is also supported by the fact that the intermediate KST is moderately overbought and declining. The long-term trend favoring the US remains intact as evidenced by the fact that the ratio is well above its long-term MA and the long-term KST. The long-term KST, shown in the bottom window, is still rising. Also, the ratio says nothing about the absolute trend of either series, merely their relationship.

Chart 6

Chart 7 shows one of the beneficiaries as the S&P Europe 350 (IEV) has completed an inverse head and shoulders pattern in its relationship with the S&P. The positive short and intermediate KST action strongly suggests that the breakout is valid, but the bearish long-term series hints that it may be a counter-cyclical move.

Chart 7

US Dollar

Chart 8 shows that the US Dollar ETF, the UUP, has tentatively violated its intermediate up trendline. Since the KST is overbought and has only just gone bearish it seems likely that the US Dollar will experience more corrective action in the period ahead. The sharper the drop the more likely the odds that it will be a countercyclical correction, as scary shakeouts are a characteristic of a strong primary bull market. Remember the Index remains well above its 12-month MA and its long-term smoothed momentum (KST) is still positive, so the balance of technical evidence still falls in the primary bull market camp.

Chart 8

Commodities

If the US Dollar does correct some more, one of the beneficiaries could be commodity prices. In this respect Chart 9 shows the DB Commodity ETF (DBC). It’s been in a sharp down trend for quite some time and is now just below its 2014-2015 down trendline. Consequently, just a small rise from current levels would trigger a more extensive rally. The Net New Commodity High indicator (!PRNNHCO50) in the bottom panel monitors a basket of commodities that are registering net new highs over a 50-day time span. Note how it has been below zero for a very long time. I have noticed that when an oscillator remains below its equilibrium level for an extended period a move above it often signals a significant change of trend. I am not prepared to say that in this case such action would signal a primary bull market, because we would need more evidence than that. However, a rally above zero would be the first positive sign in the commodity pits that we have seen for some time and probably result in the first worthwhile rally we have seen in a long while. You can follow this indicator by merely clicking on the chart.

Chart 9

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.