Does Friday's Sell-off Negate the NYSE Upside Breakout?

• -Some short-term momentum indicators weaken but are not yet bearish.
• -Dollar related relationships close to an upside breakout
• -Gold and silver under pressure

US Equities

They say that the most critical points of a flight are takeoff and landing. The same is true in technical analysis where the most critical part of a trend is the breakout point. Breakouts that hold are able to go on and complete the flight (trend) so to speak. On the other hand a false breakout is a sign of exhaustion and should be treated with great caution since such events are usually followed by  a meaningful move to the downside.

Last week the NYSE Composite ($NYA) and the MSCI World Stock ETF (ACWI) both broke out from major consolidation patterns and looked set to go higher. That is until Friday, when the NYSE Composite fell back below the breakout point and a couple of short-term momentum indicators, though maintaining their bullish status, began to turn down. Complicating matters is the fact that the ACWI did maintain its breakout status. That may sound a bit contradictory, but it’s not if international markets extend their recent superior performance against the US or if Monday’s rally extends and the NYSE Composite re-asserts its breakout, so let’s drill down on some of this.

Chart 1 shows that the NYSE Composite broke above the green resistance trendline marking the top of the trading range, but pulled back below it on Friday. Monday has seen a good rally that has the potential to push the Index back above the line again. However, both the 10-and 20-day EMA’s of the McClellan volume oscillator have both turned down. This does not negate the previous buy signal, but it will if the shorter-term EMA crosses below the longer-term one. In other words, if the black line slips below the red one. In effect, it’s of vital importance for the market to continue moving higher if a short-term sell signal is to be avoided. Usually the best policy in such situations is to assume the breakout is valid unless a confirmation of the false breakout takes place. In this case I would look at the 11050 area because that’s where the small horizontal red trendline is residing.

Chart 1

Chart 2 compares the NYSE Composite to its NYSE A/D Line. Here too we can see an upside break by the breadth indicator with a drop below the trendline on Friday and a good faith effort to move back above it on Monday. The point I am looking at is the lower red up trendline for if the breakout fails to hold and the A/D line moves below that line the advance decline indicator would have completed a bearish giant wedge. This is certainly not a forecast, I am just setting the scene to show how high the stakes are for the breakout to be successful.

Chart 2

One other area I have been following closely is the NASDAQ Composite. Chart 3 shows that this average has not yet confirmed the new high in the NYSE Composite. Last week I rated it as bullish because the McClellan volume oscillator model had turned positive with the 10-day EMA crossing above the 20-day EMA. That status may turn out to be short lived as both series have begun to roll over. At this point though, the model is still positive because the 10-day EMA remains above its 20-day counterpart. Meanwhile, the NASDAQ itself is just above its (dashed) October 2014-April 2015 up trendline. If that is violated I would suspect that the McClellan model would also turn. An outright bearish situation would arise with a break below, what could turn out to be the neckline of a head and shoulders top at 4,800. I am not saying any of this is going to happen but I think they are possibilities worth looking out for in the event our flight take off becomes more problematic.

Chart 3

Global Equities

Chart 4 shows that the MSCI World Stock ETF, the ACWI never experienced a drop below its breakout trendline. Also, the Global A/D Line managed to maintain its position above the two converging trendlines. The KST for the A/D Line is also in a rising trend, so nothing to be concerned about here over the near-term. Once again, I am assuming that the breakout will turn out to be valid. This view would change in the event that the price breaks below the $60 area. Such action would not only take the price decisively below the breakout point but would also  cause it to fall below key support in the area of the two converging (red dashed) trendlines.

Chart 4

Sector Momentum

Charts 5, 6,and 7 show the short-term KSTs for the various sectors. Generally speaking we do not see a consensus in either the bullish or bearish camps as things are pretty mixed. This is reflected in the very gentle rise in the KST for the S&P itself in the top window of Chart 5. Upside leadership appears to be provided by sectors that tend to do best at the late part of the cycle. In this respect the KSTs for energy, gold materials, technology and industrials, the “strong five” are all above their moving averages. One defensive sector, consumer staples, is also in a positive mode.

The overall position of these sectors shows that things could easily swing in either direction. I still lean to the bullish side but that could change in the event that the “strong five” start to cut and run. Don’t forget that you can update these and any other charts in the article by clicking on them and saving them in a ChartList.

Chart 5

Chart 6

Chart 7

The US versus the World

Chart 8 shows the US dollar ETF, the UUP, together with three dollar influenced relationships. The first to deteriorate was the S&P/EFA ratio as flagged by the vertical blue line. All these relationships including the UUP have corrected since then, but the green down trendlines show that several of them are close to a possible upside reversal. If their consensus breaks above their respective green trendlines that would indicate further dollar strength  and superior relative performance by US stocks and bonds. Alternatively, if they remain below this resistance the implication would be for more corrective action in the dollar, with a resultant under-performance by US stocks and bonds and a rise in commodity prices.

Chart 8

Gold and Silver

The Gold Trust, the GLD, recently supported a rally but that advance appears to be fizzling out as the KST has begun to roll over. More to the point, this action is being supported by the price itself, which appears to be breaking down from a small head and shoulders top. I say “appears” because the chart is an end-of-day plot and this article is being published prior to the final close.

Chart 9

Silver price is also under pressure since its KST has gone decisively bearish. The price itself is falling sharply but remains above the breakdown point flagged by the red trendline at just above $15.

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.