US Equities are Very Close to an Upside Breakout. Can they do It?

• World Stock ETF looks set for an upside breakout if it can get a small push in that direction
• Treasury yield curve begins to steepen
• Gold shares and silver caught in an important trading range.

Equities

Last week’s headline addressed the question of whether Chinese equities would drag US stocks up. In the last week we have seen this Asian market literally explode as US equities move higher during their bullish end of the month seasonal. That seasonal is now over but US equities remain tantalizingly close to that upward breakout.

Chart 1 shows that the NYSE A/D and upside/downside volume lines have already registered new bull market highs ahead of the S&P. They are currently in the process of breaking above the two resistance trendlines and stand a good chance of experiencing a more decisive break. This action clearly offers a positive backdrop.

Chart 1

One of the arguments for such a move comes from Chart 2, where we can see that the 10-day EMA of the McClellan volume oscillator remains above its 20-day counterpart. As long as this condition holds the NYSE Composite is likely to move higher. Since the indicator is not particularly overextended it most probably will continue to support higher prices.

Chart 2

Note that the KST for the NYA, in Chart 3, is slightly above its MA and by no means overextended. The rising series of bottoms that have developed since last December also argue for an upside breakout.  The danger point would develop if the Index slips below the red up trendline and 200-day MA, both of which are around 10,850. We would also want to keep an eye out for those three red up trendlines in Chart 1. You can update them yourself, by clicking on the chart and saving it in a ChartList.

Chart 3

The MSCI World Stock ETF, the ACWI, has also been tracing out a giant trading range and seems to want to break to the upside, though it requires more strength to achieve this objective. Note that its daily KST is very finely balanced with a bias to the upside. If the price breaks out it will undoubtedly take this indicator with it.

Chart 4

Chart 5 tells us that the stakes in both directions are very high. That’s because the Special K indicator (SPK) in the lower window is just above the neckline of a potential head and shoulders top. We look to this indicator to give us guidance as to future price movements. You can read about the Special K here. Since last fall it has been tracing out a series of declining peaks and troughs as flagged by the brown trendlines. At the moment though the SPK is in a rising mode, so it will be interesting to see whether it can now move above its early March peak. If so, a series of rising peaks and troughs will be signaled and since the indicator has already violated the green trendline the line of least resistance would appear to be an upward one.

On the other hand, you can readily appreciate the weakness that would unfold if the current rally falters without an upside breakout in the price. That’s because a break below the red trendline would probably follow. In effect, it would represent a reverse set of circumstances similar to the December 2012 buy signal signaled by the violation of the two green trendlines. Once again, it is possible to follow the progress of this indicator by clicking on the chart and saving it in a ChartList for future examination.

Chart 5

The 5/30-year Treasury Yield Curve

Chart 6 shows the relationship between the 5- and 30-year treasury yields. When the ratio is rising it means that the 5-year yield is gaining on its 30-year counterpart and the curve is said to flatten. Such action is usually a sign that the economy is improving. When activity perks up too much though the Fed tightens up and the curve is said to invert with the 5-year exceeding the 30-year series. When the curve then drops or steepens, recessions typically follow. Currently the curve, at a reading of .50, is a long way from an inversion i.e. in excess of 1.0.

However, last week it violated an up trendline. This action is being supported by all three momentum indicators, which strongly suggests that the curve has begun a path of steepening. It’s really the market’s way of saying that the recovery is not as strong as participants thought a couple of weeks ago.

Chart 6

Gold and Silver

The Gold Trust ETF, the GLD, has just experienced a small bounce. However, it remains in its trading range of the last couple of years. The arrows in Chart 7 show that recent KST peaks have been followed by short-term declines. At the moment the KST is still rising, so we have to chalk it up as to being in the bullish camp. However, looking elsewhere at two markets that typically move in sympathy with the gold price, namely gold shares and the price of silver, some technical cracks are clearly appearing. The implication is that the recent gold rally may be in the process of peaking out.

Chart 7

Chart 8 for instance, shows the Gold Miners ETF, the GDX, together with the gold share A/D Line. As you can see the breadth indicator was recently at a new low, hardly the kind of thing that could support a rally in the shares. Moreover, it’s also possible that the shares could be in the process of completing a consolidation head and shoulders pattern. That would happen with a decisive break that can hold below the potential neckline at $17.50. On the other hand, were the price to rally above the horizontal green trendline at $20, the head and shoulders would be cancelled and a strong rally signaled. I think that’s a less likely outcome but if it does develop it should definitely be respected.

Chart 8

Finally Chart 9 shows the silver ETF, the SLV. Here we can see a false or whipsaw breakout above the green trendline. Such action is often followed by an above average price move. In this respect you can see that the recent sharp rally was preceded by a false downside breakout in mid-March. Currently the KST is in a rising and therefore bullish mode, so the technical picture is not without some merit. The MACD is a more sensitive indicator than the KST and turns earlier. The disadvantage is that the increased sensitivity causes it to experience more whipsaws.

Chart 9

Chart 10 shows that it has recently started to turn down, thereby suggesting a test of the red trendline at $14.75 is in the cards. Once again there is an alternative scenario and that would involve a break above the green trendline at $16.25. Either break is likely to signal the direction of the next important move, but once again the balance of evidence, as I read it, is with the bears.

Chart 10

Good luck and good charting!
- Martin

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.