Why Is $61 Such An Important Number?

• Key levels for the MSCI World Stock ETF.
• Asia Ex Japan and Japan ETF’s can support higher prices.
• Latin America and the Middle East look the most vulnerable.

Occasionally a specific price can show up as a pivotal number that provides a valuable clue as to the probable direction a market is likely to take over the short- or intermediate-term. I believe that $61 may prove to be such a number.

The price I am referring to is that for the MSCI World Stock ETF, the global equivalent of the S&P Composite. Since this is a global index it reflects the environment for a broad list of countries, so its trajectory is of key importance to world equity markets. Its symbol is ACWI, but why $61?

Take a look at Chart 1, where we see a bullish breakout above the green trendline. Since the price remains above the line the breakout is still in force and we should assume that prices are headed higher. That does not mean that we have to maintain a bullishly dogmatic stance and cannot look for events that might alter the outlook, especially as many internal indicators are finely balanced. Oh yes, and the month of May is not usually one of the year’s best performers. That’s where $61 comes in. I use $61 because a close below that level would result in a downside penetration of the green line and complete the small potential head and shoulders top contained in the blue ellipse. The most important implication would be that the upside breakout that took place earlier in the year is a whipsaw. More often than not false breakouts such as this are followed by above average moves in the opposite direction of the breakout, in other words, down.

The real key support probably lies at the red up trendline, which is just a tad below $61 but will be at that magic number or pretty close to it by the end of the week. Since the line has been touched or approached on six occasions it represents important intermediate support. Its violation, ifit were to take place—note the emphasis on the word if – would tip the balance of some of the longer-term indicators into a bearish mode. In the meantime, note that the KST in the lower window of the chart has triggered a sell signal by crossing below its 10-day MA and violating its post October 2014 up trendline, not exactly a bullish combination.

Chart 1

Chart 2 also shows that the Global Diffusion indicator (!PRDIFGLO) has just triggered a sell signal. Previous instances of downside reversals from above the overbought zone have been flagged by the red arrows. Incidentally, this indicator is calculated from a basket of country ETF’s that are in a bullish trend. As you can see, sell signals are relatively short term in nature and do not represent an end-of-the-world scenario.

Chart 2

However it could prove to be a domino because the long-term technical structure is holding on by a very thin piece of thread. This is shown in Chart 3, where the ACWI is compared to its Special K, which you can read about here. By and large what we are trying to do is identify trend reversals in the Special K as this usually reflects a trend reversal in the price. A good example of a buy signal was triggered in December 2011 when the indicator confirmed a series of rising peaks and troughs, crossed above its MA and violated a down trendline. The signal was completed with confirmation by the price, which had violated the green trendline slightly prior to the Special K breakout. Fast track to the current situation, where we see the possibility of the Special K forming a top. That would happen with a break below the red trendline. Such action would also set up a series of declining peaks and troughs. The indicator is already below its MA. Price confirmation would require a break below the 2012-2015 up trendline just above $60, for a full-fledged sell signal. On the other hand, were the indicator to break above the horizontal green trendline it would confirm a series of rising peaks and troughs as well as resulting in a positive moving average crossover. That would be the scenario for higher global equity prices. Technicians have a saying "A trend is a trend is a trend”. Simply put, what that means is that we should assume that the prevailing trend (which is currently bullish) is in existence until proven otherwise.  That means that an upside breakout to new highs is likely. However, because of the very fine current technical balance a break below $61 could quickly tip those scales in the opposite direction.

Chart 3

Regional ETF’s

It’s a useful exercise to take a look at the various global regions to see which are likely to benefit in the event of an upside move and those that could be at risk in case we see a downside one. In this respect, Charts 4-10 show the long-term absolute and relative technical position for each region. Chart 4 shows the Asia Ex Japan ETF, the AAXJ. It has already broken out in a major way and is being supported by rising long-term KSTs.

Chart 4

The US market (SPY) remains in a confirmed up trend and is potentially vulnerable because of its falling long-term KST. However, the thing to watch here is the RS line, which is currently above its MA and the up trendline. Failure to hold above these benchmarks would be bad news but in the meantime it's steady as she goes!

Chart 5

Chart 6 shows that the Japanese ETF, the EWJ, has broken out on both an absolute and relative basis. The two positive KSTs tell us that Japan is able to support higher prices on both an absolute and relative basis.

Chart 6

Europe, in the form of the S&P Europe 350 ETF, the IEV, is still above its bull market trendline but its RS data is still in a corrective mode. However, the RS line has managed to break out of a small base and should we see the World Index (ACWI, shown in Chart 1) hit new highs, Europe would be a candidate for improving strength.

Chart 7

Chart 8 indicates that the Latin America 50 ETF, the ILF, completed a top and has rallied back to resistance at the breakout trendline. In the meantime the RS line is showing no signs of resuscitation. Since both KSTs are bearish this region could be quite vulnerable.

Chart 8

Finally, the SPDR Emerging Middle East and Africa ETF (GAF), has fallen back to support on an RS basis (see the third panel of Chart 9). The KST for RS action is marginally bullish and is clearly looking for guidance from the RS line itself as it is caught between the two converging green and red trendlines. Depending on the direction of the breakout this could be potentially the most rewarding or alternatively the most vulnerable of all the regions. Stay tuned!

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.