If You Are Bullish On US Equities Try Looking At China For A Signal

• - Special K for the NYSE Composite breaks support
• - Emerging markets getting oversold
• - Commodities are about to resolve their recent trading range

A Chinese leading Indicator?

It’s a well-known fact that the Chinese market has been the hottest on earth in recent months. What’s not so well known is the fact that Chinese momentum has, in the last few months, been a leading indicator. How long that will last is unknown at this point. For example, Chart 1 compares the daily KST for several important country or regional ETF’s. Starting at the top we see the Chinese ETF, the FXI, followed by Emerging Markets (EEM), Japan (EWJ), Europe (IEV) and the S&P Composite. The arrows flag momentum turning points with a slight slant to the right, which indicates the chronological progression. All series are currently bearish because they are below their respective moving averages. However, the Chinese FXI has certainly begun to flatten, possibly as a prelude to a reversal. That suggests to me that if we are looking for some world equity leadership China would be the place to focus on.

Chart 1

Charts 2 and 3 compare the Special K for the FXI to that of the NYSE Composite ($NYA). There is quite a difference between their action. You can read about the Special K (SPK) here. The joint arrows for the SPK and price indicate long-term buy and sell signals. Currently the FXI is undergoing a correction under the context of an on-going bull market. As you can see, it remains above its bull market trendline and 200-day MA, two important benchmarks to monitor going forward. The SPK is also in a strong uptrend since it is above its trendline and moving average.

Chart 2

Now consider the NYSE Composite ($NYA). Again the joint trendline breaks offer useful and reliable signals of important trend changes. As you can see, the SPK has just completed a head and shoulders top. In order to confirm we would need to see a more decisive break in the NYA itself and a drop below its 200-day MA. In the meantime, the loss of momentum in the SPK offers a dark cloud over any rally that may take place in the immediate future. The rule being that normally where the SPK goes the market eventually follows. I have deliberately emphasized the word “normally” because there are no guarantees in technical analysis, merely probabilities.

Chart 3

US Equities

Chart 4 shows the technical position of the NYSE Composite ($NYA) in greater detail. Some time ago it broke above the green trendline. At that time it looked as if a new up-leg in the bull market was underway. However, the price soon slipped below the line again, thereby indicating the probability of a false break. Note also that the extended portion of the dashed red line acted as resistance during this week’s (so far) failed rally attempt. Now the price is facing the twin challenge of the 200-day MA and the solid horizontal trendline. That line is also the neckline of a small potential head and shoulders top. Again the emphasis, because a top is not actually completed until the price cracks and holds below the neckline in a decisive way.

The McClellan volume oscillator (!VMCOSINYC) in the bottom window went bearish in mid-April as the black 10-day EMA dropped below its red 20-day counterpart. That condition continues to exist. However, it’s also true that the indicator is moderately oversold and is showing some tentative signs of bottoming, thereby holding out the possibility of a near-term rally.

Chart 4

Chart 5 shows one area of the market that has already experienced a McClellan volume oscillator (!VMCOSINYC) buy signal and is ready to become an upside leader. That investment style is small caps in the form of the IWM. The green arrows show that buy signals have typically been followed by rising prices. We never know the magnitude or duration of any forthcoming move, but the positive McClellan crossover certainly offers the IWM a good start. Clearly the price of this ETF is approaching an important juncture as both it and the 10-day EMA of the volume oscillator are near two converging trendlines. Remember, you can update this chart next week by simply clicking on it.

Chart 5

Another area worth keeping an eye on is the flow of money between Guggenheim (formerly Rydex) bullish and bearish funds. The bull/ bear indicator is featured in Chart 6. A rising ratio (!ASETBULSE) indicates that more money is flowing into bullish funds than that directed to bearish funds.  The trendline violations indicate when reversals in fund flows have signaled bullish and bearish moves in the equity market. For the last few months this relationship has been trading in a narrower and narrower range, indicating investor/trader indecision. On Friday it broke to the downside, which suggests money is flowing out of bullish funds and that a trend of lower prices has begun. Confirmation, in the form of a break below the red trendline for the S&P, has not yet developed, but it’s so close that only another bearish session or two would do the trick.

Chart 6

Emerging Markets

Chart 7 features the MSCI Emerging Markets ETF, the EEM. The price has been in a trading range for many years. As a result the approximate eight negative 65-week EMA crossovers since 2010 have essentially been whipsaws. The current ninth one may well have a similar outcome. That’s because the Emerging Market diffusion indicator, which monitors a basket of EM country funds in a positive mode, is very close to its maximum bearish -12 reading. The solid green arrows show that reversals from a reading at or below the -11 level (green dashed horizontal line) have usually been followed by short-term rallies. Only the dashed ones were followed by sub-par or non-existent advances. Right now the indicator is falling, so it has yet to trigger a signal. The current oversold reading suggests that even if the red horizontal trendline at $38 is violated, any initial sell-off below it will be fairly limited in scope. If the line is not penetrated then this support zone and the oversold reading could well combine to trigger another tradeable rally.

Chart 7

Commodities

Chart 8 shows that the CRB Composite ($CRB) completed and broke down from a top last year and is still in official bear market territory. That’s because it is below its 12-month MA and the KST is below its 9-month MA. The KST is beginning to get oversold, so that could mean a turn is coming, but for now we should assume that the bear market is intact.

Chart 8

Chart 9 shows more recent action in greater detail, but this time for the DB Commodity ETF, the DBC. One striking bullish factor lies in the fact that the 50-day Net New High indicator (!PRNNHCO50) in the bottom window managed to rally above zero a few weeks ago. That may not seem very significant. However, in many cases when a momentum indicator remains in negative territory for an extended period and then goes positive it’s a subtle sign that the primary trend has reversed. “Extended” in this case means a period in excess of 8-9-months.  Now the question is whether the recent trading range will turn out to be a base or a consolidation prior to further losses. The two benchmarks in this regards are at the green and red trendlines at $18.50 and $17.50 respectively.

Chart 9

Finally, Chart 10 shows that the KST for the DB Commodities Tracking Fund (DBC) has started to re-accelerate to the downside, which suggests that a breach of the $17.50 level is more likely.  You can also see that the 200-day (red) MA is just under $19.60. That becomes the initial target for those looking for a primary trend bullish signal.

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.