Is Thursday's Negative Action The Start Of Something More Serious?

• -Brokers experience a bearish two bar reversal.
• -Dollar diffusion indicator ticks up for the first time in many weeks.
• -Gold in dollars experiencing a short-term breakdown.
• -Gold in yen and euro at crucial support levels.

US Equities

The market has been working its way irregularly higher over the last few months. However, when we look at broader measures such as the NYSE Composite or the Dow Jones Composite, price action has really taken on the form of a trading range. Since the S&P Composite remains above its 200-day and 12-month moving averages the evidence still points to a primary bull market, and that’s what we should assume. However, we have recently seen some tentative potential domino type action which means the word dogmatic, in either direction, is a no no.

First though, let’s take a look at the Dow Jones Composite ($DJA). This series is, as the name implies, a composite index constructed from the 65 stocks that go to make up the Dow Jones industrials, transports and utilities. It’s a price weighted index unlike the S&P or NYSE Composites, which are cap weighted. Thirty five of its components are utilities and transportation issues, each of which occasionally lead the rest of the market both up and down. I say occasionally, because after a quick review of this relationship over the last three decades, I was surprised to find that this leadership role is far less common than I imagined. For example, there was no lead at the 2000 top or 2002 bottom. The Composite did give an advance warning of weakness at the 2007 bull market peak.  Chart 1 shows that the Composite has been moving sideways since the beginning of the year, whereas the S&P has been grinding its way higher. Both series tentatively violated key trendlines on Thursday. The stakes are higher for the Composite because it also crossed below its 200-day MA and because this action has completed a 6-month top. As it stands right now these joint penetrations are a bearish factor. Of course equities may like the often market-moving employment report tomorrow and reverse today’s action, but as it stands right now this chart is short-term bearish.

Chart 1

Chart 2 indicates that the upside breakout in the NYSE Composite ($NYA) has also been compromised since the price has fallen below the solid red up trendline. Note that the KST is also bearish and that the dashed red trendline marking the base of a small head and shoulders has been violated.

Chart 2

The problem is this recent weakness in the $NYA has also completed a top in the Special K. This indicator is by no means infallible, but normally the completion of price patterns such as this are followed by fairly lengthy declines in price. Note that the break gains credibility because the KST is negative and has violated an up trendline.

Chart 3

Price action by the Brokers (IAI) is starting to get interesting. Just as the market discounts the economy, the brokers discount the market itself. That means they have a tendency to lead at turning points. For example, during bull markets traders trade more and corporations have a habit of going public, both of which represent good cash streams for brokers and investment houses. This week the Dow Jones Broker ETF, the IAI, broke to new highs, as you can see from Chart 4. Note also that the KST has started to re-accelerate to the upside, which is usually a good sign. However, the price experienced the second day of a two bar reversal on Thursday. Since that pattern cuts straight through the resistance trendline the failure of the price to remain above it represents a sign of exhaustion. Were the price to rally back above Wednesday’s high that would cancel the bearish two bar reversal, but until then we have to assume that the whipsaw breakout is still in force.

Chart 4

One of the areas I am watching is money flows in and out of the Guggenheim funds. In this respect Chart 5 shows the ratio between money flowing into bullish funds versus that directed to bearish funds. You can plot it using the symbol !ASETBULSE. The trendlines and arrows flag periods when it has been possible to identify reversals in flow funds, most of which have signaled reversals in the S&P itself. Currently the ratio is locked between two trendlines. It’s likely that when the breakout comes it will signal the direction of the next important move for the market. The two benchmarks to monitor for a decisive breakout are 4900 on the upside and 4400 on the downside. At this point, the rising KST of the ratio in the bottom window suggests an upside breakout is more likely. On the other hand the series of declining peaks in the indicator compared to the S&P argue for a downside break. All the more reason to wait and find out which way things are going to turn.

Chart 5

The US Dollar

The dollar ETF, the UUP, has run into resistance at the $25.60 level, where the two trendlines are converging. The KST is still rising, so there is a good chance that it will be able to punch through.

Chart 6

Chart 7 features a broader measure of momentum that tracks a basket of cross dollar rates that are in a positive trend (!PRDIFCUR). In some ways that’s a better measure since the UUP has a heavy weighting of 57% for the euro which gives it an undue influence. In the last couple of days the diffusion series has started to hook to the upside. The green arrows show that sub-zero reversals have almost always resulted in a good rally.

Chart 7

One area that has not done so well against the dollar is emerging markets. The emerging market currency ETF, the CEW, recently broke down from a giant head and shoulders pattern. The price subsequently rallied but the rolling over action of the short-term KST suggests that the decline has resumed with a vengeance.  Note that the downside objective suggested by the pattern is literally off the charts, which also suggests lower prices have yet to come.

Chart 8

Gold

After regaining some technical composure recently, gold now appears to be losing some of its luster. Chart 9 for instance, shows both the Gold Trust ETF, the GLD, and the Gold Share ETF, the GDX as having tentatively broken down from consolidation trading ranges.

Chart 9

In Chart 10, we can see that this has caused the short-term KST for GLD to turn bearish. If this is a valid signal then weak short-term action should tip the technical balance for the intermediate series to the bearish side.

Chart 10

Gold denominated in yen (GLD:$XJY) has reached a critical technical point. Right now we see a normal pull-back to the neckline of a reverse head and shoulders. Any additional near-term weakness would suggest that the flattening KST action will turn into a bearish declining trajectory. It would also invalidate the upside breakout in the yen, which would also hint at weakness. We may not find out for a couple of sessions because the price has recently fallen quite sharply and is overdue for a small bounce.

Chart 11

When Gold is expressed in Euros (GLD:$XEU), the gold price is also at critical support. In this case it’s the lower line of a potential bearish triangle. In fact the price has tentatively violated that line but I would prefer to see a more decisive break before concluding that the top had been completed. If you want to keep up with these last two charts just click on them in future and they will update.

Chart 12

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.