The Market May Rally But Take Note, It's Getting Pretty Selective Out There

• Dow diffusion indicator still on a buy signal.
• Dow Jones Composite Index facing important technical challenge.
• The reflation gold rallies in Euro and Yen are over.

Long-term Background

Last week at the webinar I came to the conclusion that enough short-term indicators were reversing from oversold readings to justify a rally. However, many longer-term ones continued to roll over in an ominous fashion, which meant that the odds favored any advance being likely to represent part of an overall topping process. That process could involve a move to new highs but the bigger risk was on the downside. That view remains unaltered.

Chart 1 features the NYSE Composite ($NYA) together with its long-term KST. The KST is not perfect. That’s why we call it Know Sure Thing. As long as it continues to keel over to the downside it’s warning of trouble, but until the price actually finally confirms with a trend break of its own, a rally is still possible. Usually a negative 12-month MA crossover is sufficient to serve as confirmation. However, the Index has experienced a couple of false sell signals in the last few months and that makes me a bit wary of relying on it. A more trustworthy benchmark would be a drop below last October’s bottom at 10,500. In the absence of such a break we should assume that the trend is either up or sideways. One thing that would be a long-term game changer would be a reversal by the KST to the upside, but that’s another story.

Chart 1

Even though several averages, such as the Dow are within striking distance of new all-time highs, “Mrs. Smith’s Dow” is not doing so well. By that I mean that the advance may look good on paper but the average stock is not participating. In this respect, Chart 2 shows that the percentage of NYSE stocks above their 200-day MA ($NYA200R) has been slowly but surely deteriorating for many months. In classic technical folklore, new highs in the averages which remain unconfirmed by measures such as this portend of trouble ahead. Trouble has been brewing for some time, but the S&P has managed to remain above the fray and has not confirmed this weakness.  Trend trumps everything as we say. Chart 2 shows that at this week’s S&P high, less than 50% of NYSE stocks were above their 200-day MA’s. It may look on the chart as if this indicator is currently at an oversold position. However, closer examination shows that it is really just slightly below the equilibrium point. It looks oversold because the market has not experienced a decent correction for several years. In this case I would look for a drop by the S&P below its recent low at 2025 to act as confirmation of this weak breadth.

Chart 2

A Couple Of Bullish Indicators

Chart 3 features my Dow Diffusion indicator (!PRDIFDOW). This one monitors a basket of Dow stocks that are in a positive trend. As you can see, useful buy signals are generated when it reverses to the upside from a position that is below the oversold green dashed trendline. We never know what the duration or magnitude of any advance might be, but it is usually worthwhile as long as it is rising. This is a positive factor.

Chart 3

Chart 4 shows that sentiment was particularly constructive (i.e. lots of bears) for a bullish rally a week or so ago as the put/call ratio ($CPC) peaked from an elevated level. Once again reversals have usually been followed by a worthwhile rally.

Chart 4

Watch The Dow Jones Composite ($DJA)

One area I am monitoring closely is the Dow Jones Composite ($DJA). This series combines all three closely followed Dow indexes, the Industrials, Transports and Utilities into one series. The reason why it’s grabbing my attention is because it was one of the few major averages that actually broke down from a top last June. Since that time it has consolidated and begun to challenge the breakdown point. That area, flagged by the red trendline, represents significant resistance as the line has turned back thirteen rallies and reactions in the last eight months or so. Now it’s being joined by the declining green trendline, which at 6,300 is in the same zone. My point is that a failure to move through 6,300 will really question the rally scenario, whereas a move through it would add greater credence to an advance. Note that the S&P in the lower window, is also just below resistance, but it is not as formidable as that for the Dow Composite.

Chart 5

Gold

The price of the yellow metal represented by the Gold Tracking ETF (GLD) and the Gold Share ETF, the GDX, recently broke down from their trading ranges of the last year or so. Both are clearly overstretched on the downside and certainly due for a breather.

Chart 6

However, gold denominated in euro and yen have been in confirmed bull markets, but even that status is now being questioned as we can see from Charts 7 and 8. Chart 7 shows that gold expressed in euro broke out from a large inverted head and shoulder base some time ago. This suggested that the ECB’s program of reflation was going to succeed since gold has a habit of discounting inflation. This week though, the euro gold price broke down from a top formation. This  has the effect of cancelling the bullish implications of the base. Note that the KST has reverted to a downward trajectory again.

Chart 7

The BOJ has also been trying to reflate in an effort to stimulate inflation. For its part, yen denominated gold started off by obliging with a breakout from a large symmetrical triangle. Now it looks headed lower because the price has completed a head and shoulders top and broken below the extended trendline marking the lower end of the triangle.  The ultimate high of the rally also demonstrates a key technical point and that is that false upside breakouts (whipsaws) are often followed by above average price moves in the opposite direction to the false signal. That’s because whipsaws draw unwary traders into positions that eventually move against them, resulting in their being forced to liquidate when their expectations are not realized.

Chart 8

Good luck and good charting,
Martin J. 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.