Major Equity Market Breakdowns Warn of Lower Prices to Come

• McClellan Volume Model for NASDAQ goes bearish.
• EEM breaks down from a major top.
• Chinese equities are right on the brink.

The last time I wrote about equities, two weeks ago, I pointed out the dearth of breadth. I also mentioned that following the end of the 'bullish end-of-the-month' seasonal, equity markets could be vulnerable as they entered the seasonally weak August/October period. I mentioned two areas on the charts to watch. The levels were 2050 for the S&P Composite and 10,600 for the NYSE Composite. I stated at the time that “If support at those levels gives way it could open the flood gates to lower prices.” That seems to be what is happening since both series are below these benchmarks.

Chart 1 features a weekly plot for the Dow Industrials ($INDU). As you can see the price has broken below its red bull market trend line. At the same time the KST in the bottom window is not only bearish but has violated a multi-year up trend line. The red dashed arrows also point up the fact that the KST has been experiencing multiple negative divergences with $INDU itself for many years. Since the Dow has confirmed by breaking down from a giant wedge, as flagged by the two converging trend lines, we should be on maximum alert for lower prices.

Chart 1

The US Market

Chart 2 shows the NYSE Composite ($NYA) in more detail. First, the red and green waves reflect the fact that the price has been experiencing a series of declining peaks and troughs as well as completing a head and shoulders top.  The indicator in the bottom panel compares the 10-day EMA (black) to the 20-day (red) McClellan Volume Oscillator. Sell signals are triggered when the 10-day EMA crosses below the 20-day series. Such instances have been flagged with the red arrows. In all cases a decline takes place but some are more robust than others. Either way though, these sell signals are certainly not bullish. Currently the model is positive because the 10-day remains above its 20-day counterpart. However, both series have reversed to the downside, so if the break by the NYSE turns out to be a whipsaw it certainly has the ability to support a rally. I am certainly not forecasting a whipsaw, because that’s something for the market itself to decide. However, if the $NYA can rally back above the 10,600 area that would certainly postpone any major downdrafts. However, that is not an event likely to happen.

Chart 2

Chart 3 shows that the high rolling NASDAQ Composite ($COMPQ) has also completed a top and its McClellan Volume Oscillator (!VMCOSINAS) has gone bearish.

Chart 3

Global Stocks

It is important to note that another major benchmark that I did not cite earlier in the month comes from the MSCI World Stock ETF, the ACWI. You can see Chart 4, which shows that the price has traced out and broken down from a head and shoulders top, just like the NYSE Composite. Note that the Global Diffusion Indicator, which measures a basket of country ETF’s in a positive trend, has also gone bearish.  It’s getting a bit oversold, but just remember that last October’s decline, the largest on the chart, was also launched from a neutral level.

Chart 4

Chart 5 points out the fact that my Global A/D Line (!PRGLAD) has been leading the ACWI lower for some time.

Chart 5

Finally on the global front, Chart 6 tells us that all three KSTs for the ACWI are now in some kind of a bearish mode. This, at a time when the price has just experienced a breakdown, is not an encouraging fact. You can also see that the price has penetrated the 2012-15 bull market trend line and crossed below its 65-week EMA.  This happens to be a weekly chart, where Friday closes are important, so using Thursday’s prices is a bit of a guess. Consequently it’s important to take note of the Friday close, which would have to be below, say $58 for a decisive break.

Chart 6

Major Regional and Country ETF’s

Looking around the world we see more of the same. For example the MSCI Emerging Market ETF (EEM), has just broken down from a major trading range. It’s true that it is currently oversold and due for a bounce. August’s down side break represents a very serious development. Note also the KST for relative action against the ACWI, has once again begun to roll over to the downside.

Chart 7

The Shanghai Composite ($SSEC) is still in its holding pattern and remains in a confirmed bull market, though I am not sure it can maintain that status for much longer. The benchmark to look out for would be a daily close below the potential head and shoulders neckline and 200-day MA, say at 3640. Some breadth and diffusion indicators that I follow are already bearish. That, along with the fact that many ETF’s for Chinese dependent countries have recently broken down suggests strongly the areas of Asia surrounding China are in trouble. These ETF’s would include, Hong Kong (EWH), Taiwan (EWT), Korea (EWY), Thailand (EWT), Singapore (EWS) and Malaysia (EWM).

Chart 8

The iShares Europe 350, the IEV, appears to have failed in its attempt to remain above its bull market trend line. Its relative performance against the World ETF has been edging up as of late. However, it’s too early to call it a bull market in relative action, because the RS Line is still below its 65-week EMA. One strongly positive factor lies in the observation that the has just gone bullish.

Chart 9

The Japanese ETF, the EWJ, remains on its recent breakout and is still above its 65-week EMA, both are positive signs. The RS line is about to face an important technical test, as it is currently resting on its 2009-2015 down trendline. Since the KST for relative action is bullish, Japan looks to be very promising as a relative play.

Chart 10

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.