Lots Of Markets Are At Crucial Juncture Points

• US Equities remain short-term overbought
• Yield curves starting to steepen (decline)
• All bond maturities are at critical trendlines
• Dollar about to break down?
• Gold about to break out?

US Equities

Earlier in the week I indicated that several short-term indicators such as the Price Percentage Oscillator(PPO) using an 8/16 parameter combination had begun to register an overbought reading.

The point I made at the time was that most of the long-term indicators were bearish. Normally oscillators, such as the PPO are far more sensitive to overbought conditions in that kind of an environment than in a bull market. Ergo, we should expect to see a digestion of recent gains either through price erosion or a trading range. This week has seen some ranging action, which has given breathing space for several other short-term indicators to flash momentum sell signals. That suggests that Friday's rally will at best be halted at the overhead resistance at the red trendline and 200-day MA in the 2050-60 area.

Chart 1

Chart 2 compares the NYSE Composite ($NYA) to a 10- and 20-day EMA of the McClellan Volume Oscillator. Sell signals are generated when the (black) 10-day EMA crosses below its red counterpart. Earlier in the week both EMA’s were still rising but now look as if the 10-day series has peaked and is ready to trigger a sell signal.

Chart 2

Chart 3 shows that the 9-day Money Flow (MFI) has also reversed from an overbought reading, thereby adding further fuel to the corrective argument. Note that there is a gap at around the 10,000 level. These emotional points on the chart are usually “filled” or at least a worthwhile attempt is made at closing them. We never know how long it takes to complete this process, but most are closed within an approximate two to three week period. Since the current gap remains intact, the probabilities favor an attempt to close it lies ahead and that means lower prices.

Chart 3

Yield Curve may be reversing

The  yield curve compares a relatively short-term to a longer-term maturity. There are many variations on these bond spreads, but Chart 4 shows the 2-year/30-year relationship, which has recently crossed below its 12-month MA. Note that the KST in the center window has just tentatively crossed below its MA. A declining spread normally means that the economy is weakening, but this is not a precise relationship. You can see from the dashed arrows. They compare the differing lead times between turning points in the yield curve KST with that of the nonfarm payroll numbers in the bottom panel. Nevertheless, it is fairly evident that swings in the yield curve do affect the economy at some point and the topping action of the yield curve argues against the economy accelerating. More to the point, the break in this yield relationship below its 12-month MA and the bearish KST represent evidence that economic momentum will more likely continue to slow.

Chart 4

Chart 5 features a different spread, that between the 2-year and 10-year government maturities. In this instance, we see a much finer balance. The long-term KST is still above its MA but has gone completely flat. Perhaps some further weakness in the short-term KST would tip the balance to the downside. The more important event to look out for, would be a violation of the 2-year up trendline. Were that to take place it would certainly confirm the negative action of the 2/30-year spread in Chart 4. Please remember you can click on the chart at a future date to follow what happens. Once clicked, you can also save it into a chart list.

Chart 5

Chart 6 reinforces the idea that US bond yields are at a very critical juncture. The top series shows the price of the Barclays 20-year Trust, the TLT. The other three panels represent yields from other maturities. All have been plotted inversely to correspond with price movements in the TLT Each one is at an important resistance trendline. The rule of commonality states that the more securities that are reflecting the same technical characteristic, other things being equal, the stronger the ensuing price move. Since a wide number of maturities are at important juncture points it seems likely that if they all punch through we could see a very strong rally in the credit markets.

Chart 6

The Dollar Index

Falling rates could feed back into a falling US dollar ($USD) and Chart 7 shows that the Index has now tentatively crossed below its 12-month MA and the red trendline. Also, the KST, whilst still above its MA, definitely has the smell of rolling over action. It’s important to note that this chart is based on monthly closing prices. Since we do not have that data the current plot is a tentative one and that it is not the end of the month yet.

Chart 7

However, Chart 8 uses daily closes. In this case, the Dollar Index ($USD) is being featured with its Special K (SPK), a series that combines the short-, intermediate and long-term KSTs into one indicator. Peaks and troughs in the SPK often line up with major turning points in the price series that it is monitoring. It’s easy to spot them with the benefit of hindsight, so we use trendline violations to confirm reversals after they have taken place. A couple of examples have been highlighted on the Chart. Recently the SPK completed a small head and shoulders top and had begun climbing back to the neckline. However, in the last week it has started to reverse to the downside again. The KST in the bottom panel is doing the same thing. Since the SPK is also below its MA, the implication is that the Index itself is likely to complete its potential top by breaking decisively below the red trend line, with say, a daily close under 93.

Chart 8

Chart 9 suggests that will happen because the diffusion indicator calculated from cross dollar relationships in a bullish trend continues to deteriorate. It’s featured in the lower panel of the chart, where you can see that it is still in an overbought condition.

Chart 9

All that glitters

Where the dollar goes usually gold does not! Occasionally they move in tandem but the vast majority of the time their paths diverge. If the Dollar Index does break down then it makes sense to see whether gold is also likely to break out. Chart 10 shows that gold (GLD) is poised to do so as it is resting on its 2012-2015 down trendline after having tentatively crossed above its 200-day MA. The SPK is still within the confines of its base but if the price violates the line with a break that holds that base in the SPK is very likely to be completed and a very worthwhile rally supported.

Chart 10

With the 2/20-yield curve, most bond maturities, the dollar Index and gold all at crucial technical points, next week could be setting the scene for a very interesting webinar next Tuesday at 5 PM EST. Until then….

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.