Did Friday's 370-Point Rally Change Anything For The Equity Market?

• Friday’s rally fails to reel in new highs
• Guggenheim asset flows just above critical support
• 30-year yield caught between two converging trendlines
• Energy SPDR XLE completes a bearish head and shoulders

A couple of days ago I wrote that a bearish two-bar reversal that had developed in many averages last Wednesday signaled a decline lasting in the order of 5-10 sessions was likely. Everything seemed on track on Thursday as we saw a sharp retreat. However, Friday’s action brought the averages back to around Wednesday’s closing levels. I say around because some series such as the S&P and Dow closed higher, but others, such as the NYSE Composite, closed slightly lower. In any event, the big question relates as to whether Friday’s rally has canceled the possibility of a decline. The short and disappointing answer is that we will have to wait and see. In that respect I think next week’s action will tell us whether the market is going to take advantage of the much touted bullish end-of-the-year seasonal and break to new highs or if something more negative develops. The best I can do at this juncture is to suggest a few indicators you might want to monitor. Remember you can always update these charts by clicking on them later in the week. The first thing to notice from $NYA on Chart 1 is that the strong resistance we observed last week is still there. That resistance takes the form of the 200-day MA and the two trendlines. Also, Friday’s rally has done nothing to reverse the declining KST. Nevertheless, it would not take much in the form of upside action to reverse this oscillator into a bullish mode. A break above the green down trendline would probably do the trick.

Chart 1

Chart 2 compares the NYSE Composite ($NYA) to the McClellan Volume Oscillator ($VMCOSINYA), or rather two EMA’s derived from its construction. As you can see, the black 10-day EMA has now crossed below its 20-day counterpart thereby triggering a new sell signal. Previous instances have been flagged by the red arrows. The signal has developed close to the equilibrium level, so once again a modest amount of upside action could reverse the trend. As it stands right now, this action is short-term bearish.

Chart 2

Chart 3 compares a volume oscillator (PVO) with the price movement of the New York Composite ($NYA). Last week, when I showed it, the volume oscillator was oversold. This indicated that activity was likely to expand. The question then became: Which direction will prices go? The answer at present seems to be down, as the price based oscillator (MACD) in the bottom window is heading south. Again, we must be careful because it is around zero and could easily reverse to the upside. Rising volume, with a break above the green trend line that holds, would be very positive for a year-end rally. Note also that the small red up trendline has been violated and the NYSE Composite has pulled back to the extended line. Again, it’s possible that the market can overcome this obstacle, but right now the line remains violated. It’s what is, not what we would like it to be.

Chart 3

The S&P 500 ($SPX) itself has actually rallied back above its equivalent red up trendline but remains below the two green resistance lines. The thing which really stands out on the chart is the fact that the upside/downside volume line in the bottom panel is continuing to act weakly and is well away from last summer’s high.

Chart 4

We can also see from Chart 5 that Friday’s rally did not register any net new 52-week highs ($SUPHLP) in the S&P 1500 Index($SPSUPX). I would not expect to see a huge number of new highs. After all, the Index is still about 15-points below its bull market peak. However, I would expect to see some. Look, for example at the two blue arrows in last September. At that time, the Index was much lower than it is today but nevertheless, the number of highs, began to expand.

Chart 5

Finally, Chart 6 features the Guggenheim Asset Flow Index (Formerly Rydex) (!ASETBULSE). This series monitors money flowing into Guggenheim index and sector ETF’s compared to money market and inverse funds. A rising ratio is positive because it reflects money flowing into bullish funds and vice versa.  This series was recently in a trading range and whipsawed back into it again. Last week’s action took it back to the upper end of the range but by the end of the week it was closer to the lower end again. Note that the KST for the ratio is also bearish and moderately overbought. Its action is hinting that flows will violate the red trendline thereby signaling lower prices.

Chart 6

Three different yields

Everybody and his (or her) dog knows that Mrs. Yellen is going to raise interest rates next week, so it seems likely that such information is already baked into the price but--- What is the technical position telling us? Chart 6 compares three yields at different ends of the curve. The blue arrow points to the high set in the 20-year ($TYX) series in 2014. Note that the 2-year ($UST2Y) is well above it, having experienced a decisive upside breakout. The 5-year ($FVX) is also threatening to break out but is really the same level as that 2014 juncture point. Finally, the 20-year series has been dragging its feet. Because of its lengthy maturity the 20-year series is the most sensitive to future inflation. The less robust action seen on the $TYX suggests that long-term bond investors are not that worried about an inflationary environment. That sort of thing is normal at the early phases of the tightening cycle as short rates gain on longer-term ones. However, if long rates actually decide to decline in the face of rising short rates that is a deflationary signal.

Chart 7

30-year yield caught between two converging trendlines

In that respect, Chart 8 shows that the 30-year yield ($TYX) is currently caught between two converging trendlines. Momentum action is mixed with a slightly bullish (for yields) long-term KST but a bearish short and intermediate series. The market, it would seem, is expecting higher rates. However, should the yield fail to co-operate by declining, that would be quite unexpected. Such action would also likely be bearish for stocks since declining bond yields would be pointing to a weaker economy and lower profits. For the record, the breakout points for a decisive trendline violation would be 3.15% on the upside and 2.8% on the downside.

Chart 8
Energy Spider completes a bearish head and shoulders

The Energy Spider ETF, the XLE, has completed a bearish head and shoulders consolidation pattern, as has its relative strength line against the S&P. That probably means these shares are headed lower though we must be a bit careful because they are very oversold and the burden of year-end tax-loss selling may soon be lifted in the next few sessions.

Chart 9

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.