More Of The Santa Sell-Off To Come?

• Volume starting to expand on the downside
• Half a Dow Theory sell signal on the weekly charts
• 30-year yield locked in a tight trading range
• Dollar Index facing important test

Expanding volume on the downside

This market continues to be plagued with volume problems. Initially, it was a lack of volume on the rally. Now the tables have turned as the level of activity is now expanding, but this time on the downside. Normally volume contracts on the downside because of a lack of buyers. However, when it expands as prices decline this indicates that sellers are motivated. Motivated sellers have a nasty habit of pushing prices sharply lower. Let’s examine these concepts by taking a look at a couple of charts.

Chart 1 shows the interaction between volume and price momentum. The red and green arrows show when volume reverses from an oversold level. That can be bullish or bearish, depending on what prices have been doing. If both series are oversold (see the green arrows) that is generally bullish because it means that prices should rally and that the advance should take place under the cover of expanding volume. On the other hand, if the volume is oversold and price momentum is overbought (see the red arrows) that tends to be bearish. Right now the volume oscillator is rising and the MACD is declining, definitely a negative combination as long as it lasts. Since the NYSE Composite ($NYA) has ruptured the small red up trendline, that suggests that prices will continue to erode.

Chart 1

Chart 2 uses two different indicators for the NASDAQ QQQ Trust. The first is a price oscillator for volume, which has just broken out from a base. The second is a KST that finds itself in a declining and therefore, bearish mode. Once again we see a combination of falling prices and rising volume. This is not the stuff from which your friendly Santa rally is made of! The chart also shows that the price itself has broken its October/December up trendline.

Chart 2

Finally, on the volume front, the bottom window of Chart 3 warns of more weak action. This time, it’s the cumulative line constructed from the volume of advancing versus declining stocks comprising the S&P Composite ($SPX). This series looked as if it was in the process of forming a reverse head and shoulders pattern. However, this week’s action has resulted in the penetration of the line joining the head with the prospective right shoulder. This kind of signal is usually followed by some form of decline, as those expecting to profit from an upside breakout are subsequently forced to liquidate.  You can also see that the S&P A/D Line experienced a minuscule false break above the small green trendline. This action has now been confirmed by the violation of the small red October/December up trendline and points to lower prices.

Chart 3

Net new high totals ($NYHL) have also been disappointing of late. Chart 4 shows that the cumulative line constructed from daily net new high data remains below its (red) 50-day MA. The KST of the line itself is also in a declining mode. We would need to see a positive MA crossover in order for a buy signal to be generated. Unfortunately, the indicator has just rolled over to the downside, so there is no indication of a positive reversal on the horizon.

Chart 4

Dow Theory

Chart 5 compares the two components of the Dow Theory, the Industrials($INDU), and the Transports($TRAN). Dow Theory goes positive when both series begin to experience a series of rising intermediate peaks and troughs. It stays bullish until both series experience a series of declining intermediate peaks and troughs. It’s most important that both agree since it indicates that stocks representing the producer part of the economy move in sympathy with those involve in transporting those goods.  It’s normal for the theory to be interpreted on daily charts, but I am using a weekly one here to gain some perspective. Also, bear in mind that this week’s plot is not complete since the chart contains Wednesday’s close and really needs Friday’s. Bearing that in mind, you can see that the Trannies have tentatively broken below their August low which means thereby triggering a sell signal. The industrials are still bullish, but in my view would need to drop below the August low in order to confirm the Transports. Then we would have a full- fledged sell signal. Until then Dow Theory is in a bullish mode.

Chart 5

Chart 6 shows that the Transports ($TRAN) have now completed a relative strength top as well. Regardless of the direction of the absolute price this break tells us that transports are likely to underperform the market for an extended period.

Chart 6

Bonds

Chart 7 shows that the 30-year Yield ($TYX) is caught between two converging trendlines. Decisive breakouts would take place with a move above 3.15% or below 2.85%. Note that the lower (red) line gains added importance as a support line by the fact that is also intersecting with the 200-day MA. Momentum at this point is mixed, with a bearish short and intermediate, and a bullish long-term KST. Because of this, it’s probably best to wait for the resolution of this trading range dilemma by observing the direction of the breakout itself.

Chart 7

US Dollar Index

The Dollar Index ($USD) rallied back to its spring high but failed to break to the upside. Now we are faced with the possibility that the recent drop below the green trendline is part of a false breakout. The bearish and moderately overbought KST certainly suggests such a possibility.  Right now the price is resting on the blue support trendline and is slightly above its 200-day MA. However, if it slips below the red up trendline at 96 I think that would confirm the false mid-November upside breakout. If so, it would probably signal that an extended trading range or bear market had begun.

Chart 8

It’s also important to remember that the Index consists of a 60% weighting in the euro, so the Chart 8 largely represents an inverse euro. The Wisdom Tree US Dollar Bullish Fund, the USDU, is a much more broadly based series and probably gives us a more accurate overall picture of the dollar’s health. The price of this ETF did experience an upside breakout and has now pulled back to its breakout point. That’s a perfectly normal technical development.  Once again we find ourselves with a bearish and overbought KST, which means that green breakout trendline may well give way.  If it does, and the price subsequently slips below the red up trendline and 200-day MA at around $28.50 that would again suggest bear market status. Remember, oscillator sell signals do not have as much bearish effect in a bull market as in a bear. That means that if the KST can correct without prices breaking down it would be a characteristic of a bull market. At the moment, I am treating the dollar as being in a bull market but my hand is extremely shaky!

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.