World Stock ETF Rallies Back To Its Bear Market Trendline And 200-day MA. Is The Bear Market Over?

• World markets are just below key resistance
• Junk bonds break through their 200-day MA. Will the break hold?
• World Bond Index breaks to the upside

Last week I called for some corrective action in the US equity market based on what, at the time, appeared to be a couple of false upside breakouts and a short-term top in commodities. Clearly I was wrong on that one because the false breaks were quickly cancelled and prices subsequently moved higher. Part of my rationale was based on the fact that bear market rallies are usually, but certainly not always, sub-par in nature. Since the bulk of the long-term indicators I follow, continued to point in a southerly direction, a call for lower prices seemed like a logical step.

Since this longer-term evidence remains bearish, and the market is more overextended this week than it was last, I continue to find myself in the unconfirmed cautionary camp. By unconfirmed, I mean that several indicators are showing negative characteristics but that this has not yet shown up or been confirmed by actual prices in the form of trend breaks.

For example, Chart 1 features the Dow ETF (DIA) together with a price (PPO) and volume oscillator (PVO). The high reading in the PPO shows that the market is overextended but the falling PVO tells us that the rally has developed on the back of shrinking volume. Rising prices and contracting activity is a classic bearish characteristic. However, that characteristic needs to be confirmed by price action, which would happen with a drop below $169 or 16,900 on the Dow itself.  I am using that point because it is below the green breakout trendline, red up trendline and 200-day MA.

Chart 1

We are also finding that many series have rebounded to important resistance areas. Resistance is made to be broken of course, but more normally serves as a temporary barrier of some kind. Chart 2, for instance, shows that the NYSE/Barclays 20-year Trust ratio (NYA/TLT) broke down from a head and shoulders top earlier in the year and has now risen slightly through resistance as flagged by the extended neckline. The Dow Jones Transports ($TRAN) suffered a similar fate, as you can see from the lower panel in the chart. However, this series has decisively moved above the extended neckline but is still below resistance in the form of the line joining the head with the right shoulder. A breakout that can hold above the line would suggest that the top had experienced a false breakdown and that we should expect substantially higher prices.

Chart 2

What does the world say?

Chart 3, featuring the MSCI EAFE ETF (EFA) shows a similar resistance setup. This index, which represents virtually the rest of the world ex the US,  is just below a key (green) down trendline but is above the red breakdown line. That green line is particularly impressive since it has turned back eight rallies and therefore, represents formidable resistance. A move above it would be quite positive. However, a failure to remain above the extended red line would mean that the recent breakout would turn out to be false and that would not be good.

Chart 3

The World Stock ETF itself, the ACWI, is also at resistance in the form of its bear market down trendline and the 200-day MA (Chart 4). The fact that you cannot see the latest MA plot goes to underscore that both it and the line reinforce each other as a resistance point. The lower series in the chart is my Global Advance/Decline Line, calculated from the cumulative daily plurality of a basket of individual country funds. It is also caught under a bear market trendline. Moreover, the relatively weak post-February rally indicates that the strong price showing by the ACWI itself is not being replicated by the broad market. However, if both the breadth and price trendlines are  decisively violated on the upside this would suggest that  the 2015-2016 bear market in global equities ended in February.  We are likely to find out soon because the KST is about as strong as it gets in a bear market. Thus, if it continues to work its way higher from here that would be quite positive.

Chart 4

Credit spreads are at a critical juncture

Another item that will likely provide a clue as to a rally to new all-time highs or a drop below the 2016 lows is the ratio between the iBoxx High Yield and Barclays 20-year Trust ETF’s (HYG/TLT). It’s shown in Chart 5, where you can see that it too has managed to rally to its breakdown point. If it can jump back above the green down trendline this would indicate that the trend favoring high yield has reversed to the upside and that such a boost of confidence in the credit markets would likely spill over into the equity area. It, like so many other series at a critical juncture, so let’s take a look at the technical position of its two components.

Chart 5

Junk bonds break through their 200-day MA. Will the break hold?

Chart 6 shows the HYG, where you can see that it is in the process of poking through resistance in the form of the 200-day MA and the green down trendline. If it can build on that breakout that would suggest higher prices. However, the sharp rally that started in early February has left the KST in a very overextended position. Note also that volume, as evidenced by PVO action in the bottom panel did not support the rally by expanding. That tells me we need to monitor the breakout in the price very carefully in the event that it does fail. This is not a prediction but merely an observation. That’s because a failure to hold above the MA and red trendline, in combination with the overextended KST and weak volume would suggest at least a retracement move to the (blue) 50-day MA.

Chart 6

Chart 7, on the other hand, shows that the other component of the ratio, the TLT, has fallen back to support in the form of the green trendline. That support may not hold of course, but the neutral reading of its KST, combined with the contraction of (PVO) volume during the corrective period, suggests that the possibility of a rally definitely exists. The signal would be a break above the green downtrend line just above Thursday’s high.

Chart 7

Finally, Chart 8 shows my Pring World Bond Index (!PRWBI), which consists of the Barclays Aggregate Bone ETF (AGG) being combined on a GDP-weighted basis with the International Treasury ETF (BWX). As you can see it has managed to break out from its 2015-16 base. Since the long, and the intermediate KSTs are in a positive mode, the odds are high that the price will push further away from its rising 65-week EMA. Our conclusion is that global treasuries expressed in US dollars are headed higher.

Chart 8

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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.