We Were Told That Rates Were Going Up, But Government Bond Yield Charts Look Like They Are Headed South

• Balancing out the possibilities for US equities
• Show me the bullish sectors
• Those rates were supposed to go up but the charts say that might not be the case

Balancing out the possibilities for US equities

Chart 1 shows the NYSE Composite ($NYA) and the Coppock Curve. The curve gives long-term buy signals when it drops below zero and turns up. Apart from a whipsaw signal in 2001 it has performed brilliantly in the last 80-years or so. I am showing it because it illustrates, probably more than any other indicator, the extremely fine long-term technical balance. Right now the Coppock’s  trajectory is very much a flat one, so it could easily move in either direction. The current plot is for May 11, but this is just an “estimate” for May since this is a monthly chart and the final plot will not take place until the close of the last trading day of the month. It would be wrong to base a primary bull/bear decision on this one indicator alone, but since we are seeing a really mixed bag at the moment the Coppock Curve could well tip the balance.

Chart 1

Chart 2 looks at an optimistic scenario, where the recent trading range in the major averages turns out to be a consolidation inverse head and shoulders. That would involve the three series in the chart pushing through those green horizontal trendlines.

Chart 2

Chart 3, on the other hand, suggests the possibility that any right shoulder formation in Chart 2 will require some more downside action. I say” suggests” because these potential head and shoulder formations remain just that, potential patterns, until their respective red necklines are penetrated on the downside. It’s interesting to note that two of these three potential patterns have an indicated downside objective that would take prices back to support in the form of the early February highs.

Chart 3

Charts 4 and 5 argue in favor of a downside break. The first shows that the Dow ETF, the DIA, has just completed a two-bar reversal, where the first day opens near the low and closes near the high, and the second opens near the high and closes near the low. In effect, most people who bought during those two days went home with a loss and represent potential sellers down the road. Such patterns only have an effect for 5-10 bars but this bearish formation, unless quickly canceled, should have enough negative power to result in the completion of that head and shoulders pattern. Note that the KST has worked off a substantial amount of its overbought condition but is nonetheless still bearish.

Chart 4

Chart 5 is still bearish but is offering the possibility more in the direction of  a soft landing. That’s because the (black) 10-day EMA of the McClellan Volume Oscillator has fallen below its green oversold line and ticked up. Actual buy signals (flagged by the green arrows) are triggered when it rises from below the green line and crosses its (red) 20-day EMA counterpart. I would be the first to say that this technique has its failings as you can see from the dashed arrows, but the very fact that it is already oversold opens the short-term bullish widow a tad.

Chart 5

Show me the bullish sectors

Charts 6, 7, and 8 feature the daily KSTs for the principal sectors. Most are still moving in a downward trajectory, as was the case last week. The only hold out then, the GDX, has also started to flatten out (Chart 7). The good news is that two early leaders, utilities and consumer staples (Chart 6) have begun to turn up, which suggests two things. First that these sectors may be able to withstand any near-term downdraft. Second, their reversal may mean that any near-term (Chart 2) “right shoulder” weakness will be contained.

Chart 6

Chart 7

Chart 8

Those rates were supposed to go up but the charts say that might not be the case

Chart 9 shows that the Fed sensitive 2-year note has fallen back to the lower area of its 2013-16 trend channel. If it violates the red trendline that would turn the tentative decline in the short-term KST into a decisive one. That certainly appears to be the most likely outcome since the intermediate and long-term KSTs are already in sell mode. The two benchmarks to monitor are .65% on the downside and .90% on the upside.

Chart 9

Chart 10 shows the other end of the yield spectrum, where the 30-year yield looks as though it is on the verge of completing a head and shoulders formation. In this instance, the short-term KST is rolling over, but not quite bearish. This $UST30Y yield chart is further away from a breakdown than its 2-year counterpart.

Chart 10

Finally, Chart 11 shows a ratio between the 2-and 30-year yields. Once again we see this part of the yield curve resting above key support, with all three momentum curves tentatively suggesting the probability of a downside break. The convergence of the two trendlines emphasizes the significance of that support. If it is violated a major decline in this spread would likely follow.  For the record, a rising curve implies a growing economy, that eventually expands to the extent that a rising curve, known as flattening, leads to economic constraints. This process eventually runs its course with monetary tightening and an eventual recession.

A declining curve (called a steepening because the spread between the shorter-term maturity and its longer-term counterpart is widening) implies a weakening economy. The implication, should this spread violate the two green trendlines in a decisive way, would not necessarily be for a recession to develop, but certainly for a lower growth outlook.

Chart 11

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.