Brexit Or Bropportunity? What The Charts Are Saying

• Selling climax at the opening
• UK versus European Monetary Union
• What are global equities saying?
• What’s up with the pound?

Selling climax at the opening

There is an old saying on Wall Street that the market does not discount the same thing twice. Back in early June, we saw a 6-day sell-off as the polls unexpectedly swung in favor of the UK leaving the European Union. Today, when Brexit is a reality you can see from Chart 1 that the NYA has again fallen, but not by as much. We won’t know for sure until more trading takes place but at this point, it looks like a higher low. If that proves to be the case then the market will turn out to have discounted Brexit at the early June low, thereby leaving it free to move higher.

Another bullish point comes from the fact that the price opened with a huge downside gap. In almost all situations gaps are eventually filled, or at least a good attempt at filling them takes place. The problem is that we do not know when that closing process will take place, though usually, it’s within a 4-week time span.

Chart 1

Chart 2 also argues in favor of strength rather than weakness. That’s because this hourly data indicates a selling climax.  Selling climaxes develop where volume (see the PVO) rises to an exceptionally high level and price moves to an oversold level (RSI). A climax does not guarantee that this morning’s low will be the final one for the day, but it certainly places the odds in that direction. We will probably not know the real outcome with any degree of certainty until Monday when investors will have had a chance to mull things over during the weekend.

Chart 2

Now look at the stock market which should be the eye of the storm, the FTSE 100 ($FTSE). This Index is shown in Chart 3. Because of the way it is reported the data gives us a false sense of what happened as it suggests the market opened unchanged. That obviously did not happen. However,  it is interesting to note that the UK market  regained a substantial amount of lost ground by the close, actually ending the day near its 200-day MA. It certainly seems that investors are viewing this as a buying opportunity. Even though the chart does not show it, a gap still exists between Thursday’s low and Friday’s high, and that’s bullish. The bullish KST certainly does no harm either.

Chart 3

UK versus European Monetary Union

Chart 4 compares the relative strength of the UK market with that of the European Monetary Union (EWU/EZU). One would think that if Brexit was so bad that UK stocks would be badly under-performing Europe. However, even before the vote, the UK had already begun a trend of superior performance. You can see this in Chart 4 by the fact that the ratio has broken above its 2013-2016 down trendline and decisively crossed above its 12-month MA. In addition, the long-term KST has gone bullish.

Chart 4

Chart 5 features the same ratio, but this time featuring the short and intermediate KSTs. Both are bullish and prior to the Brexit vote you can see that the ratio had broken out from a base. Friday’s action late morning shows a pull-back to the extended down trendline, but apart from that, surprisingly little weakness.

Chart 5

What are global equities saying?

Chart 6 features the MSCI World Stock ETF, the ACWI. Brexit action has pushed it to the lower area of its recent trading range, but it has nevertheless just triggered a couple of buy signals. The first is shown in the lower panel and monitors a basket of country ETF’s that are above their 50-day MA”s. The green arrows flag previous instances when the indicator has turned up from at or below the green horizontal line.

Chart 6

The second signal is featured in Chart 7 and comes from my global net new high indicator. This series again looks at a basket of individual country ETF’s, but this time from the aspect of net new high data. Once again the arrows signal when the indicator reverses direction to the upside. It has not yet triggered a signal because it is still below its MA. However, it has turned up from a position in which the price itself is at support. A drop below $54 would weaken the bullish case, but a move above $57, i.e. the top of the range, would greatly enhance it.

Chart 7

What’s up with the pound?

Chart 8 shows the long-term picture for the pound. I have had to import my own data to encompass the sharp drop in the 1980’s and subsequent rise as the StockCharts database only goes back to the mid-1980’s. The chart clearly shows that the pound has completed a massive head and shoulders top  going back 30-years or so. This was preceded by a false break to the upside in 2014 and a smaller head and shoulders, the neckline of which has been flagged with the red dashed trendline. We saw a retracement move follow the breakdown move and this week the previous low has been taken out. One word of caution here, which relates to the fact that this chart is constructed from month-end closes. That means that Friday’s price is not a real one and we will not know for sure until June 30, which is next Thursday. We have to let the markets decide and that means that if, at next Thursday’s close the pound is at $1.38 or below it will re-confirm the top as a valid one. On the other hand, a $1.47 close or higher will surpass the previous peak, thereby placing the price above the breakdown trendline. Such action would then indicate that the downside break was a whipsaw and suggest a very strong rally would follow. Since the breakdown is currently in force and the currency is below its 12-month MA, caution is advised until these signals are reversed.

Chart 8

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.