Are They About To Take The Punch Bowl Away From The Party?

• Some key averages showing signs of temporary exhaustion
• Energy burnt out?
• Defensives and interest sensitives looking more positive
• What about those bonds?

I have been bullish on the stock market for some time and in terms of the main trend I still am.  I also council on focusing on the main trend, because that, as the late great Richard Russell used to say, is the direction in which surprises typically occur. In addition, trying to call counter-cyclical short-term price moves is often the quickest way to get your financial head handed to you on a platter. Bearing all that in mind, I noticed that Monday’s price action hints that some kind of near-term weakness may well start to unfold. What I am trying to say is that I am not worried about a short-term correction, but if you are, then now might be as good a time as any for anticipating one. This is especially true as CNBC anchors have started the 20,000 Dow count-down. Let’s examine the action in closer detail.

Some key averages showing signs of temporary exhaustion

Chart 1, for instance shows that the NYSE Composite ($NYA), has experienced a mild form of dark cloud cover. This pattern develops when, after a rally, the opening of the dark cloud candle takes it above the previous candle’s high, but closes more than half way down its real body. Strong patterns of this nature develop with a substantial gap forming between the open and the previous high. Furthermore, the real body of the first candle should be quite long, so that the close in the second, more than half way down the real body, reflects a strong change in sentiment between buyers and sellers. The combined action of Friday and Monday’s session qualify in a pure technical sense but do not reach the “strong” characteristics. Nevertheless, the overbought nature of the RSI also argues for a pause in recent upside action and give the dark cloud pattern some credibility.

Chart 1

Not all the averages are expressing exhaustion. Chart 2, features the Dow (DIA) and the S&P (SPY) ETF’s, and indicates a harami type situation. This candlestick characteristic reflects more of a change in the balance between buyers and sellers to an evenly matched situation than a dramatic reversal. Once again, the narrow width of Friday’s trading does not offer the kind of comparison typical of a strong harami. Had something the size of Wednesday’s rally been present on Friday then we would be dealing with something of far greater significance.

Chart 2

Chart 3 shows similar price action from a post Trump election leader, small caps, in the form of the Russell 2000 ($RUT). In this instance Monday’s action almost caused the price to close at the same level as Thursday’s open. These patterns are only expected to have an effect for a few sessions. However, you can see that if we do get some corrective activity this is likely to lead to more widespread damage, as the KST is virtually in a sell signal situation.

Chart 3

Energy burnt out?

I thought a review of the principal stock market sectors might unveil some interesting observations but that was not what I found. One sector though, did stand out and that was the Spider Energy ETF, the XLE. It is shown in Chart 4, where you can see that Monday’s price action opened near to the high and closed pretty much at the low. Since this followed a sharp short-term rally, the sharply higher gap opening and round trip with little net upside progress on Monday, indicates a key reversal bar. Key reversals are strong indicators of exhaustion. In this instance volume did expand but not to an extreme level. Had it done so it would have emphasized the exhaustive characteristics of the price action.

Chart 4

In this respect, Chart 5, which features the iShares Oil Equipment and Services ETF, the IEZ, did experience a classic key reversal day, complete with a sharp increase in volume.

Chart 5

Defensives and interest sensitives looking more positive

Charts 6 and 7 indicate that early cycle liquidity driven defensive issues, such as utilities and consumer staples are in a better short-term technical position. The Spider Utilities ETF (XLU), for instance, has just broken to the upside in conjunction with a positive KST. Very similar action is being experienced by the Spider Consumer Staples (XLP).

If these defensives do manage to extend recent positive action this could temper the expected corrective activity in the major averages. In any event, it’s a better policy to focus on the main trend, for which the vast majority of long-term indicators are pointing due north.

Chart 6

Chart 7

What about those bonds?

If defensive issues are going to extend recent gains that could be a signal that bonds are about to perk up. Since the long-term indicators continue to point in the direction of higher yields and lower prices, any rally in price should be treated as a sub par counter-cyclical move. Even so, with the Fed widely expected to raise rates this week, what would make more sense from a contrary point of view is to anticipate a decline in yields. That's exactly what Chart 8 suggests with a deeply oversold level on the IEF and reversing bond net new high indicator.

Chart 8

Chart 9 shows that the Barclays 20-year Trust (TLT) has usually filled gaps in both directions. We can see one unfilled gap around the $128 level. If a rally does develop I would look for a peak around that zone--not a prediction, merely some guidance.

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 of Walnut Creek or its affiliates.