The Main Trend Is Still Positive But The Consensus Says?

• One reliable long-term indicator is bullish
• What are the short-term indicators saying?
• Bottom fisher to the rescue?

The long-term indicators for equities have been pointing north for quite a while. Quite often I’ll include one of those indicators in my articles as testimony to the bull, but hedge my bets by also featuring some bearish looking short-term indicators. The morale of the story is, that we should be aware of any near-term vulnerabilities, but focus on the main upward trend and not worry about any counter-cyclical moves unless the technical situation looks especially bad with say, a plethora of negative divergences. The reason, is that most counter-cyclical corrections are difficult to identify, so that when it is apparent that prices are going to slip, a large part of the sell-off has already taken place. Then the decision becomes one of re-entry, and by the time the realization sets in that the correction has run its course, prices have already moved above the level where you liquidated.  You then wait for the short-term retracement, which never comes, and you are automatically enrolled as a member of the ancient society of sold out bulls.

Intraday traders of course, don’t have to worry about these matters because they are on a totally different time frame with different problems such as how to deal with overnight gap openings etc. Far better I think, to focus on the long-term or primary trend. By all means worry about corrections, but try and make as few trading/investment decisions as possible. Bearing all that in mind, let’s take a look at the current US equity market‘s technical position.

One reliable long-term indicator

One of my favorite (and consistent) long-term indicators is the Financial Asset Velocity, featured in Chart 1. It combines the momentum of stocks, bonds, and commodities into one series that rises and falls with equities. Buy signals are triggered when the indicator either touches, or falls through the green horizontal line and then rallies back through it. Since the early 1900’s there have been 20 such signals, sixteen of which I interpret as successful. Currently the indicator is in a rising mode and is by no means overextended. As long as it continues to forge ahead it provides a positive backdrop for equities.

Chart 1

What are the short-term indicators saying?

Sometimes it’s easy to conclude that a consensus of short-term indicators are either bullish or bearish. Now is not one of those times. Mixed bag would be a better way of describing things. That’s probably because the market has already been correcting since early December, as it has made very little net upside progress since then. There is certainly nothing to complain about in terms of breadth as the NYSE A/D line, which includes all traded issues, and the common stock measure remain in confirmed uptrends. The lack of negative divergences between them and the NYA does not guarantee there will be no correction but it is certainly a potential negative that is completely absent at present. A violation of their two red up trend lines would be a different matter.

Chart 2

Chart 3 shows an indicator I have featured several times in articles and webinars. It consists of two moving averages for the VIX. I like to see everything going up and down together, so I have plotted this indicator inversely. The arrows show when these MA’s reverse direction from an elevated level the S&P typically experiences a correction that is usually greater than 4-weeks duration. Right now the indicator is at a relatively overbought position but is still rising. I would feel a lot more comfortable if the indicator had fallen to a lower level in the face of recent price softness.

Chart 3

Chart 4 compares the S&P 500 ($SPX) to its short-term KST. This momentum series has already peaked and is trying to trigger a buy signal from above the equilibrium level. In the last couple of days it has moved slightly to the downside, which is not encouraging. Nor is the failed upside breakout, which would be confirmed with a violation of the red up trendline.

Chart 4

Our Dow Diffusion indicator (!PRDIFDOW) in Chart 5 monitors the percentage of stocks included in the DJIA that are in positive trends. Right now it too is at a very overextended reading. It has earned a sell signal by crossing below the red horizontal line. The three dashed arrows indicate that this technique is not perfect, and the three horizontal arrows above the price show that corrections can take the form of ranging action as well as an actual decline. Even so, the recent sell signal argues in favor of further digestion of gains before the market is likely to move sustainably higher.

Chart 5

Not all indicators are short-term bearish. Chart 6, for instance, shows that the 10-day MA of the McClellan volume oscillator for the NYSE has already bounced off an oversold level.

Chart 6

A similar measure for the NASDAQ (!VMCOSINAS) is not oversold, which is a reflection of its recent superior relative action. That suggests that if prices were to defy the other short-term indicators and move to the upside, this would be one place to look for leadership.

Chart 7

Bottom fisher to the rescue?

On the other hand, If things deteriorate some more, an indicator that may well provide an early bird warning of an upside reversal is my Bottom Fisher (!PRBFISH) in Chart 8. This one is designed to find bottoms and has no relevance in identifying tops. It triggers such signals by reversing from below the green horizontal dashed trendline. It’s on its way lower but still has some way to go before getting down to the bottom fishing area.  That may not happen for some time if the market decides to move higher. However, if it does not, this series may well provide a timely signal to buy.

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 of Walnut Creek or its affiliates.