Five Markets That Are Approaching Critical Junctures

• US Dollar completes a head and shoulders top
• Dollar right at key up trendline against the rest of the world
• Gold caught in a tight trading range
• West Texas oil also restrained in a tight trading range
• Mexico---a chance to jump over the wall?
• Emerging markets to the rescue

It seems that a lot of markets have reached inflexion points, the resolution of which could result in some important intermediate-term price movements. Several of these markets and relationships are connected to what happens to the US Dollar, so let’s use that as a starting point.

US Dollar completes a head and shoulders top

A couple of weeks ago I had thought that the US Dollar ($USD) was in the process of extending its advance. That’s still a possibility, but recent price action has brought the technical position more into balance, so a downside break is also possible. Chart 1, for instance, shows that the Index recently broke out from a small inverse head and shoulders pattern, as marked by the green letters and trendline. However, it has recently fallen back below the red up trendline, which forms the neckline of an upward sloping head and shoulders top, and that suggests that the upside breakout was a whipsaw.  The dollar has recently been trading on the back of rising US interest rates, so this weakness, in the face of a recent Fed rate hike, is particularly worrying from a bullish viewpoint. That’s especially relevant when it is considered that the short-term KST has now gone bearish for the Index.

Chart 1

Dollar right at key up trendline against the rest of the world

If the dollar is going to soften from here, there are a number of important implications. First, the trend favoring  US stocks against international ones, that has been in place for the last six years or so, may be about to change. Either we will see an extended trading range in that relationship, or more likely, a new trend favoring the rest of the world. Take a look at Chart 2, which compares the S&P Composite in the form of the SPY, to that of the MSCI World Stock ETF, the ACWI. That relationship has recently fallen to a key uptrend line. Note that all three KSTs have also, to some degree or another, started to roll over.  The uptrend favoring the SPY must still be regarded as being intact, but the weak momentum action suggests that it may soon be about to change, as this relationship either enters a trading range or an actual decline.

Chart 2

Chart 3 shows a similar technical position, but this time the SPY is being compared to the MSCI Europe, Australia Far East ETF ( EFA), effectively the rest or the world. The situation here is slightly worse since the rolling over action of the intermediate KST is slightly further advanced. The message though, is clear. Any additional weakness will rupture an important uptrend in this relationship and encourages investors to shift more of their portfolios to non-US markets.

Chart 3

Chart 4 shows that the US Dollar does not move tick for tick with this USA/Rest Of The World relationship. However, the broad waves are sufficiently interrelated as to suggest that where the dollar goes the RS line for the SPY will eventually follow.

Chart 4

Gold caught in a tight trading range

Gold is another market that is approaching an important juncture point. Chart 5 compares its recent performance to that of the US Dollar Index. Since the two often move in opposite directions, the Index has been plotted inversely.  Here again, we can see the Dollar’s recent breakout from a reverse head and shoulders pattern with similar potential for the Gold Trust. A decisive breakout would occur with a daily close in excess of $119. On the other hand, the price of the yellow metal may be in the process of completing a small head and shoulders top, which would require a daily close under $114.

Chart 5

West Texas oil also restrained in a tight trading range

Chart 6 shows oil’s recent converging trading action together with the three KSTs. The $WTIC price recently dropped to a one year up trendline. The 65-week EMA emphasizes the tight balance between buyers and sellers as it  has recently given eight false buy and sell signals. At this point, the balance of evidence has tipped slightly to the bearish side, because the short and intermediate KSTs are both falling. However, these trajectories are not particularly steep, so a quick rally from here could yet save the day.  The all-clear though, needs a decisive Friday close above the green resistance trendline at just below $55.

Chart 6

Mexico---a chance to jump over the wall?

The iShares MSCI Mexico ETF (EWW) does not have the best chart around, but it does intrigue me as a possible contrary play.  Late last year the price dropped below a head and shoulders neckline. After a successful test of the low, it then turned around and broke back above the neckline.  That, along with the marginally positive long-term KST, suggests that the break was a false one. That, in my view, would be confirmed with a decisive Friday close above the green 2014-17 down trendline. False breakouts are often, but certainly not always, followed by an above average price move as short positions are covered and new money flows in. Let’s see what happens in this instance!

Chart 7

Emerging Markets to the rescue

Chart 8 shows a couple of ETF’s that look as if they have just resolved  a trading range dilemma. They are the Wisdom Tree Emerging Currency Strategy ETF (CEW) and the MSCI Emerging Markets ETF, the EEM. The chart shows that both series move in tandem, so their recent inverse head and shoulders breakouts suggest that both emerging market currencies and emerging markets in general are headed north.

Chart 8

Many emerging markets have already moved decisively to the upside and are therefore short-term overextended, but one that looks as though it is just breaking through is the S&P Emerging Latin America ETF, the GML.  It has recently completed a 2-year reverse head and shoulders. The RS line, though, has not yet crossed above its down trendline, but its rising long-term KST for relative action is in a bullish trend. That augers for an eventual relative breakout.

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.