Monday Was A Very Important Inflexion Point For Several Markets

• Two short-term indicators that can support higher prices
• Global equities ex the US are poised for a mega breakout
• Three markets poised for a major breakout
• Commodities coming to life?

It’s a well-known axiom on Wall Street that it’s not the news that is important but the market’s reaction to it. That saying applies to anything freely traded and is not limited to stocks. On Monday, the market was given a great excuse to sell-off, but ended the day mixed. That excuse came from the failure of Republicans to pass the health care bill, which, many investors argued would harm the Trump agenda, for which the market had priced in great expectations. Take that prop away ergo, stocks should have fallen a lot more than the 180 Dow points around the opening. Either the market didn’t care, or it thought the agenda of tax cuts and de-regulation would be adopted anyway. Either way it shrugged off bad news and is now well above Friday’s close, just before the news initially came out. In my book, a market that can shrug off bad news is usually in great technical shape. I must say I am surprised, because several intermediate indicators are overstretched and equities have not experienced a healthy correction in excess of 5% since the lows experienced in February 2016. On the other hand, some short-term series are trying to reverse to the upside from an oversold reading, and there is that old saying that surprises develop in the direction of the main trend. By all accounts that trend is up!

Two short-term indicators that can support higher prices

Chart 1 shows a 10- and 20-day EMA for the McClellan Volume Oscillator (!VMCOSINYC). The vertical lines show when the 20-day series reverses to the upside from a position at or below the green oversold line. It’s just below that line right now and would not take much to experience a reversal.

Chart 1

Chart 2 compares the NYSE Composite ($NYA) to its 9-day RSI. It seems to have reversed direction in sympathy with the 10-day MA of Net New NYSE highs. We interpret this latter indicator as being bearish when it crosses below the equilibrium line. Such periods have been highlighted with the pink shading. Note the two whipsaws flagged by the green arrows. Those however, developed when the RSI was deeply oversold. Right now, the new high series is rising, which is clearly a positive development.

Chart 2

Global equities ex the US are poised for a mega breakout

What’s really interesting, is that a rally from here could be highly significant, not for the US market, but for the rest of the world (Chart 3). Two measures, the MSCI Europe Australia Far East (EFA) and the Vanguard World Ex the US (VEU) ETF’s are positioned just below major resistance. That resistance takes the form of a 10-year horizontal trendline. Since both have been touched several times their violation, if it comes, will be highly significant.

Chart 3

Chart 4 features the relative action between the VEU and the S&P ETF (SPY). The ratio has just violated a 4-year down trendline, and its weekly Coppock indicator in the bottom window is in a rising mode. Since the ratio has also surpassed its previous minor peak it seems very likely that the rest-of-the-world has begun a trend of superior performance against the US. If our bullish conclusion re the short-term outlook for the US is correct, that should mean that both will advance, but the rest-of-the-world will be stronger.

Chart 4

Three markets poised for a major breakout

Charts 5, 6 and 7 display three Asian markets that have been in extended trading ranges for many years and appear to be on the verge of an upside breakout. They are Taiwan, Japan and S Korea. If our assumption of an upside breakout for the Vanguard World Ex US ETF proves viable, these three markets clearly have an extremely strong base from which to advance, should they choose to experience a decisive upside breakout.

Chart 5

Chart 6

Chart 7

Commodities coming to life?

The long-term picture for commodities continues to look positive as the DB Commodity ETF (DBC) remains above its 12-month MA (not shown) at a time when the long-term KST is in a bullish trend. Having said that, it is right at that average and needs to rally right away if a negative crossover is to be avoided.

Charts 8 and 9 suggest that it will. Chart 8 indicates, that as of mid-day on Wednesday, the price had broken out from a double bottom formation, just as the KST had begun to trigger a buy signal.

Chart 8

Chart 9 shows an indicator that monitors a basket of commodities registering net new highs over a 50-day time span. The green arrows show that when its (red) 20-day MA reverses direction from a sub-zero reading some kind of a rally in the DBC typically follows. That indicator bottomed some time ago and is still at a pretty subdued reading. That suggests that the DBC itself stands an excellent chance of bettering its 200-day MA, which lies at just over $15.

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.