Bull Market Correction Looks Likely To Continue

• Recent technical deterioration
• Bonds and the recent false upside breakout
• Gold’s false breakout also turned out to be “false”

The long-term indicators for the equity market continue to look positive, as the major averages are comfortably above their key moving averages. Pretty well all measures of long-term smoothed momentum also remain in an uptrend. That may change, of course, but the evidence as presented at this juncture point is bullish. Having said that, it is becoming clear that the market has been in a corrective mode since early March. It also appears the correction probably has further to run. Corrections that develop under the context of a primary bull market are usually pretty limited in their scope, so I don’t want to emphasize the downside that much, preferring instead to focus on the kind of indicators that would likely signal a bottom.

Recent technical deterioration

Chart 1 compares the New York Composite ($NYA) performance with that of two advance decline lines, the broadly based NYSE version, in the bottom panel and a line constructed purely from common stock issues in the center panel. Both series have violated their 2016-17 up trendlines, which at minimum indicates a loss of upside momentum. The common stock version is very close to confirming a downside breakout, which is already apparent for the NYSE in the top panel. All three series though, remain comfortably above their red 200-day MA’s.

Chart 1

Note that the NYSE upside/downside volume line also completed a top last Thursday. These are not serious breaks, but they do indicate that further downside action should be expected.

Chart 2

That’s also true for global equities, as featured in Chart 3. The MSCI World Stock ETF (ACWI) has not violated any major trendlines, but the Global A/D Line, constructed from individual country ETF’s, has fallen below its December/April up trendline as has the PPO in the bottom window. That indicator continues to drift lower, and is well above the kind of oversold reading from which we could anticipate a rally developing from.

Chart 3

Chart 4 displays the 10-day and 15-day MA’s for the VIX. Since the VIX moves in the opposite direction to stock prices, it has been plotted inversely. The thick red arrows show, when the MA’s have reversed direction from a position above the horizontal red line, a  correction, even in a bull market typically follows. A short-term downtrend is obviously underway. A relatively reliable sign of a reversal develops as the indicator bottoms out from at or below the green dashed line. The green arrows flag recent occurrences. The indicator may never reach the green line, but if it does, and subsequently reverses, it will likely offer  a signal that the correction is over. Remember, you can click on this, or any chart in the article for that matter, and save it to a chart list. Then, it’s a simple matter to follow future action.

Chart 4

Another series worth following is my Dow Diffusion indicator (!PRDIFDOW). This one monitors the number of Dow 30 stocks that are in a positive trend. As you can see, this indicator diverged negatively with the NYA between December and March and remains in a declining trend. Good short to intermediate buy signals have been triggered with an upside reversal from a position at or below the green dashed line at -15. Once again, there are no guarantees that it will fall that low, but if it does, and subsequently reverses to the upside, there’s a pretty good chance that the Dow will as well.

Chart 5

One of my favorite indicators is the Bottom Fisher (!PRBFISH), in Chart 6. This one looks for bottoms by dropping to the green horizontal line and reversing to the upside. It has no implications for sell signals when it reverses from a high level. Once again, this series is falling, which suggests that the correction has further to run.

Chart 6

Bonds and the recent false upside breakout

Last week I pointed out that the Barclays 20-year Trust (TLT) had experienced a false breakout that needed to be confirmed with a break below support in the area of the red trendline.  That confirmation never developed, thereby leaving the price free to move higher. Since the KST remains in an uptrend there is a good chance that the unfilled gap between $126 and $$128 will be closed. At the very least an attempt at closing it will be made. Note that the 200-day MA (resistance) is just above the $126 level. Assuming bonds are still in a primary bear market, that would be a likely place for anticipating a reversal.

Chart 7

Gold’s false breakout turned out to be “false”

Last week I also pointed out that Gold (GLD) had also experienced a false breakout to the upside (Chart 8). Again, I was looking for red trendline violations as confirmation, but they were never given. Now, the price has moved decisively above the high of the “false” day, which means that its bearish effects, which in this case turned out to be minimal, have been cancelled.

Chart 8

Also, Chart 9 shows that the price of the yellow metal has also broken out when plotted in a weekly format. It now looks set to challenge the all-important resistance at the green trendline at $1350.

Chart 9

I am going with the upside breakout, but there is one thing that is worrying me. It lies in the fact that we do not, as yet, have confirmation from the shares. These kinds of discrepancies can always be cleared up of course. However, it’s better to see the shares lead, rather than lag. Perhaps of greater significance is the fact that the Junior Gold ETF (GDXJ) in the bottom window, has experienced a tentative downside break. Again, this weakness, given time, may be cleared up. However, right now it’s a reason my bullishness is a tad constrained.

Chart 10

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.