Five Charts That Say Today's S&P Breakout Is For Real
- Lots of supporting breakouts
- Confidence ratio on the verge of a major bullish breakout?
- Financials: trick or treat?
- The US is due for a bounce against the rest of the world
- Is it time to play the China card?
Lots of supporting breakouts
Last week I pointed out that the 10-day ROC of the (inverted) $VIX had reversed from the kind of level that is more normally associated with a rally than the start of an important decline. Since then stocks have risen to the point that many indicators have now broken above their February-May trading ranges.
Most impressive of all, is the fact that the MSCI World Stock Index (ACWI) has been even stronger, as has my Global A/D Line (!PRGLAD). Chart 1 also shows that the net new high oscillator (!PRNNHGL), whilst admittedly overstretched, is nonetheless in a positive mode.
Chart 1
Chart 2 tells us that the NYSE A/D Line ($NYAD) has also confirmed the S&P at new highs. The Common Stock A/D Line (!NETADNYC) probably has as well, but the chart does not include Thursday’s advance.
Chart 2
Chart 3 features the PPO for the NYSE Composite ($NYA), using the 8/16 parameters. Twice in the last two years it has been possible to construct a trendline for this indicator. When that line has been violated and then confirmed by a similar one for the Index, a worthwhile rally has followed. A third such setup has just been completed, with the PPO and price both breaking above their respective down trendlines. In my experience when such double breaks develop simultaneously, as compared to say, the price lagging, the resultant trend is usually far stronger.
Chart 3
Another indicator that has been correcting since January of this year is my Dow Diffusion (!PRDIFDOW). This one monitors the 30-Dow stocks to see how many are in a positive trend. This series is right at its 15-day MA at the same time the Dow itself has surged to a new all-time high. Thursday's strong market has not yet been included, which means that the 15-day MA has probably been crossed.
Chart 4
Finally, Chart 5 tells us that the 10-day EMA of the NYSE McClellan Volume oscillator has just broken out from a small base. That sort of thing doesn’t happen very often, but you can see that a similar breakout last November was followed by the formidable “Trump” rally.
Chart 5
Confidence ratio on the verge of a major bullish breakout?
One indicator that is very close to an important breakout is the ratio between high yield and treasuries (HYG/IEF). A rising ratio means that bond traders are growing in confidence because they are betting on poorer quality bonds rather than the relatively safe treasuries. This growing confidence often spills over to the equity market, which also has a tendency to rally. Chart 6 clearly shows that there has been a long-term negative divergence with the S&P Composite. That’s likely to provide a major problem down the road. In the meantime though, it’s important to note that both series have been in gear since the February 2016 bottom, as each successive high in the S&P has been confirmed by the ratio. This week’s new high so far remains unconfirmed. If it is, then that will mean that the ratio has broken above its 2014-17 down trendline, thereby suggesting much higher levels. We would look upon a daily close above .7225 as a decisive breakout and additional evidence that stocks are headed higher.
Chart 6
Financials: trick or treat?
The Financials (XLF), Chart 7, look as if they may be in the process of completing a head and shoulders top. Alternatively, if they fail to do so and rally above the green down trendline that would be positive not only for this sector, but the overall market. The KST is modestly bearish but is so evenly balanced it could easily move in either direction. $23.90 and $22.75 are the key levels to monitor.
Chart 7
The US is due for a bounce against the rest of the world
Chart 8 features the ratio of the USA to the rest of the world in the form of the Vanguard FTSE All-World ex-US ETF (VEU). The bearish long-term KST and the fact that this relationship is below its 65-week EMA sets the scene for a primary trend favoring international equities. However, the ratio has also reached support, in the form of the downward sloping red trendline. Note also that the short-term KST is moderately oversold. This by no means guarantees a rally, but does seem likely given quite a few recent financial press articles sympathetic to non-US markets. I am not envisaging a huge jump in the ratio but a retracement back to the 65-week EMA would not be out of bounds.
Chart 9
Good luck and good charting,
Martin J. Pring
