Small Caps Break To The Upside Big Time

• Small Caps breaking out
• Gold and Silver may be close to a resolution to their recent rangebound activity
• Euro in a real dilemma but with a bullish bias

In sorting through a number of charts I recently came across some potential price patterns that are developing in several key markets. I want to emphasize the word potential, because until these formations are actually completed with valid breakouts, they are just that… potential.  Before we proceed in that direction, one market appears to be breaking to the upside as we speak.

Small Caps breaking out

In that respect, Chart 1 features the Value Line Arithmetic Index (VLE). This is an end of day update, so the latest plot is for Monday November 20, unlike the other charts which include Tuesday’s intraday data. What we see here is a broadening formation with a flat top, otherwise known as a bullish right-angled broadening formation. In order to construct such a pattern, we need to be able to first construct a trend line that joins a series of lower lows. That’s the broadening part. The “flat” portion requires another line connecting a series of rally peaks that form at roughly the same level. Usually these formations are very powerful, as those traders who became progressively bearish as the price reached consecutive lower lows, are forced to cover their short positions as the price rallies to new highs. It’s really like a reverse head and shoulder pattern that is so bullish it does not have the time to form the right shoulder.

Chart 1

We see similar action in the Russell 2000 ETF, the IWM, in Chart 2. Note that, the PPO has just supported the breakout with a buy signal. The slower moving KST has not yet crossed above its MA, but has certainly begun to reverse to the upside. It’s also important to note that the mid-November to early March period is also the most bullish seasonal for small caps.

Chart 2

One area in the small cap space that appears poised for lift off is the Dow Jones US Small Cap Growth Index ($DJUSGS). Chart 3 shows that it has once again started to pull away from that 2015-17 green resistance trend line. The relative line is still below its resistance trend line, but bearing in mind that the long-term relative KST is positive, it could quickly and easily complete that potential large base.

Chart 3

Chart 4 displays the Vanguard Small-Cap Growth ETF, the VBK, where we can see a similar breakout in the price. This ETF, is in a stronger position than the $DJUSGS, because its RS line has just moved to a post late 2015 high and both KSTs are positive.

Chart 4

Gold and Silver may be close to a resolution to their recent rangebound activity

These two precious metals have experienced ranging action for some time and may be close to a resolution. Chart 5 shows the SPDR Gold Trust (GLD) together with the possibility that it may be in the process of forming a bearish head and shoulders. To do that it would have to drop below the red dashed up trend line, which is currently just above the $121 level. That’s also the point at which the 2016-17 up trend line is currently residing. When combined, these two lines represent very important support. That $121 level takes on added significance since the price recently experienced a false breakout to the upside. I always like to see such whipsaws confirmed by additional technical evidence, and that has not yet happened. It would though, if both red trend lines are violated. One indicator that suggests that it may have problems in doing so, is the KST, as it is currently in a rising mode. This suggests that the price may rise above the dashed green line, which would suggest that the head and shoulders will not "work", and would signal higher prices.

Chart 5

Silver, featured in Chart 6, also looks as though it is in the process of forming a bearish head and shoulders. It sports some other technical characteristics  similar to those currently being experienced to gold, in that it recently experienced a whipsaw upside breakout and currently has a positive daily KST.

Chart 6

One negative comes from the Global X Silver Miners ETF, the SIL. The solid arrows in Chart 7 show that this series usually, but certainly not always, leads the SLV. Note that the shares have already violated their 2016-17 up trend line, unlike the metal. Also, since mid-October the silver shares have been in a clear-cut downtrend, whereas the SLV itself has basically been moving sideways. All of that suggests that the SLV stands a good chance of breaking below that dashed red up trend line, thereby completing a head and shoulders top. Until it does though, that “top” remains a potential one.

Chart 7

Euro in a real dilemma but with a bullish bias

Our final set of charts display the Euro, another market that is at a crossroad. Chart 8 indicates that it completed a head and shoulders top in late October, but that the downside break turned out to be a whipsaw move. That whipsaw appears to have been confirmed by a rally that took it back above the green down trend line that joins the head with the right shoulder. Since then it has retraced some of those gains and tried to close a small upside gap.

Chart 8

This is perfectly normal behavior, so the question now is whether it can rally above the horizontal resistance trend line shown in Chart 9.  If it can, that would complete a reverse head and shoulders, confirm that the downside break was a whipsaw, thereby signalling higher prices. The bullish KST suggests that, that will happen. Once again, this a potential breakout and until it materializes patience is the order of the day. It’s an important distinction because a Euro rally would cause downward pressure on the Dollar Index and presumably stimulate precious metal prices, which usually move in the opposite direction to the dollar.

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.