Four Markets To Watch In 2018 For A Potentially Important Breakout
- 10-year bond yields could be in the process of a secular reversal.
- What odds is the S. Korean ETF placing on the breakout of war?
- China has gone uncharacteristically quiet. Is this the quiet before the storm?
- CRB Composite just below mega resistance
As we approach 2018 I thought it would be fun to look at some longer-term charts that could be setting the scene for major breakouts in the weeks ahead.
10-year bond yields could be in the process of a secular reversal
Chart 1 compares the 10-year yield to a credit spread between Junk bonds, in the form of the iBoox High Yield ETF (HYG), and the Barclays 7-10-year government ETF (IEF). Note that the HYG/IEF ratio is unadjusted for dividends. Both are what can only be described at a crucial technical juncture. The 10-year yield peaked in 1981 and has been zig zagging down in successive business cycles ever since. It is now bumping up against the top of what could turn out to be an 8-year base. If that base is completed it would greatly increase the odds that a secular reversal is underway. Since secular trends do not reverse very often this would be a very big deal!
The second window returns us to the HYG/IEF bond spread. When this relationship is rising, it means that investors are favoring the higher risk, higher yielding junk instruments over the safety of governments. It has been closely correlated with the yield itself in the last decade, so if this confidence measure breaks out, so likely would the 10-year yield. Using the benefit of hindsight, I have shaded periods of rising confidence in green. As you can see, except for a small period at the start of 2016, they represent a positive environment for yields.

Chart 1
For most of 2017, Chart 2 shows that the HYG:IEF ratio has been trading below that 8-year resistance trend line. The three slightly positive KSTs, hint that it may soon break to the upside. If so, it would confirm that a major up leg in confidence, and presumably bond yields is underway.

Chart 2
What odds is the S. Korean ETF placing on the breakout of war?
Markets often have an uncanny way of smelling out the potential for war or peace. In that respect, the South Korean ETF, the EWY could be our canary in the coal mine. Despite the ratcheting up of tensions and talk of “Fire and fury the likes of which the world has never seen before”, it’s business as usual in Seoul as the price of the EWY broke out from a 10-year consolidation formation earlier in the year (Chart 3). It’s comfortably above its 12-month MA and the long-term KST is positive. Far from signalling the danger of war these vibes are very much those of peace and prosperity. It seems to me that if market participants were anticipating the breakout of hostilities we would be seeing some distinct weakness. At the moment, from a chart aspect, there seems to be very little to worry about. However, a month-end close under the two red trend lines at $55 would be another matter entirely.

Chart 3
China has gone uncharacteristically quiet. Is this the quiet before the storm?
For a large part of the time, Chinese equities march to a different drum than most others around the world. From time-to-time though, prosperity or trouble from the world’s number two economy, can spill over to the global equity scene. For example, the sharp drop in 2015 was cited as a partial cause for weakness in the US and other markets at the time. Chart 4 shows two things. First, that the basic trend is up. That’s because the Shanghai Composite ($SSEC) is trading above its red secular up trend line. Second, the technical structure, from a primary trend aspect, is very finely balanced. Price action has gone quiet, the long-term KST is totally flat and the Index itself is extremely close to its 12-month MA.

Chart 4
Chart 5 shows the same thing in greater detail. Both the Shanghai Index itself and its relative line are caught in a narrow band. In recent years the slight downward trend of relative action shows that the $SSEC has been a consistent under-performer. The recent marginal drop below the red support trend line is therefore not encouraging. The quiet before the storm characteristic though, preceded the two previous run ups in 2007-8 and 2014-15, so China is definitely worth monitoring. The Chinese economy has lost some of its appetite for raw materials in the last few years as government policies have tried to steer it more in a consumer direction. However, as an economic heavy weight, China still has a substantial demand on global resources. That’s why an upside breakout, if it comes, would definitely be a plus for commodity markets.

Chart 5
CRB Composite just below mega resistance
Talking of commodities Chart 6 tells us that the CRB Composite is trading below, what can only be termed mega resistance. In this respect, the green and red arrows flag instances when the line turned back reactions and rallies. Right now, the Index, at 190 is very close indeed to the line at 193. We would look at a month-end close above 200 as a decisive breakout.

Chart 6
Chart 7 shows the situation in more detail. The CRB Composite Index ($CRB) is comfortably above its 65-week EMA, though that should be downplayed because of recent whipsaws due to the rangebound nature of 2016-17 price action. However, intermediate and long-term momentum is positive, which means that once the short-term KST has finished correcting the Index will be free to challenge that green resistance trend line.

Chart 7
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.