Time For Some Temporary Grief In The Equity Market?

• Path of recoveries from recent declines have been mixed
• S&P is at short-term resistance
• Some reliable short-term indicators not quite there yet
• Yen breaks out from a large base

Path of recoveries from recent declines have been mixed

After five straight up days since the February 9 intraday low, it’s probably a good time to review how other contra trend corrections have unfolded in order to come up with a possible outcome for the present situation. In that respect, Chart 1 features the S&P Composite, together with its 12-day ROC. The vertical lines show reversals that have taken place from at or below the green horizontal trend line. Examples 1,2, and 5 experienced a quick takeoff and a subsequent correction that developed well above the correction low. On the other hand, the lows in examples 3 and 4 were both followed by a quick test. Unfortunately, there is no known technique, as to how one can determine the characteristic of the subsequent recovery move, but there are a couple of reasons for suspecting that the current bounce may be close to running its course, which would mean that we could be looking at a situation similar to examples 3 and 4. This is certainly not a forecast, I am merely pointing out that the S&P has reached a point from which we might expect to see some resistance and a test of the lows.

Chart 1

S&P is at short-term resistance

Chart 2 indicates a resistance zone on the $SPX. It is characterized as falling between a 50% and 61.8% retracement of the total decline. Moreover, the 50-day MA is transiting approximately half way through the pink resistance box. Just slightly above it at 2730 is the intraday high of the second recovery day. Finally, the Index managed to push through the red up trend line, which is positive. However, if it fails to hold above it, say with a print below 2,700 that would be a piece of evidence in favor of a forthcoming test.

Chart 2

Some reliable short-term indicators not quite there yet

Two indicators that I follow closely and that have been reasonably reliable in the last few years are very close to triggering buy signals but need more time in order to go fully bullish. It’s quite possible that any test of the early February low would allow time for them to turn bullish in a timely manner.

The first is shown in Chart 3. It monitors the percentage of Dow stocks that are in a positive trend. This series has been falling sharply of late and is rapidly approaching an oversold condition. The solid green arrows point up that reversals from such a deeply overstretched readings, have typically been followed by a worthwhile rally. The dashed arrow reminds us that it is not a perfect indicator.

Chart 3

Chart 4 features my Bottom Fisher, this indicator monitors internal market momentum and only triggers buy signals. It does this by reversing from an oversold reading from a position at or below the green horizontal trend line. Currently the Fisher is declining but is already at that overstretched triggering level. Clearly, it could turn at any time.

Chart 4

Yen breaks out from a large base

Chart 5 shows that the Japanese Yen has managed to break above its 2017 resistance trend line.

Chart 5

However, the breakout does come with some baggage, as reflected in a high daily KST and a couple of gaps, as we can see from Chart 6. Normally we expect gaps to be closed, as indeed are all but two in Chart 6. These have been flagged by the dashed arrows. However, when a market is traded outside of its “liquidity time zone” the gap closing rule can be relaxed a little. By the term “liquidity time zone”, I mean the time zone in which a particular financial market is domiciled and where we would reasonably expect to see the majority of its trading to take place. For example, European stocks are predominantly traded in the euro time zone, Australian equities in a Pacific time zone and so forth. Chart 6 shows yen trading in the Eastern time zone, whereas the Tokyo session would be more likely to reflect yen dominance. On the plus side lies the fact that the KST has started to re-accelerate to the upside, but that is based on Thursday’s intraday data and we need the close for the final plot of the day. Having qualified this week’s breakout to some extent, we can also say that the stakes are pretty high.

Chart 6

When the technical position is considered from a longer-term perspective in Chart 7, we can appreciate that the currency has broken out from its 2016-18 base along with the Special K, which you can read about here. Most of the time this momentum indicator peaks and troughs more or less simultaneously with the price series it is monitoring. As you can see from the chart joint trend line violations by the Special K and the price usually result in serious trend reversals. The trend line in question is over 1-year in length. It can therefore be said to reflect a price movement of primary trend proportion. Another way of identifying trend reversals in the Special K itself is to observe crossovers of its red signal line. That indicator also triggered a buy signal simultaneously with the trend line violation of the Special K and the yen itself. If the overbought condition being flashed by Chart 6 causes the yen to move back decisively below its breakout trend line, all bets are off. However, as it stands right now, we have a highly significant breakout on our hands.

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.