NYSE Composite Draws Closer To Its 200-day And 12-month Moving Averages

• Breadth is more of a positive than a negative factor
• Global breadth is also positive
• Dow Diffusion Indicator close to a buy signal
• Consumer cyclicals versus technology

Since early February, the US equity market, in the form of the NYSE Composite, has been in a trading range. This is flagged by the current distance between the (blue) 50-day and (red) 200-day MA. As at the end of Thursday’s session the price was very close to the lower end of the band, having experienced a downside break below the late February bottom. Things look pretty gloomy right now, but unless this is a bear market, there are several reasons for optimism, once we have got past the current selling squall. First, the Index remains above its 200-day and 12-month MA’s.

Chart 1

Remember, while the price is not far from the average, this is a monthly Chart, for which the March 30 close is the only one that counts. Second, the recent decline has left the long-term KST, in the lower window, in a bullish mode as well. The latter is shown in Chart 2.

Chart 2

Breadth is more of a positive than negative factor

Chart 3, compares the Index to the NYSE total issue A/D Line and its common stock only equivalent. Note that both breadth series came very close to their January peaks, whereas the NYA itself, fell by a significant margin to do the same. Moreover, their March peaks were above that for the recovery high established in February. That was not true for the Index, which registered lower highs in both February and March. A superior performance by the broad market does not, of course, guarantee a new bull market high, but I would rather see this kind of positive action than a negative divergence, where the NYA makes a new high unaccompanied by the two A/D Lines.

Chart 3

Global breadth is also positive

Breadth is not only positive for the US, but for the world as a whole. In this respect, Chart 4 displays my global A/D line in the center panel. It’s calculated from the daily cumulative plurality of a universe of individual country ETF’s. As you can see, it registered a new bull market high earlier this month, unlike the MSCI World ETF (ACWI), which did not. The one obvious negative lies in the fact that the PPO calculated from the A/D Line remains in a downward trajectory.

Chart 4

One reliable global indicator that looks as if it is in the process of bottoming, is our Global Diffusion series, as shown in Chart 5. This one monitors a basket of individual country ETF’s that are above an intermediate moving average. The green arrows flag periods when it reverses from below the dashed horizontal oversold zone. Of the six signals since 2014, only the July 2016 signal was followed by a disappointing rally. Its recent reversal therefore offers some encouragement to the possibility of an imminent reversal to the upside.  The chart also shows the precarious nature of the current technical picture since the ACWI has marginally violated its 2016-18 (solid) up trendline. The dashed line has not been touched so many times and is therefore of lesser significance. Note that it, unlike the solid line, was not violated in early February. It is currently at the same level ($69.64) as the 200-day MA. Quite often when a trendline and MA intersect they reinforce each other as a support zone. That means that if the solid line is penetrated more decisively, the next level of support would lie in that area.

Chart 5

Dow Diffusion Indicator close to a buy signal

Chart 6 features my Dow Diffusion indicator. It is calculated in a similar way to the Global Diffusion in the previous chart, except that it is constructed from the Dow 30 stocks. This series is currently bearish, because it is below its red MA. However, it is has fallen back towards the oversold zone again, in a not dissimilar way to its late 2016 experience. When it turns, a spirited rally is likely to follow.

There is no doubt that the market is in a precarious position near-term. However, the breadth momentum indicators are telling us, that once the current selling squall has run its course, they are in a position to kick in for some kind of a rally. Their current overstretched readings also mean that any negative 200-day MA crossover stands a higher probability of being a whipsaw. The big question, will be whether any sustained weakness develops before or after long-term moving averages are crossed or other primary bear signals are triggered. It seems likely, but by no means guaranteed, in this charged atmosphere, that a turnaround will be signaled by a bullish one or two bar pattern or positive candlestick formation. If so, I will be in touch.

Chart 6

Consumer cyclicals versus technology

The technology sector has been an undisputed winner for quite some time. However, Charts 7 and 8 suggest that it may be in the process of passing the baton to the consumer cyclical sector.

Chart 7 shows that the momentum (KST) for the Spider Technology (XLK) has just triggered a sell signal on both an absolute (second window) and relative (bottom window) basis. Compare that to Chart 8, which shows that Spider Consumer Cyclical (XLY) momentum, while not quite bullish, is in a far better position to experience a positive turn.

Chart 7

Chart 8

Finally, looking at the long-term position for the same indicators in Chart 9, we see that the XLY has broken out on both an absolute and relative basis. Most impressive of all, the long-term KST for relative action has just triggered a buy signal by crossing above its 26-week EMA.

The XLK and the XLY are free to up or down on an absolute price basis. One thing that looks obvious though, is that the XLY will be the sector experiencing the superior performance.

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.