More Indicators Are Flashing The All Clear

• Bearish engulfing pattern and outside day are cancelled
• Breath indicators are firming up

Bearish engulfing pattern and outside day are cancelled

Last week I wrote that many of the short-term indicators were flashing buy signals and that we should expect the US equity market to work its way higher. I also pointed out that the DIA had experienced a bearish engulfing pattern and the S&P a negative outside day, and that a pause prior to this renewed strength was likely. That pause, as Chart 1 shows, did not take place as prices have now rallied decisively above the engulfing pattern, thereby cancelling it. Usually, when a perfectly legitimate pattern such as this, does not “work” it is a vote of confidence for the prevailing trend, which in this case would be up. A small gap was left following Tuesday’s trading that needs to be filled, but apart from that things are looking up.

Chart 1

Chart 2 tells us that the DIA has crossed above its 50-day MA and the KST has gone bullish. A final positive statement comes from the decisive penetration of the green down trend line.

Chart 2

Breath indicators are firming up

Several indicators monitoring market breadth from different aspects have now joined others in the bullish camp. Chart 3 for instance, tracks the NYSE Common Stock Only McClellan Oscillator. The green shadings tell us, that when it is above its 30-day MA, the NYSE Composite usually rallies. One notable recent exception, flagged in gray this time, was the failed buy signal in early March, which was almost instantly followed by a nasty decline that formed part of the 2018 trading range. As of the April 16 close, this series has once again moved above the 30-day MA. There is no indication of how long it will remain bullish or the magnitude of the rally. However, most of the time these positive periods last at least two weeks. Note that the latest signal followed a recent false downside break below the red 2016-18 up trendline. Normally whipsaws trap traders who acted in the direction of the break (in this case on the short side) and are forced to unwind those positions. As a result, rallies following downside whipsaws are usually quite spirited. Now the whipsaw has been confirmed by the upside penetration of the solid green down trendline, the odds of a strong advance have been enhanced.

Chart 3

Chart 4 compares the NASDAQ Composite to the bullish percentage of NASDAQ stocks. In this case it has been plotted with a 20-day MA. The green shadings approximate when it is above that average. It’s not a perfect indicator. However, when it’s positive two things are indicated. First, a rising bullish percentage is usually associated with a rising NASDAQ Composite. Second, even if the NASDAQ itself does not respond that positively, a rising indicator still tells us that the advance is broadening and is therefore a fruitful environment for trading from the long side. As you can see from the chart, the indicator went bullish during Tuesday’s trading. Looking at the width of the green shading we can also see that once a positive signal is generated it usually lasts for well over 3-weeks.

Chart 4

Chart 5 extends the idea that the current advance is broadening out as the NYSE Common Stock A/D Line is edging through the correction bear trend line and is very close to a new bull market high. Compare that to the NYSE Composite itself, which is even below its March high. Even more impressive, is the NYSE A/D Line itself as it has punched through the line joining the January and March peaks and is now right at that January peak.

Chart 5

Another breakout is featured in Chart 6, where the NYSE upside/downside volume line has managed to really above its correction down trend line. Also, its PPO is decisively above its 15-day MA and certainly some distance away from an overstretched reading from which we might anticipate a correction.

Chart 6

Finally, completing our breadth picture, net new highs on the NYSE are also sporting some positive characteristics. This is shown in Chart 7. Historically, when it has been possible to construct a simple trend line for this series, its violation has usually been followed by a reversal in the trend of the NYSE itself.  Several examples are featured in the chart. Note that in some instances, this reversal process has been enhanced by the appearance of positive and negative divergence characteristics. These have been highlighted by the dashed green and red arrows against the Index and indicator. Recently, we saw a very positive characteristic, as the February and March intraday lows, developed at approximately the same level. However, the net new high series was far lower in February. Strictly speaking that does not qualify as a divergence, but in technical analysis it is sometimes important to adopt common sense rather than strict rules. In this instance the relative paucity of new lows in March, even though the NYA was pretty close to that February bottom, told us that most stocks were not following the Index down. That’s a positive sign!

Chart 7

The vast majority of indicators that warn of declines are currently bullish, but nothing is guaranteed in this business. In that respect I would be remiss if I did not point out the possibility that the price action for 2018 may  represent the formation of a top, as shown in Chart 8. It would be completed with a decisive drop that holds below the the red trend line. Volume characteristics are not particularly encouraging with activity recently shrinking against a backdrop of higher prices. However, with all of the major averages above their long-term moving averages and breadth data very positive it seems more likely that the top to this bull market has yet to be seen.

Chart 8

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.