Equities At A Make-Or-Break Level What To Look Out For

• CPI adjusted S&P is just above a long-term make-or-break point
• The rest of the world is at the brink
• US market looks stronger

CPI Adjusted S&P is just above a long-term make-or-break point

Last week I pointed out that US equities were experiencing a marginal upside breakout out against the rest of the world. It seemed at the time that with the backing of a rising dollar a more decisive breakout was likely. The implication was that the US market was about to take off in its own right. However, this relationship is a relative one, so it could also mean that the US and rest of the world both decline, but the US less so. The outcome is very important because both the US and international markets appear to have reached a make or break point. In other words, prices are about to make a big move, only the direction is in doubt.

Take Chart 1 for instance. It compares the inflation adjusted S&P Composite to three different ROC indicators. Each  reflects a different time span in recognition of the fact that price at any one time is a function of the interaction of many differing time cycles. When these cycles are in gear we tend to get the larger price moves. Conversely a conflict between these cycles has a habit of producing weak trends or ranging action. When it’s possible to construct a trend line for the three ROC’s and price, it suggests that the time cycles they are monitoring are in gear. Consequently, a joint violation of all four lines is usually followed by a worthwhile price move. We see three examples, and a potential setup for a fourth in the chart. None  of the current lines have yet been penetrated, but just a small drop from current levels would result in a negative 12-month MA crossover, as well as the trend lines themselves. The closeness of a potential signal should not be viewed negatively, only the actual violations, should they develop. That’s because a bounce from these support lines could be followed by a powerful rally due to the fact that these cycles would then be in gear on the upside. Consider the 2016 period as a classic example of a potentially weak market that held and subsequently reversed at support. The purple arrows demonstrate this principle quite clearly. It represents a great example of a market that looks as if it is about to break down but greatly surprises us with a move in the opposite direction.

Chart 1

The rest of the world is at the brink

This brings us back to the rest of the world again, as other regions are close to breakdown levels, proving that  this make or break possibility is not solely a US phenomenon. Chart 2 features the Vanguard FTSE All World ex-US ETF, the VEU. Last week it bounced off the red support trend line for the sixth time. If it ever goes through, a pretty nasty decline would be expected to follow. On the other hand, a break above the green trend line at $55.50 would resolve the trading range in a bullish fashion.

Chart 2

Chart 3 features the European Monetary Union ETF, the EZU. It recently broke down from that nasty looking top, but the break has not held. A rally above the green line at $44.5 would confirm that it was a whipsaw, especially as that would take the price back above the two MA’s.

Chart 3

The BLDRS Asia 50 ADR, the ADRA also experienced a drop below support. This time it took the form of a rising trend line. That downside move would earn whipsaw status if the price now moves above the potential inverse head and shoulders neckline at $35.50.

Chart 4

Finally, emerging markets in the form of the MSCI Emerging Markets ETF, the EEM, is also in limbo. That’s because it broke to the downside last week, and appeared to complete a nasty head and shoulders top. However, Chart 5 shows that the price has subsequently managed to claw its way back above the neckline. It is now very close to invalidating that break with a move above its green down trend line and 200-day MA.

Chart 5

It may well turn out that these downside moves will be validated, However, should they turn out to be false, it is very likely that we will see a powerful global move to the upside.

US market looks stronger

There is no question that the technical position of the US and these overseas markets are finely balanced. However, there are some short-term US indicators that argue for higher prices.

Chart 6, for instance, shows that the NYSE A/D line registered a new high this week and appears to be leading the NYSE Composite higher. Good breadth is always a healthy sign.

Chart 6

Chart 7 tells us that the 10-day ROC of the VIX, recently reversed from that solid horizontal line for the twelfth time since 2016. All previous instances were followed by some kind of an advance, most of which were worthwhile.

Chart 7

Volume also appears to be expanding, as we can see from the recent breakout in the PVO for the NYSE. You can also see a slight pick-up in the volume histogram in the last few days.

Chart 8

Finally, the NYSE bullish percent has completed a base and continues to trade above its 20-day MA, thereby indicating that the uptrend is intact. The green shaded areas flag previous periods when the bullish percent was above its MA. That usually means that stocks in general are on the rise. The ellipses indicate whipsaws, which shows this approach, while working most of the time, is certainly not perfect.

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.