Global and US Equity Markets On A Knife Edge

• The US on a knife edge
• Global markets are also on the edge
• Individual regions largely around key support

Last week I wrote about the important upside breakout in the US market vis a vis the rest-of-the-world, and a previous article pointed out that the S&P had also re-confirmed its breakout against the gold price. Both are shown in Chart 1 and obviously represent positive factors. However, it is no exaggeration to say that the US stock market itself is on the edge of a potential technical cliff. If it falls over, the relative breakout against the rest-of-the-world would then mean that the US would outperform by falling less. If it does not, and rallies from here, that superior performance would suggest that the world rallies with the US in the lead.

The precarious nature of the US technical position can also be appreciated from Chart 1, where the S&P is trading slightly above its 2009-18 up trendline. The two relative breakouts argue in favor of the line holding, but there is no doubt that something needs to happen on the upside pretty quickly if a downside break is to be avoided. Given the fact that several reliable long-term indicators I follow are not that far from a primary bear market signal, we have the ingredients for a very interesting technical situation to say the least.

Chart 1

The US on a knife edge

Look at Chart 2, for example. It features the more broadly-based NYSE Composite along with a cumulative measure of the McClellan Oscillator. The green shaded areas reflect periods when the indicator has been trading above its 30-day MA. Typically, this is very positive for the market as a whole. That’s not a guarantee, of course, because the gray shaded area reflects a losing signal. On Tuesday it slipped below the average, thereby removing a bullish prop. The latest data does not include Wednesday’s action, so it may have reversed again. However, that does not take away the point that the market is precariously balanced. Look at the NYA for example. It is trading slightly above its 2016-18 up trendline. We judge the significance of trendlines by their length, the number of times touched or approached and the angle of ascent or descent. On all three counts, this is an important must hold one. It’s long, has been touched or approached on nine occasions and has a fairly low, and therefore sustainable, angle of ascent.

Chart 2

We need to add an important aspect to this, and that is that in early June, the NYA experienced what looks to be a false upside breakout. That whipsaw would be confirmed with a break below our red 2016-18 up trendline. Given the significance of that line, and the fact that whipsaws are often followed by above average price moves, we have the ingredients for a nasty decline. That’s not a forecast because we do not know whether the line will hold or not, it’s merely pointing out the likely consequence in  the event of a violation. It’s also possible to appreciate the current fine technical balance by the fact that the 200-day MA is trading right between the two converging trendlines.

Chart 3 also underscores the need for equities to rally, as both the NYSE Common Stock A/D and the NYSE Upside/downside Volume lines are also resting on trendlines.

Chart 3

Global markets are also on the edge

Broadening out, Chart 4 compares the MSCI World ETF, the ACWI, with my Global A/D Line, which is constructed from the cumulative plurality of a basket of advancing and declining country ETF’s. The ACWI has already violated its 2016-18 up trendline and is now very close to its 200-day MA. The A/D line, though, is in much worse shape as it has not only violated its up trendline, but has completed its 2018 top, by dropping below the red dashed head and shoulders neckline. The last barrier of support for both series now lies at their respective 200-day MA’s. The PPO looks to be oversold, but that’s because it has not suffered much of a decline in the period covered by the chart. Look to the overbought readings flagged by the three red arrows, and project them below the equilibrium line, to get a true feeling of an oversold condition.

Right now, this chart has a bearish bias. However, markets reflect people in action and people can and do change their minds. In this case I would look for an upside break of the two green trendlines in the chart to signal the all clear and a pathway to a nice summer rally.

Chart 4

We should not forget that some indicators have already reached oversold status. For example, Chart 5 indicates that my Global Diffusion indicator has just fallen into such territory. The solid arrows indicate that reversals in this series have usually been followed by a worthwhile rally. The two dashed ones reflect failed signals. The indicator has yet to reverse direction, so a buy signal has not yet been generated, but clearly it would not take much in the form of upside ACWI action, to trigger one.

Chart 5

Individual regions largely around key support

Chart 6 compares some regional ETF’s, starting with the Vanguard World Ex US (VEU). The price is slightly below the red support trendline, which could be the neckline of a head and shoulders top. The European Monetary Union (EZU) and Vanguard FTSE Pacific (VPL) ETF’s are both at support. Dragging down the whole complex it’s the MSCI Emerging Markets  ETF, the EEM.

Chart 6

Finally, we see that the Chinese market is slightly below its secular bull market trend line and experienced a long-term KST sell signal. The line has not been touched or approached on that many occasions, but the current position of the Shanghai Composite is certainly consistent with the idea that global markets have reached a critical juncture.

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.