Getting Through The Old Highs Could Be A Challenge

• Last week's test of the highs leaves a lot to be desired
• Breadth and momentum indicators fail to confirm
• Some international charts not looking so good

Last week's test of the highs leaves a lot to be desired

If the charts in this article look a little bumpy it's because I am sending this out during the StockCharts cruise to Alaska, and the ship is swaying a bit as we head north. However, I wanted to get this out to you as I do not like the quality of the recent rally, which took us back, in S&P Composite terms, to the January high.

Chart 1, for instance, shows that the S&P came within a whisper of its old high, yet the KST was lower and could not even bear its June high, and has now started to edge lower. There is a small gap above Friday's trading, which may need to be filled before prices react to the general weakness I see elsewhere.

Chart 1

Throughout the rally dating from mid-March, we saw the NYSE A/D and common stock A/D line try to lead the market higher. This is normally a good thing, as we want to see these breadth indicators succeed in this respect. If they do not and prices head lower, that's also a bad outcome, similar to when the breadth indicators fail to respond to a higher reading in the market averages themselves. Both represent disagreements, which when confirmed, usually lead to trouble. That may be the case now, because Chart 2 shows that both breadth series are starting to break their April/August up trend lines.

Chart 2

Breadth and momentum indicators fail to confirm

Other measures of breadth are looking even worse. Chart 3, compares the NYSE Composite to the Common Stock Only McClellan Oscillator. The red shaded areas flag when the oscillator is below its 20-day MA. That doesn't always translate into lower prices, but it does indicate that fewer stocks are participating in any rally, thereby making it more challenging to select a profitable trade. This indicator went bearish in June and has been falling ever since. Note that the latest recovery high, flagged by the dashed arrow, failed to be confirmed by the oscillator. That's not a good sign. At this point we have to say that the uptrend is intact, since the NYA is above both its red up trend line and 200-day MA. However, we can also say that the quality of that uptrend is far from satisfactory, thereby rendering it vulnerable.

Chart 3

The same comment can be made about the NASDAQ and its bullish percentage indicator. That's because  it recently failed to confirm the all-time-high set by the NASDAQ Composite. That indicator remains below its 20-day MA and has just violated its 2018 up trend line, all of which suggests that the market and the number of NASDAQ stocks in a bullish trend are vulnerable.

Chart 4

For the last chart of the USA, Chart 5 shows that the S&P has just marginally violated its summer up trend line. So far the break is a marginal one, but we also see from the chart that all three ROC's have broken up trend lines as well. Whenever several ROC's of widely differing time spans, cross below a meaningful trend line this is usually a sign that a sell-off is in the cards.

Chart 5

Some international charts not looking so good

For some time the MSCI World ETF, the ACWI, was able to hold above its (red) 2016-18 up trend line. There was a small breech earlier in the summer but the price has now slipped below the line again, following an unsuccessful attack on the horizontal green breakout trend line. In retrospect, it is clear that the Global A/D line has been in a trading range for most of this year. However, the peaking action of the price oscillator calculated from this breadth indicator has started to turn down, which is not the kind of thing we would expect to see prior to a rally in the ACWI to new highs.

Chart 6

In addition, charts 7 and 8 show that the diffusion indicators calculated from a basket of European and emerging market ETF's have started to roll over. That in itself, suggests that the ACWI will have difficulty in moving higher in the period ahead.

Chart 7

Chart 8

This month, the Market Roundup carries a lot of information about how acute the current market position is in globally.

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.