Global And US Equities Violate Major Up Trendlines: More Downside To Come

• The big global picture
• US equities are violating key trend lines
• Financials experience false upside breakout
• Energy triggers a false positive
• Bubble-prone e-commerce on the verge of being pricked!

Last week, I wrote about the possibility of an October “surprise.” I pointed out that such an event is completely random and, therefore, unpredictable. Even so, several pre-conditions for a sharp drop were certainly in place. In the intervening period, global equity markets have sold off, resulting in some significant long-term technical damage.

The Big Global Picture

To appreciate this, let’s back up and consider Chart 1. It’s been featured for the last few months in my Market Roundup Video. In the top left hand corner, I have listed four conditions that signaled three of the last four bear or mini-bear markets in the Dow Jones Global Index ($DJW) since the mid-1990’s. These are: a negative 12-month MA crossover, a major downside trend line break, the completion of a multi-year top and a long-term KST sell signal. At month’s end, only two of those conditions, a trend line break and a KST sell signal, had been met. With this week’s action, the number rises to four. That said, it’s vitally important to note that this is a monthly chart, based on month-end closing prices. Before these conditions can be truly said to have been met, therefore, we need to wait until the close on October 31.

Chart 1

Charts 2 and 3, which feature daily prices, argue that further downside lies ahead, thereby enhancing the chances of an end-of-the-month bear signal. Chart 2 compares the Dow Jones Global Index to my Global A/D Line. It’s pretty obvious that the Index has completed a major top and is decisively below its 200-day MA. The A/D line has also violated its 2016-18 bull trend line. Moreover, the PPO, calculated from the same breadth data, experienced a negative divergence with the other two series and has now broken below its previous lows. All of this argues for lower near-term prices.

Chart 2

The MSCI World Stock ETF (ACWI) has also completed a top. It is shown in Chart 3. Such action confirms the Special K trend line violation that took place earlier. Note that the KST has gone bearish, but, with a current reading around zero, it has a long way to go before it registers an oversold reading.

Chart 3

US Equities are Violating Key Trend Lines

One of the indicators I have been following for some time is a PPO constructed from a Friday close divided by a 180-week timespan. In the past, it has triggered some pretty timely long-term buy and sell signals. They occur when it has been possible to construct a meaningful trend line and said line has been violated. Since it’s not possible to buy and sell momentum, it’s also important to make sure that such action is confirmed by the S&P. As shown in Chart 4, this week has seen the violation of a 10-year up trend line in the PPO. The S&P, for its part, has started to edge below its uptrend line. Please note that this is not yet a decisive break; we need to see something a little stronger. Also, this is a Friday close chart and we are not at the end of the week yet. However, there is no doubt that this indicator is in a precarious position and should be monitored closely. Remember, you can view a live version of the chart by simply clicking on it.

Chart 4

Chart 5 compares the bullish percent to the NYSE Composite ($NYA). If we ignore the early 2016 low, the resulting 2009-18 uptrend line has now been violated. If the line is interpreted as a dynamic level of support, these two temporary violations actually enhance its importance, since the Index was unable to hold below that support. It is a very long line and has been touched or approached on numerous occasions, so its violation is a very significant long-term technical development. Even though the market has dropped quite a bit this month, the bullish percent at just below 50% is really at a neutral reading. It’s always possible that it can bounce off the red line once again. A more likely scenario, though, is that it will not.

Chart 5

Take Chart 6, for instance, which monitors the Dow stocks that are in a positive trend. This series has started to turn, but remains at a relatively extended level, indicating that prices are vulnerable. The 2016-18 bull market trend line for the Dow itself is still intact, but just barely. Virtually any additional weakness would result in a meaningful violation. Having said that, it is also pretty obvious that the market has fallen a long way in the last couple of days, so a sharp 2- to 4-day partial retracement bounce would not be surprising.

Chart 6

Financials Experience False Upside Breakout

Financials were looking pretty constructive in mid-September, because they broke above the green neckline of a bullish inverse head and shoulders. That favorable situation soon reversed as the price quickly fell back below the breakout point, confirming this action with a violation of the two red trend lines. Failed patterns are usually followed by above-average moves in the opposite direction of the breakout. This is because traders are forced to unwind losing positions as they return to the right side of the market. This fact, along with the bearish KST, strongly suggests that the thick red line marking the lower part of a potential large top will likely be violated more decisively in the period ahead.

Chart 7

Energy Triggers a False Positive

I reviewed the energy sector earlier in the week and came to the conclusion that it was one of the better-acting areas. It also looked as if the SPDR Energy ETF (XLE) was about to experience an upside break, not only from the 2018 trading range shown on Chart 8, but from an even larger pattern going all the way back to 2014. However, that break has turned out to be false. I always like to see confirmation of invalid breaks. In this instance, it would take the form of a more decisive drop below the dashed red trend line. Even stronger confirmation would be provided by a violation of the thick red line at $70.

Chart 8

Bubble-Prone E-commerce on the Verge of Being Pricked!

Finally, the Dow Jones E-commerce Index ($DJECOM) has started to edge through its 2009-2018 bull market trend lines for both absolute and relative action. I think we need to see a bit more weakness before concluding that these breaks are for real, especially as their respective long-term KSTs (not shown) have gone flat rather than negative at this point. That would be a serious blow for the Index and for technology generally as a high proportion of the tech-heavy NASDAQ is weighted towards such equities.

Chart 9

Finally, with energy, financials and technology accounting for just under half of the S&P capitalization (and all looking vulnerable), a return to new highs would be quite a challenge!

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.