Market Hits Resistance, So What's Next?

• Averages Reach Resistance
• Selected Emerging Markets Starting to Look Interesting

Last week, I wrote that, while my view on the primary trend remained bearish, I thought the lows established a couple of weeks or so ago stood a good chance of holding for a while. That view was based on a deeply oversold condition and widespread caution, both of which suggested that the pendulum had swung too far on the downside and was therefore overdue for one in the opposite (upward) direction.

Pretty much all the longer-term indicators are signaling a primary bear market. In this sense a “bear” market is defined by a consensus of the indicators falling below long-term trend lines and moving averages, accompanied by negative long-term momentum, etc.. It has nothing to do with the arbitrary definition of a 20% drop promoted by an intellectually lazy financial press. It’s important to note that surprises usually develop in the direction of the primary trend. In a bear market, that means they typically develop on the downside. We should therefore continue to be suspicious of rallies, especially if they reach short-term overbought territory.

Averages Reach Resistance

Chart 1 shows that the three featured market averages, the S&P, NASDAQ and NYSE Composite, have all returned to their extended breakdown trend lines. Prior to their violation, the lines represented support, but their roles have now reversed to being a temporary overhead barrier.

Chart 1

Chart 2 shows the situation from a momentum point of view. During a bull market, as experienced by the S&P for most of last year, the 9-day RSI was able to reach an overbought condition multiple times. When it touched an oversold reading for the only time in late June, the Index experienced a healthy bounce and a sustainable rally. That is typical bull market behavior. The opposite has been true since the October peak, as the indicator dropped to an oversold reading several times. Since then, the RSI has been unable to reach the overbought level at 70. Indeed, the previous two rallies were turned back at the horizontal green-dashed line. In the last couple of days, the RSI has started to roll over from a position just below the green line. However, since this is a fairly jagged indicator, it is too soon to come to the conclusion that it has actually peaked. Let’s just say that it is starting to look suspicious.

Chart 2

Chart 3 compares the Dow ETF (DIA) to its PVO, using the 12- and 26-parameters. Note that the DIA, just like the other averages, has rallied back to its breakdown trend line. It is fairly obvious, whether we are looking at the actual volume histograms or the PVO, that volume has been shrinking during the last 2-3 weeks. Rising prices and falling volume is usually bearish. However, the peaking action in the PVO at the turn of the year indicates that the late December bottom experienced a small selling climax, as volume picked up and prices fell. In this instance there is nothing unusual about the drop-off in activity, which is an integral characteristic of a selling climax. What is interesting, though, is that the PVO is currently oversold. That means that volume has probably stopped shrinking and will likely begin to expand. If prices could push through the overhead resistance on higher volume, that would obviously be a positive development. On the other hand, rising volume and falling prices would be negative, as that combination would reflect the urgency of the selling. Either way, we are likely to find out in the immediate future. Note also that following a decline, it is usual to see a test of that initial low. This characteristic has been flagged by the B/B2 lettering. We have already seen B, but have yet to experience B2. Don’t forget that, going forward, you can click on this chart in order to update it.

Chart 3

Selected Emerging Markets Starting to Look Interesting

Chart 4 shows that the ratio between the MSCI Emerging Markets ETF (EEM) is poised to break out against the European Monetary Union ETF, the EZU. Also, note how its KST has begun to reverse to the upside. We cannot yet call the chart bullish for the EEM until both series actually break out; however, it’s something well worth monitoring. since it will tell us of a major global equity market character change.

Chart 4

Chart 5 tells us that the iShares Latin America 40 (ILF) is also close to a breakout. The relative action against the World Index, seen in the third window, is also worth our attention going forward, as its long-term KST has already started to turn up and is on the verge of crossing above its EMA.

Chart 5

Delving deeper into the South American space, we can see that Brazil (EWZ) is literally right at a 6-year resistance trend line. In this instance, the relative line has already started to break to the upside. It very much looks as if the new business-friendly government there is being reflected in an improving technical position.

Chart 6

Finally, Russia is another EM that should look unattractive, given the constant negative press coverage concerning sanctions and low oil prices. However, as Chart 7 points out, its RS line has just punched through a 7-year downtrend line, while the long-term KST for relative action is right at its bullish crossover point. The absolute price has not moved much since early 2017, which has enabled the VanEck Vector Russia ETF (RSX) to move comfortably above its 200-week MA.

Chart 7

Please note that some of these charts have broken out on a relative basis, but none of them have on an absolute one. While the upside breaks would argue for superior relative performance, that could mean that these markets drop less than the World Index, should the global bear market extend.

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.