Are US Equities About to Break Out Against The Rest of The World?

• S&P Relative Action Edging Through Resistance
• British Pound Going Wobbly Before Brexit?
• Mega Buy Signal Could be in Store for the Shanghai Composite
• Gold at a Momentum Downtrend Line as Well

S&P Relative Action Edging Through Resistance

We have all heard about the US economy being stronger than most of its competitors around the world. If that’s true, we would expect to see US equities outperforming the globe ex the US. That relationship has been plotted in Chart 1, where the S&P ETF (SPY) is compared to the Vanguard FTSE All-World Ex-US ETF (VEU). The ratio, whichis above its rising 12-month MA, is clearly in an uptrend favoring the US and is being supported by a rising, though moderately overbought, long-term KST. However, this relationship has gone nowhere in the last year, so we must ask if this range-bound activity is a top or, alternately, a consolidation prior to a new up leg. It’s an important distinction. If the ratio breaks to the upside, that will mean we should continue to focus on the US for the next few months. On the other hand, a reversal to the downside would suggest the need for greater international exposure. It’s always well to remember that an upside breakout does not tell us that the US market is going higher, nor does a downside one mean that it is likely to sell off. Breakouts merely tell us that one party is likely to out- or underperform the other.

Chart 1

Chart 2 argues in favor of an upside breakout, as the ratio has just moved very slightly above the neckline of a downward sloping inverse head-and-shoulders pattern. That view would change in the event that this relationship drops below the 5.5 level. This is because it would then be trading below its 50- and 200-day MAs, as well as below the red support trend line. More importantly, it would mean that the upside breakout was false and that the inverse head and shoulders had failed, all of which would combine to add up to a pretty nasty technical event.

Chart 2

The Dollar’s performance could be a crucial factor in all this, since the ratio and the Dollar Index often move in sympathy with each other. There are, of course, exceptions where their paths differ for a while. However, when it is possible to construct trend lines for both series and they are more or less simultaneously violated, it usually signals a change in trend. Chart 3 shows several examples where this happened since 2016. The last few months have seen these markets form another such setup. The Dollar Index recently experienced an upside whipsaw upside break, followed by an invalid one to the downside. Since the negative one was the last to materialize and also involved an invalid 200-day MA penetration, I am going to assume that the bullish connotations from the false break are still in force. That view would be confirmed if the Index now moves decisively above both the green resistance trend line and the early March false breakout high.

Chart 3

British Pound Going Wobbly Before Brexit?

Chart 4 features the last 30 years-or-so history for the British Pound. It broke below a mega support trend line in 2016, declined and subsequently rallied back to that same line, which by then had reversed its role to one of resistance. That, along with the green secular downtrend line in the $1.40-$1-47 area, is the zone of overhead resistance to beat. Right now, the currency is in a fine state of technical balance. That’s because it has recently been hugging its 12-month MA and its long-term KST has gone completely flat. The green and pink shadings flag previous periods when this indicator was finely balanced for an extended period. The arrows to the right of the shading show that some unusually sharp moves in both directions followed.

Chart 4

The ultimate direction of the current impasse is not known, of course, but most factors point to the downside. Chart 5 shows that the currency recently experienced two false upside breaks from a reverse head-and-shoulders formation. At the time, it looked as if the market was thumbing its nose at the truly messy Brexit mess and was likely to head higher. However, over the last few days, the pound has fallen back below its breakout point and is now facing the red uptrend line. The 200-day MA is around the same area, at just under $1.30. If that is penetrated in any meaningful way, the two false upside breakouts would be confirmed as such. False breakouts are typically followed by above-average price moves in the opposite direction to the breakout, as traders are forced to unwind or even reverse positions. If that proves to be the case, with a daily close below, say, $1.29, it would likely tip the very fine long-term balance in Chart 4 to the bearish side.

Chart 5

Mega Buy Signal Could be in Store for the Shanghai Composite

The Shanghai Composite recently broke back above its red secular uptrend line, which is a very bullish development. However, there is an even stronger signal possibly waiting in the wings. This signal comes from the 18-month ROC, as the latest plot is just slightly below an 11-year downtrend line. That kind of setup does not happen very often, of course. However, when a multi-year down- or uptrend line for a rate of change indicator is violated, such action is usually followed by a very significant price move. Note that a similar break preceded the 2006-2018 mega bull market. I do need to point out that the break above the 2015-2019 bear trendline for the Index itself has not actually taken place. It will, though, if prices close the month at or above Monday’s 3170. Since this is a monthly chart, we need an April 30 close for confirmation. The same goes for the ROC, which is right at its trend line. I think it will happen, as the price is above both its 12- and 24-month MAs, but let’s see on that one.

Chart 6

The X-tracker Harvest CSI China 300 China A-Shares ETF (ASHR) is a US-traded vehicle that that is the closest it gets to replicating the Shanghai Composite. Chart 7 shows that it, too, has started to break out on both an absolute and relative basis. Please note that this is not yet an official breakout, as that can only come from a Friday close and the chart is plotted only to Tuesday.

Chart 7

Gold at a Momentum Downtrend Line As Well

I originally meant to introduce Chart 8 by using the 1987-2002 downtrend line as an example of a multi-year ROC breakout. On closer examination, though, we can see that the 18-month ROC for gold is currently right at a major downtrend line. It's not as long as the others, but does show that if the price of the yellow metal can gain some more strength, it could easily mount a nice double breakout.

Chart 8

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.