Nail Biting Time For Equities, Green Shoots For Agricultural Commodities

• Top or Consolidation for Equities?
• Agricultural Commodities Perking Up Following a Severe Sell-Off
• Grains Fully Supporting Price Action in the DBA

Top or Consolidation for Equities?

The S&P, like the other market averages, has been in a trading range since March. We will have to see how it plays out, but, were the Index to drop and hold below 2,800, it would have completed a head-and-shoulders top. Ironically, the downside objective would call for prices to fall to the 50% retracement line, as flagged by the diagonal blue arrow. That would not be a problem in itself. However, if it occurred and was not remedied by the end of the month, it would result in some long-term technical deterioration. None of this has happened yet, so it is premature to hit the exits. However, it does point up the fact that the market could be subject to further setbacks, especially as several sentiment indicators have been overly juiced on the bullish side recently.

Chart 1

The NASDAQ is not without its problems either. The small dashed red arrows point up that the bullish percent of NASADAQ stocks peaked in February, well ahead of the NASDAQ itself. This setup is similar to that which preceded the March and August 2018 highs. The key in this case is to see whether the Index confirms with a break below the potential neckline of a small head-and-shoulders top with a drop below the 7600 area. The most troubling aspect of all lies in the fact that the January and August 2018 peaks and the April 2019 top, though they grew progressively higher, were each accompanied by fewer and fewer stocks in bullish trends. There is nothing in the rule book that says we could not see a fourth divergence, but, the longer this weakening trend continues, the greater the cause for concern.

Chart 2

Some weeks ago, I pointed out that the MSCI World Index had, along with my Global A/D Line, broken out from a large trading range. My conclusion was that both were headed higher, which has so far proved to be the case. However, I also pointed out that a daily close below $71 would invalidate that breakout. The price got to that point a week ago, but then held exactly where it needed to. Now, since it has fallen back below the two green breakout trend lines, it’s nail-biting time again.

Chart 3

Agricultural Commodities Perking Up Following a Severe Sell-Off

When reviewing last week’s charts, an area that really stood out to me was agriculture, specifically the grains. Chart 4 shows that the DB Agriculture Fund (DBA) experienced a bullish outside week. The lower window also indicates that the action of the last two weeks qualified as a bullish engulfing pattern. These formations, if valid, are only expected to have an effect between 5-10 weeks. If that were the case, though, it would probably  push the balance of technical evidence to the bullish side. I think it’s important to note that the agricultural commodity sector has been badly hit in the last 11 years, with the DBA dropping from $40 to a recent $15.40. Corn and Soybean hedgers, which are usually correct at turning points, are at multi-year highs. Finally, sentiment, while not at an extreme, is certainly constructive following the breakdown in the China trade talks. Arguably, we are in the "give up" phase with agricultural commodities. While I think there is a pretty good chance that agriculture has bottomed, the failed bullish two bar reversals and hammer in Chart 4 are a reminder that a bullish short-term signal in a bearish primary trend can be fraught with deception.

Chart 4

Chart 5 looks at the weekly closing price, where we can see the convergence of the purple and green trend line around $17.50. A Friday close above that level would clear the green line and the 65-week EMA, as well as complete what looks to be a broadening formation with a flat top. This is often a particularly bullish formation when completed. Given the outside week/bullish engulfing scenario outlined above, this is as an intelligent place as any for anticipating a move to that magic $17.50 area and the start of a new bull market.

Chart 5

Grains Fully Supporting Price Action in the DBA

Chart 6 features the continuous contract for soybeans. The upper window shows that the price experienced an outside week last week. Because of its width, indicating a large battle between buyers and sellers, it is a stronger formation than that indicated last September. The candlestick rendition of recent price action reveals a bullish piercing white line. That’s where last week’s white real body gapped down below the previous week’s trading and closed more than halfway back above the previous week’s real body. Note that the recent decline was signaled by a dark cloud cover pattern, the opposite of the piercing white line.

Chart 6

The corn price is showing similar characteristics with an outside week, but, in the case of the candlestick format, we see a bullish engulfing pattern with a strong bullish white line. The short-term KST is positive, which should enable the price to maintain that trend line breakout in the candlestick window.

Chart 7

That’s important, because Chart 8 tells us that corn could well be in the terminal phase of completing a large base. If it does so, you can be pretty sure that the long-term KST will also turn up.

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.