The China Trade Talks And The Technical Position Of The Equity Market

• Long-Term Divergences
• Some Short-Term Technical Sell Signals Triggered in the Last Few Days
• Prices May Be Falling, But Bond Spreads (Confidence) are Holding in There

Long-Term Divergences

My first reaction to this week’s stock market tantrum (in response to the China trade talks) was to brush it off as just another brick in the wall of worry that the stock market has recently been climbing. That may well turn out to be the case; however, it is also true that this week’s action has also caused some technical damage that could, depending on the unfolding news background, result in further price erosion or rangebound action.

Let’s backtrack a bit. April saw the S&P Dow and NASDAQ Composite, amongst the usual media fanfare, touch a new bull market high. What was not noticed was the fact that the NYSE Composite, which is more broadly based than the S&P, did not. Indeed, the high for this Index was achieved way back in January 2018. As Chart 1 points out, the S&P has now achieved two post-January 2018 highs, neither of which has been confirmed by the NYA. That’s not the kiss of death by any means, as there is nothing in the rule book that says we can't still see another negative divergence, or even another following that.

That said, the chart also shows that the two market averages have, tentatively and jointly, violated secondary trend lines in a similar fashion to their 2018 breaks. Any additional weakness will result in decisive breaks.

Chart 1

Chart 2 indicates that the PPO, using the 12 and 26 parameters, is very close to crossing above its 9-month MA. Previous examples of this have been flagged by the green arrows; all of these were followed by worthwhile advances. The chart also shows that, with the exception of the 2009 signal, all were preceded by a test of a previous low, which served as a platform from which a trend of higher prices was able to be launched. So far, December’s low has not been tested. A mild test may lie ahead.

Chart 2

Some Short-Term Technical Sell Signals Triggered in the Last Few Days

Chart 3 shows that the 9-day RSI has violated its 2018-2019 uptrend line and that the short-term KST has crossed below its 10-day MA for a sell signal. Since the Index is comfortably above its 200-day and 12-month MAs, I am treating this as a correction under the context of a primary bull market, which means that any damage will likely be limited in scope.

Chart 3

Chart 4 compares the progress of the NYSE Composite to the McClellan Oscillator for common stocks listed on the NYSE. Here, we see that it has recently crossed below its 30-day MA and has experienced a negative divergence with the price. Such action is not dissimilar to that which developed at the January and September 2018 peaks. While I am not saying that it will wreak a similar amount of havoc, this inconsistency could clearly be looked back on as something of a serious discrepancy down the road. As long as the oscillator remains below its 20-day MA, it will be a cause for concern.

Chart 4

The VIXX has been plotted inversely in order to correspond with S&P price movements. Since the raw data is somewhat jagged, it has been smoothed by a 10- (black) and 15-day MA in Chart 5. The red arrows tell us that, when the VIXX has reversed decisively to the downside, a correction of some kind has typically followed. We never know the magnitude or duration of such moves ahead of time, but they are usuallygreater that what we have experiencedso far. The two failed signals, flagged by the dashed arrows, were followed by a quick reversal in the VIXX, flagged by the green arrows. Consequently, I am assuming that this indicator is flashing trouble as long as the 10-day MA continues to decline.

Chart 5

An alternative VIXX indicator worth monitoring is a 10-day ROC, as swings in the momentum of sentiment can often give timely signals of short-term trend reversals. This is featured in Chart 6, where the indicator has not been plotted inversely as it is not possible to invert momentum indicators in StockCharts. In this instance, a high reading indicates an oversold market, while an oversold reversal indicates a buy signal. As you can see, the ROC has already reached a high level, so, when it reverses, it is likely to tell us that the recent selling squall is over.

Chart 6

Chart 7 gives us a similar feel from a similar measure calculated from the NASDAQ VIXX. The solid vertical lines tell us that this series, at least in the last 3 years, has had a more accurate track record in calling overall market reversals. Don’t forget, you can update this and the rest of the charts in this article simply by clicking on them.

Chart 7

Prices May Be Falling, But Bond Spreads (Confidence) are Holding in There

One area I monitor daily is the technical picture of bond spreads and other market relationships that reflect confidence. That’s because changes in their direction often lead or confirm what is actually happening to equity prices in general. One of my favorites is the ratio between the iShares High Yield and iShares 7-10-year treasury ETFs (_HYG/_IEF). When it is rising, it indicates investors and traders are growing in confidence concerning the level of business activity, as they are willing to bid up the HYG in order to receive its generous yield. When they are worried about the economy, there is a rush to the quality offered by treasuries and the ratio falls. Chart 8 shows that this relationship clearly does not move tick for tick with the NYA. However, we do find that, if trouble is brewing we normally get an advance warning from the ratio itself or a reversal in its momentum. Right now, it is caught between the two converging trend lines. Whichever way it breaks is likely to signal the direction of the next important move for both confidence and the equity market.

What is surprising is the fact that this relationship has held up very well, despite the recent selling squall. Moreover, the two momentum series, which you can read about here, are both in a bullish mode. If investors are in any way worried by a failure in the trade talks, I would expect it to show up here. So far it hasn’t, which could mean that the current decline will be limited in scope.

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.