US Breaks Out Against the World as Bonds Fail at 200-day Moving Average
The US Breakout
The S&P has been in a secular or very long-term uptrend against the Dow Jones World Stock Index since the financial crisis. That trend is still intact, as the ratio remains above its 2011-2021 up trendline. The primary trend picture is a bit mixed as this relationship has moved back above its 12-month MA, but its KST, though flattening, has yet to re-cross its 9-month MA. In reality, the ratio has been in a trading range for the last couple of years, as demonstrated by the two blue dashed lines. That rangebound activity could turn out to be a consolidation of previous gains or a top. In technical folklore, it is wiser to assume that the prevailing trend is intact until proven otherwise. Consequently, we should assume that the secular uptrend is intact, which means that any breakout from the recent trading range will be resolved on the upside.
That's also the impression we get from Chart 2, which compares the ratio to its Special K indicator (SPK), explained here. First, it is evident that it has completed a reverse head-and-shoulders. Second, this is being supported by the SPK trading above its red signal line and the small solid green trendline, not unlike its bullish 2018 action. In the current situation, though, the SPK itself has also begun to trace out a series of rising peaks and troughs. What has not yet happened is a break above the green dashed-down trendline, as that would complete the positive momentum picture.
Chart 3 says that it is likely to happen, as both the short- and intermediate-term KSTs are in a bullish mode. This weekly chart enhances the reverse head-and-shoulders seen on the previous daily one. That's because the neckline has been touched or approached on six different occasions. Remember, the more touches or approaches, the more formidable the resistance and the greater the significance of any penetration.
If the US is to Gain, Who Loses?
If the US breakout is valid, nobody has to lose on an absolute trend basis provided the world equity market, as I expect, continues in its long-term bullish phase. However, in a relative sense, there are always winners and losers. In this instance, we are using the S&P Composite as our relative benchmark. On that basis, Asia and some emerging markets look the most vulnerable. Chart 4 shows that the iShares Japan ETF (EWJ), as featured in the top window, continues to trade above its 65-week EMA. It is also being supported by a positive long-term KST. No problem there, apart from an overextended KST. However, relative action recently broke below significant support in the form of the red trendline. The relative KST is also dropping.
China is also positive on an absolute basis, but only just. That's because the iShares China ETF (MCHI) is only slightly above its 65-week EMA. Adding to the stress level is the fact that the price is also right at the neckline of a potential head-and-shoulders top. Moreover, the absolute long-term KST has begun to roll over. Not much doubt as to the bearish direction of relative action, as the RS line has just broken to a post-2016 low. In addition, the relative KST has recently crossed below its 26-week EMA.
Chart 6 indicates that the SPDR Emerging Asia Pacific ETF (GMF) is comfortably above its 65-week EMA. However, the RS line is right at 5-year support trendline and therefore faces a critical relative strength test. One problem lies in the fact that the RS long-term KST has just triggered a sell signal by crossing below its EMA. Finally, we should note that emerging markets prefer a falling dollar and it's quite possible that the Dollar Index is in the process of signaling an end to its bear market.
iShares 20-year + Treasury Bond ETF (TLT) fails to hold above its 200-day MA
A key test of any bear market bull market transition is for the price to cross and then hold above its 200-day MA. The crossover is the easy part, but the ability to hold above the average is far more difficult to achieve, as it represents an important piece of evidence that the tide has turned.
Chart 7 shows that the TLT was recently showing some promise, with two overbought readings (see the blue arrows) failing to trigger a decline, which is a bull market characteristic. Since that positive action was capped by a 200-day MA cross, evidence in favor of a primary trend reversal or trading range environment was beginning to mount.
However, Tuesday's action confirmed Friday's drop below the average, thereby indicating that the breakout was a whipsaw. Bear market rallies are notably deceptive, where false breaks above the 200-day MA are a typical characteristic.
The failure of the price to hold that breakout now throws open the possibility that a test of the neckline of the potential head and shoulders top (Chart 8) is now underway.
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 Groupof Walnut Creek or its affiliates.
