The All Country World Index Is Headed For Trouble

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via John Murphy

WORLD STOCK INDEX HEADED FOR A TEST OF ITS FEBRUARY LOW AND ITS 200-DAY AVERAGE… Stocks around the world had a terrible week. Foreign stocks fell along with the U.S. That’s not unusual since global stocks become tightly correlated on the way down. Selling in Chinese stocks was especially heavy this week which also weighed heavily on emerging markets and Chinese stocks traded in the states. In Europe, the STOXX 50 Index fell to the lowest level in 15 months. The daily bars in Chart 1 show the MSCI All Country World Stock iShares (ACWI) heading down for a test of its 200-day moving average and its February low. That’s a big test coming in the week ahead. And that test could help determine if the global bull market in stocks is just correcting, or in danger of ending. The same is true for stock indexes in the states.

S&P 500 IS ALSO HEADED FOR A MAJOR TEST OF SUPPORT… The daily bars in Chart 2 show the S&P 500 in a similarly dangerous situation. After suffering its biggest percentage drop in two years, the SPX is bearing down on its 200-day moving average and its February intra-day low at 2532. Needless to say, that’s going to be a very important test. Any serious violation of those two support levels could call into question the sustainability of the major bull market that just passed its ninth birthday. One positive sign on Chart 1 is that the 14-day RSI line (top of chart) has reached oversold territory below 30. That may lend some support in the coming week. It’s very likely that stocks will start the coming week on the weak side. What matters more is how they end the week. That will help determine whether this week’s impending test of chart support is successful or not.

S&P 500 IS ALSO TESTING MAJOR TRENDLINE SUPPORT … The weekly bars in Chart 3 show the S&P 500 also testing a major trendline extending back to early 2016 when its last upleg began. The flat Fibonnaci retracement lines show where potential support levels are located if the trendline doesn’t hold. Meanwhile, its 14-week RSI line (top of chart) has fallen below 50 for the first time since October 2016, and its weekly MACD lines (below chart) have turned negative. A trendline violation might not be enough to end the market’s nine-year bull run. But it might signal a deeper retracement of the uptrend that started two years ago.

FINANCIALS AND TECHNOLOGY LEAD MARKET LOWER … The stock market lost the support of two of its most influential sectors, namely financials and technology. Chart 4 shows the Technology SPDR (XLK) falling to the lowest level in a month on rising volume. Social media stocks led the week’s decline but most big tech stocks also suffered losses. Chart 5 shows the Financials SPDR (XLF) already threatening its February low, also on rising volume. A pullback in bond yields this week (mainly from a flight to safety in bonds) may be a contributing factor. Those two influential sectors suffered the week’s biggest losses. Sectors that held up better were energy (on a sharp rise in the price of crude oil) and bond proxies like staples, utilities, and REITS. The CBOE Volatility (VIX) Index jumped 57% during the week to reach the 25 level, which was its highest close since early February. Two other safe havens that climbed during the week were gold and the Japanese yen.

GOLD AND THE YEN ARE RISING TOGETHER … Gold had three things going for it this week. A weak stock market, a drop in bond yields, and a falling dollar. And it’s once again nearing a potential upside breakout. Gold rose $37 (2.8%) this week. The brown weekly bars in Chart 6 show the price of gold once again nearing a test of a “neckline” drawn over its 2014/2016 peaks. A decisive close above that resistance line would constitute a major bullish breakout for the commodity. Keep in mind that gold is viewed as alternate asset to stocks. It tends to do better when stocks are in trouble. Which they may be. Any serious drop in global stocks would most likely drive money into gold assets. Gold miners had an even stronger week with a gain of 3.2%. Gold has something else trending in its favor. And that’s the rising Japanese yen. The weekly bars in the top box in Chart 6 show the yen rising this week to the highest level in sixteen months. I’ve pointed out in previous messages that the yen and gold usually trend in the same direction. A rising yen also contributes to a weaker dollar which is also supportive to the price of gold.

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