More Warning Signs From The ChartsOpinion
Yesterday’s action moved the NYSE McClellan OB/OS Oscillators into oversold territory suggesting a short term bounce as likely. However, we continue to see further technical warning signs develop within the charts of the major equity indexes that suggest the expected bounce has a probability of failing with further downside over the intermediate term.
- Looking at the data first, the McClellan OB/OS one- and 21-day Oscillators rolled into oversold territory on the NYSE as the result of yesterday’s decline to -113.33 and -58.02 suggesting some potential for a bounce from an oversold condition. As well, the Equity Put/Call Ratio (contrary indicator) saw a jump in put buying to .81, also suggesting bounce potential.
- However, we would note the OTC OB/OS levels remain neutral at -39.67 and +5.53 suggesting no current oversold condition requiring adjustment.
- As well, sentiment remains a problem for us as the “crowd” measured by the Rydex Ratio (contrary indicator) remains quite bullish at 43.9 while insiders measured by the Gambill Insider Buy/Sell Ratio have yet to be motivated into a buying mode on any weakness at a low 11%, just shy of a bearish 8% reading, as of 6/8. As such, the NYSE numbers suggest a bounce but there is little in the way of complimentary data beyond that.
- On the charts, yesterday’s decline came on higher volume and very negative breadth, again suggesting distribution. As well, there were recurrences of the candlestick “evening star” formation on virtually all of the indexes that, in our opinion, suggest the correction is not complete. As noted in one of our recent reports, the “evening star” is a three session pattern suggestive of a top. The fact that it is the second occurrence on the SPX, OTC and MID indexes in a short time frame adds to our interpretation that the equity indexes still have further risk over the intermediate term.
- The DJI (page 2) and DJT (page 3) saw their first appearance of this pattern yesterday while the DJT also closed below its uptrend line from the November lows.
- Also, The NYSE and All-Exchange Net New Highs made a lower low versus April while the NYSE A/D dropped below its 50-DMA. Internals continue to weaken.
- For the longer term, we remain bullish on equities as they remain undervalued with a 7.1% forward earnings yield versus the 10-Year Treasury yield of 2.19%.
- SPX: 1,598/1,650
- DJI: 14,840/15,300
- OTC: 3,267/3,473
- DJT: 6,113/6,392
- RUT: 950/995