Charts Positive But Data Overbought
Opinion
All of the indexes closed higher yesterday with positive internals as volumes declined from the prior session. All closed at or near their intraday highs. Several more positive technical events occurred on the charts. However, in spite of the futures indicating a positive open this morning, we remain near term neutral/negative as the McClellan OB/OS Oscillators are quite overbought along with the stochastic levels and some other cautionary data. They suggest risk outweighs potential reward for the short term. We still need to see some further improvement in the NASDAQ A/D to shift our neutral intermediate term opinion, although it has gotten better.
- On the charts, all closed higher and near their intraday highs with positive breadth but volumes declined. The SPX (page 2) closed above its resistance and 50 DMA as the DJI (page 2) closed above resistance as well. The DJT (page 3) also closed above resistance with the MID (page 4) closing above resistance and its 50 DMA. The COMPQX (page 3) and RUT (page 4) closed at resistance. The NYSE A/D made a higher high but the NASDAQ A/D made a lower high as it closed at its 50 DMA. All but the NASDAQ A/D are positive events. However, the distance traveled over the past week, in addition to the data, suggest to us the rally is now long in the tooth.
- The McClellan OB/OS Oscillators are overbought with only one exception (NYSE:+143.11/+53.29 NASDAQ:+88.0/+7.95). In fact, they are so overbought we feel there is a high probability of some retracement. The WST Ratio and its Composite corroborate the OB/OS as they remain on a “bear alert” signal at 77.6 and 191.3 while the stochastic levels are overbought on every index. They have not flashed bearish reversal signals yet. However, given the setup of this set of data, we suspect the near term outlook has a high probability of being neutral at best with downside risk now greater than upside reward over the near term.
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- For the intermediate term, while the NYSE A/D has shown a recovery in market breadth, the NASDAQ has A/D has yet to reverse its downtrend. It has improved over the past week but we still have yet to see a bullish reversal of trend.
- For the longer term, we remain bullish on equities as they remain comparatively undervalued with a 6.3% forward earnings yield for the SPX based on 12 month IBES forward earnings estimates of $126.83 versus the 10-year Treasury yield of 2.11%.
- S&P 500: 1.951/2,044
- DJI: 16,302/17,284
- NASDAQ: 4,552/4,830
- DJT: 7,850/8,427
- MID: 1,385/1,462
- Russell 2000: 1,103/1,163