Charts Suggest Sellers Washed Out
The major equity indexes closed mostly lower Monday with negative internals on the NYSE and NASDAQ on heavy trading volume with 3 of the index charts closing blow their near-term support levels. However, there were multiple “hammer” candlestick chart patterns created that imply the recent notable market 5-session correction may have been completed as the bulk of the charts closed near their intraday highs after recovering from significant intraday lows. These “hammer” formations, in our experience, have a high probability denoting a washout of sellers at the end of a steep downtrend as has been recently experienced. So, while the data has yet to turn green, remaining largely neutral, we are shifting our near-term macro-outlook for equities to “positive” from “neutral/positive” with the understanding that yesterday’s lows could be retested at some point.
On the charts, the indexes closed mostly lower yesterday on heavy volume except for the COMPQX (page 3) and NDX (page 3) that managed to post gains.
- While the DJT (page 4), RTY (page 5) and VALUA (page 5) closed below their support levels, the rest of the charts gave very encouraging signs, in our opinion, that the recent market correction has a high probability of being completed as all, but the DJT and RTY, formed “hammer” patters as noted above. Said patterns appear at the end of a downtrend when, on heavy volume, as seen yesterday, a chart opens, trades significantly lower intraday but manages to close at or near the highs of the day. Such patters, as noted above, typically are seen at correction lows as they suggest the selling panic was completed as supply was finally depleted to the point that demand was able to take control.
- Market breadth was unchanged with the cumulative advance/decline lines for the All Exchange and NASDAQ negative and the NYSE neutral.
- No stochastic signals were generated. However, the COMPQX and NDX are very close to registering bullish crossover signals.
The data finds the McClellan 1-Day OB/OS Oscillators still neutral (All Exchange: -21.24 NYSE: -6.45 NASDAQ: -32.61).
- The % of SPX issues trading above their 50 DMAs dipped to 60% and remains neutral as the Open Insider Buy/Sell Ratio (page 9) unchanged at 36.8.
- The detrended Rydex Ratio (contrarian indicator page 8) measuring the action of the leveraged ETF traders dipped slightly to 0.94, also staying neutral.
- This week’s contrarian AAII Bear/Bull Ratio rose to 0.95 turning neutral from bullish. The Investors Intelligence Bear/Bull Ratio (23.5/50.6) (contrary indicator page 9) remains neutral although the number of bullish advisors declined.
- Valuation finds the forward 12-month consensus earnings estimate from Bloomberg rose to $222.24 for the SPX. As such, the SPX forward multiple is 21.0 with the rule of 20” finding ballpark fair value at 18.2.
- The SPX forward earnings yield is 4.76%.
- The 10-year Treasury yield rose to 1.78%. We view support for the 10-Year at 1.60% with resistance at 1.85%.
In conclusion, while the data continues to send a generally neutral forecast and cumulative market breadth remains poor, the significant shift of demand overtaking supply yesterday after a steep decline as seen by the hammer formations, suggests we shift to a “positive” near-term macro-outlook for equities.
SPX: 4,654/4,718
DJI: 35,922/36,300
COMPQX: 14,877/15,087
NDX: 15,561/15,902
DJT: 15,836/16,363
MID: 2,777/2,866
RTY: 2,160/2,190
VALUA: 9,715/9,824