Charts Break Down

McClellan 1 Day OB/OS Very Oversold

Opinion

All of the indexes close lower Friday with very negative internals on the NYSE and NASDAQ as volumes rose form the prior session. Several of the index charts broke below support, turning their trends to negative from neutral. The 1 day McClellan OB/OS Oscillators are very oversold suggesting the potential of a near term climax while valuation has dropped further due to a rise in earnings estimates as the SPX has declined in price. Yet given the chart conditions, until some technical signals are given that a selling climax has been reached, the discipline requires us to turn near term negative in our outlook.

• On the charts, all of the indexes closed lower Friday with significantly negative internals on higher volume. Several of the index charts turned negative as support levels were violated on the SPX (page 2), DJI (page 2), COMPQX (page 3), NDX (page 3) and VALUA (page 5). The DJI also closed below its short term uptrend line while the RTY (page 5) closed below its 50 DMA. The only potentially positive signals are coming from the stochastic readings that are deeply oversold on the DJT, MID (page 4) and VALUA (page 5). However, bullish reversals would need to be seen to become more encouraging. All of the cumulative advance/decline lines closed below their 50 DMAs and remain in downtrends. Some signals of a selling climax may need to be seen on order to repair the charts.

• One positive signal is coming from the data as all of the 1 day McClellan OB/OS Oscillators are now deeply oversold to levels frequently seen near bottoms (All Exchange:-119.73/+1.73 NYSE:-84.21/-31.93 NASDAQ:-105.0/-15.05). The 21 day levels remain neutral. The Equity and OEX Put/Call Ratios are neutral at 0.59 and 1.12 respectively with the Total P/C a mildly bullish 0.9. The OpenInsider is a neutral 34.5. We would also note the forward 12 month earnings estimates for the SPX were raised to $156.95, dropping the forward p/e to a 17.6 multiple, a significant decline given it was at 18.7 early last week.

• In conclusion, while some data and valuation maybe more encouraging, the charts rule and, in our opinion, need to exhibit action suggesting a selling climax. That may be near at hand given the oscillators. Yet we would not jump the gun until such signals may appear.

Forward 12-month earnings estimates for the SPX from Bloomberg were raised to $156.95, leaving a 5.7 forward earnings yield on a 17.6 forward multiple.

• SPX: 2,693/2,798
• DJI: 24,835/25,950
• Nasdaq: 7,217/7,387
• NDX: 6,508/6,894
• DJT: 10,582/11,203
• MID: 1,911/1,980
• Russell: 1,550/1,596
• VALUA: 6,093/6,270

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Charts Break Down

Written By: Guy S. Ortmann, CMT