NYSE: Charts Improve As Data Warnings Intensify

Remaining Short Term Neutral/Negative

Opinion: All of the indexes closed higher Friday with positive internals as volumes declined from the prior session. Some improvements were seen on the large-cap indexes. However, the warnings from the data dashboard have intensified and continue to imply the current rally is stretched and vulnerable to some notable retracement. As such, we remain near term “neutral/negative”. Breadth has continued to improve, boding well for the more intermediate term that remains “neutral/positive” by our work.

• On the charts, all of the indexes closed higher Friday and at or near their intraday highs. Breadth was positive but volumes declined again, taking some of the luster off of the action as it implies a waning of demand. The charts improved in the following fashion. The SPX (page 2), DJI (page 2) and COMPQX (page 3) all closed above their short term resistance levels while the DJI and VALUA (page 5) closed above their 200 DMAs. As well, both the VALUA and DJT (page 3) closed back above their long term downtrend lines. The DJT closed at resistance and remains on a bearish stochastic crossover signal. All in all, the charts improved.

• However, the data has intensified its warning signals that now, in our opinion, suggest the potential for some corrective action that may be of greater note given the fact that the rally of 1,700 points in the DJI over the past month has been uninterrupted with high levels of short term risk based on current data. The McClellan OB/OS Oscillators remain over bought on their 1 day readings. However, the 21 day levels are now at their highest overbought level in over 2 years (All Exchange:+123.94 NYSE:+151.37 NASDAQ:+98.67). The more overbought the readings for the OB/OS within an extended trend, the greater the potential impact of a correction. And although the OEX Put/Call Ratio (smart money) is a bullish 0.78 as the pros are weighted in calls. The WST Ratio and its Composite are now on a “bear alert” signal at 72.4 and 184.5.

• Given the current state of the data within an extended rally that is advancing on lesser and lesser volume, we remain of the opinion that short term risk is sufficient to warrant some caution. However, with the advance/decline lines of the VALUA and NYSE now above both their 50 & 200 DMAs, breadth remains encouraging for the more intermediate term, in our opinion.

• Forward 12 month earnings estimates for the SPX from IBES of $123.57 leave a 6.21% forward earnings yield on a 16.1 forward multiple.

SPX: 1,971/2,024

DJI: 16,811/17,258

COMPQX; 4,612/4,787

DJT: 7,411/7,662

MID: 1,367/1,415

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RUT: 1,035/1,107

VALUA: 4,320/4,457

Morning Technical Note

Written By: Guy S. Ortmann, CMT