Some “Hammers” Appear

The bulk of the indexes closed lower Monday but saw positive internals on the NYSE while the NASDAQ’s were negative. A couple of technical events occurred on the charts that add to our speculation that the indexes are attempting to put in a short term bottom. The data remains somewhat encouraging as well. As such, we are maintaining our near term “neutral” outlook for the major equity indexes at this time.

• On the charts, The DJI (page 2) and MID (page 4) managed to post gains yesterday with the rest closing in the red. However, all but the COMPQX and NDX closed near their intraday highs that included “hammer” formations on the RTY (page 5) and VALUA (page5). “Hammers” are chart patterns that show a stock or index, during a downtrend, opening, trading notably lower during the day, but managing to climb all the way back to or very near its original opening level. It suggests a washout of selling pressure with enough buying interest entering the market to force prices back up. The one outlier was the NDX (page 3) that closed below near term support as the large cap leaders in that index continued to see selling pressure. Several of the stochastic levels are oversold but have not yet registered bullish crossover signals. We would reiterate our observation that the NASDAQ cumulative A/D is below its 200-DMA that has marked short term bottoms six times since 10/15.

• The data remains a bit encouraging. Most of the McClellan OB/O)S Oscillators are oversold (All Exchange:-84.9/-44.93 NYSE:-84.2/-34.34 NASDAQ:-88.44/-55.3). The Total Put/Call Ratio (contrary indicator) finds the crowd long puts at a very bullish 1.17 while the pros are also long puts at a bearish 1.52 OEX P/C as they still expect more weakness. The Open Insider Buy/Sell Ratio is at its highest level of comparative buying interest since 1/16 at 86.5. It is at levels that have also been coincident with short term market lows six times since 10/15. Valuation finds the forward 12 month earnings estimates for the SPX via Bloomberg at $172.66 leaving the forward 12 month p/e for the SPX at 16.7 versus the “rule of 20” implied fair value of a 16.8 multiple. The “earnings yield” stands at 5.99%.

• In conclusion, while the charts and market breadth look dreadful on the surface, there are a number of indicators that continue to suggest it may be unwise to follow the crowd in their rush to sell. Said historical indicators, in fact, suggest we may be near a near term market bottom. Thus we are keeping our outlook “neutral” for the present.
• SPX: 2,862/2,913
• DJI: 26,402/NA
• NASDAQ: 7,729/7,996
• NDX: 7,300/7,490
• DJT: 11,142/11,358
• MID: 1,957/2,013
• Russell: 1,607/1,673
• VALUA: 6,4328/6,463

Some “Hammers” Appear

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Written By: Guy S. Ortmann, CMT