Dow Jones Transports Only Index Not To Break Support

McClellan 1-Day OB/OS Oscillators Oversold

All the major equity indexes closed notably lower Friday with broadly negative internals on the NYSE and NASDAQ. All closed at or near their intraday lows with all but one chart breaking support, thus turning all near-term trends negative except the DJT staying neutral.

And while the SPX and DJI may, in our opinion, be entering the latter stages for inverted head & shoulders patterns, the fact that said patterns appear to have failed on the COMPQX and NDX leaves the SPX and DJI patterns vulnerable to failure as well.

However, it is too soon to make that assessment, in our view. As well, market breadth weakened further and is now negative on all the indexes.

The data finds the 1-day McClellan OB/OS oscillators down in oversold territory post Friday’s slide with investor sentiment near peak levels of fear that offer some encouragement while the rest are neutral.

So, Friday’s poor performance says our assumption that the market correction had been completed was wrong and premature. Important chart recovery action is now needed to bring the idea back to a point of some credibility.

On the charts, the major equity indexes closed lower Friday with all but the DJT breaking near-term support levels. The depth of the declines left all but the DJT in near-term downtrends with the DJT neutral.

The action also took our speculation that the COMPQX and NDX were possibly forming inverted head & shoulders patterns off the table as the right shoulder levels were significantly lower than those on the left.

And while the SPX and DJI now appear to be in the latter stages of the same pattern, the failures of the COMPQX and NDX make them less predictive.

Market breadth weakened as well with the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ negative and below their 50 DMAs. No stochastic signals were generated.

The data finds the McClellan 1-Day OB/OS oscillators now oversold but not deeply so (All Exchange:  -65.9 NYSE: -69.82 NASDAQ: -61.9).

• The % of SPX issues trading above their 50 DMAs (contrarian indicator) dropped to 41%, remaining neutral.
• The Open Insider Buy/Sell Ratio lifted slightly to 51.1, also staying neutral.
• The detrended Rydex Ratio (contrarian indicator) slid to -0.91 and remains mildly bullish as the ETF traders are slightly more leveraged short.
• We remain focused on last week’s AAII Bear/Bull Ratio (contrarian indicator) that rose to a very bullish 1.62 as crowd fear intensified. Meanwhile the Investors Intelligence Bear/Bull Ratio (contrary indicator) was 32.1/35.8, remaining bullish. We reiterate such high levels of fear have frequently been upside catalysts over the years once the markets start to improve.
• The forward 12-month consensus earnings estimate from Bloomberg for the SPX rose to $236.43. Thus, the SPX forward multiple dropped 18.1 with the “rule of 20” finding ballpark fair value at 17.1.
• The SPX forward earnings yield is now 5.53%.
• The 10-year Treasury yield closed slightly lower at 2.91. We view resistance as 3.0%. Support is 2.5%.

In conclusion, chart improvements are now required to become more optimistic.

SPX: 4,254/4,403  DJI: 33,665/34,248   COMPQX: 12,839/13,2350  NDX: 13,265/13,832                         

DJT: 14,900/15,621  MID: 2,569/2,615  RTY: 1,930/1,990   VALUA: 9,084/9,363