“Hammers” Suggest Possible Bottom

McClellan OB/OS Oscillators Remain Oversold

Opinion

The bulk of the indexes closed higher Friday with the one exception of the DJT. Internals were positive on the NYSE and NASDAQ on heavy trading volumes. The charts saw possible “hammer” formations on all of the indexes implying the potential for a near term bottom having been put in place. However, current trends remain negative. The data is somewhat encouraging with all of the McClellan OB/OS Oscillators remaining in oversold conditions. Yet while we suspect lows may have been registered, we would need to see violations of the current downtrends and/or resistance levels to alter the current negative status of the charts.

• On the charts, all but the DJT (page 4) closed higher Friday with positive internals on heavy volume. While no current downtrends were violated, we find some encouragement as, in our opinion, virtually all of the indexes saw possible “hammer bottoms” formed. “Hammer bottoms” occur at the end of a protracted downtrend when, on heavy trading volume, an index or stock opens, trades significantly lower and then rallies by the end of the session all the way back to or above its opening price. In traditional technical analysis, this action is interpreted as a final washout of selling pressure followed by an increase in buying demand sufficient to erase the prior losses. We believe the chart patterns registered Friday fit every requirement of the theory. We would also note the % of SPX stocks trading above their 50 DMAs sank to only 17.5%. Similar to the hammer comments, extreme lows in the % 50 have tended to coincide with market lows.

• The McClellan OB/OS Oscillators remain oversold in spite of Friday’s rally (All Exchange:-103.36/-68.17 NYSE:-145.56/-63.76 NASDAQ:-96.32/-51.82) suggesting, by this measure, some fuel is still in the tank to drive prices higher. The Equity Put/Call Ratio (0.68) is neutral with the Total (1.31) and OEX Put/Call Ratio (1.58) counterbalancing with bullish and bearish signals respectively. Forward earnings consensus estimates for the SPX via Bloomberg rose to $157.30 leaving a16.7 forward multiple, down from the pre correction 18.7 level.

• In conclusion, while we suspect the worst may be over, we need to see violations of resistance and trend to turn more positive.

• Forward 12-month earnings estimates for the SPX from Bloomberg are $157.30, leaving a 6.1 forward earnings yield on a 16.7 forward multiple.
• SPX: 2,565/2,748
• DJI: 23,522/24,875
• Nasdaq: 6,723/7,102
• NDX: 6,237/6,661
• DJT: 9,975/10,582
• MID: 1,772/1,869
• Russell: 1,450/1,510
• VALUA: 5,765/6,044