Stochastics Overbought

Possible Tests of Support

Opinion

The indexes closed mixed Tuesday with positive internals on the NYSE while NASDAQ internals were negative. Volumes declined on both exchanges from the prior session. No major technical events occurred on the charts although stochastic levels have become overbought. The data is quite mixed and yielding no dominant directional implications. Given the weak futures this morning combined with stochastic levels, we are of the opinion that tests of support levels may be forthcoming. However, unless said supports are broken, we are maintaining our near term “neutral/positive” outlook for the major equity indexes.

• On the charts, the indexes had mixed results yesterday. The SPX, DJI, COMPQX, and NDX closed higher while the DJT, MID, RTY and VALUA posted losses. The SPX (page 2) did manage to close above resistance while the DJT (page 4) closed back below its 50 DMA. We would note the advances on the COMPQX and NDX occurred with negative internals, masking weak breadth. What stands out for us this morning is the condition of the stochastic levels that are now overbought across the board with the exception of the DJT. For the greater part of this year, overbought stochastics have typically been followed by pauses or retracements of the preceding gains. As such, when combined with the weak futures this morning, we suspect tests of support levels on the charts may be forthcoming.

• The data is mixed. The bulk of the McClellan OB/OS Oscillators are neutral (All Exchange:+23.15/+35.34 NYSE:+37.8/+51.26 NASDAQ:+12.3/+21.54). The bullish signals from the Total (0.98) and Equity (0.74) Put/Call Ratios (contrary indicators) are being counter balanced by a very bearish 2.13 OEX Put./Call Ratio as the pros are loaded with puts. The OpenInsider Buy/Sell Ratio (39.9) and detrended Rydex Ratio (0.91) are both neutral. Valuation finds consensus forward 12-month earnings estimates for the SPX of $167.41 leaving the forward 12-month p/e for the SPX at 16.7 versus the “rule of 20” implied fair value at a 17.1 multiple.

• In conclusion, while we suspect some tests of support may be probable, unless supports are broken we are maintaining our “neutral/positive” near term outlook for the major equity indexes.
• SPX: 2,741/2,813
• DJI: 24,300/25,163
• NASDAQ: 7,597/7,797
• NDX: 7,100/7,306
• DJT: 10,436/10,771
• MID: 1,968/NA
• Russell: 1,654/1,712
• VALUA: 6,365/NA