Charts See Multiple Failures in This Market

 | May 18, 2017 | 9:24 AM EDT
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All of the indexes closed lower yesterday, with broadly negative internals on both exchanges as volumes rose from the prior session. Multiple failures were seen on the charts, including violations of support and moving averages.

The data are a mixed bag, but not heavily suggestive that near-term relief might be expected. As such and due to the chart breaks, we now find enough of a shift in the weight of the evidence to alter our near-term outlook for the major equity indexes from "neutral" to "negative".

On the charts, all of the indexes closed notably lower yesterday, with very poor internals as volumes lifted from the prior session. Virtually every index broke below its near-term support level (adjusted below).

The S&P 500, Dow Jones Industrials, S&P Midcap 400 Index, Russell 2000, and Value Line Arithmetic Index closed below their 50-day moving averages as well, leaving the Nasdaq as the only index trading above that mark.

Also, the Nasdaq closed below its short-term uptrend line while flashing a "bearish stochastic crossover" signal, while the Dow Jones Transport closed below its 150-day moving average.

We would also note the S&P 500, S&P Midcap 400 Index and Value Line Arithmetic Index all closed very close to their new support levels, which would likely be violated on any further weakness. As well, we now find the advance/decline lines for the exchanges have turned negative.

The data are mixed. The one-day McClellan OB/OS Oscillators dropped enough to register mildly oversold levels, although they are far from levels strongly suggestive of a bounce (All Exchange:-52.34/+1.22 NYSE:-53.89/+19.17 NASDAQ:-54.37/+8.47).

The 21-day readings remain neutral. And while the Total and Equity Put/Call Ratios (contrary indicators) show the crowd has grown nervous and long puts at 1.09 and 0.73 respectively, the pros are neutral via the OEX Put/Call Ratio. The Open Insider Buy/Sell Ratio is also a neutral 48.4.

Unfortunately, the Rydex Ratio (contrary indicator) still finds the leveraged ETF traders very leveraged long at 70.4, having yet to look for the exits.

In conclusion, given the breaks in the charts combined with a lack of strong positive signals from the data while forward valuation of the SPX remains near historic highs, we believe it appropriate to shift our near-term outlook for the major equity indexes from "neutral" to "negative".

Forward 12-month earnings estimates for the SPX from IBES of $134.56 leave a 5.63% forward earnings yield on a 17.6x forward multiple, near a decade high.

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