Chart Trends Are Evenly Split, but Current Market Action Could Tip the Scales

 | May 23, 2018 | 11:02 AM EDT
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Wednesday's action in the stock market could tell us a lot.

While stocks are trading lower Wednesday morning, the current state of the charts and data suggest we maintain our near-term "neutral/positive" outlook for the major equity indices, with the "neutral" aspect largely due to stochastic levels and valuation. However, recent action suggests a more "neutral" outlook may be on the horizon.

Index Charts

On the charts, all of the indices closed lower Tuesday, giving up early gains to close at or near their intraday lows. The NYSE saw negative internals on higher volume while the NASDAQ's breadth was negative but up/down volume positive.

Source: Worden

Two technical events occurred that are worth noting. The Nasdaq Composite Index (see above) gave a bearish stochastic crossover signal, joining the Nasdaq 100, which did so a few days ago. Meanwhile, the S&P MidCap 400 Index (see below) closed below its short-term uptrend line, turning its trend from positive to neutral.

Source: Worden

So, we now find the indices evenly split regarding trend: The S&P 500, Dow Jones Industrial Average, Nasdaq Composite and MidCap 400 are in neutral sideways patterns, while the rest remain in short-term uptrends.

The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ remain positive and above their 50-day moving averages. Still, we would repeat our observation that the overbought stochastic levels may present some headwinds.

Should we see further bearish crossovers, the outlook would likely dim for the near term. Only two of the eight indices have done so at this point.

Data

The data is now entirely neutral including all of the McClellan Overbought/Oversold Oscillators (All Exchange:+26.48/+40.69 NYSE:+24.32/+46.18 NASDAQ:+30.48/+38.07).

The Equity (0.58), Total (0.83) and OEX (1.21) put/call ratios are also neutral as is the OpenInsider Buy/Sell Ratio at 38.1.

Valuation

The forward P/E multiple for the S&P 500 based on 12-month consensus earnings estimates from Bloomberg of $163.21 per share is 16.7x, versus the "rule of 20" implied fair value of 16.9x.

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