Charts Say We Are Not Out of the Woods Yet

 | May 30, 2018 | 11:42 AM EDT
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Despite the positive action Wednesday, the charts and data have turned to a point that warrants changing our near-term outlook for the major equity indices.

While no support levels were violated, a number of the charts saw various forms of warning signals. Meanwhile, the data did not see enough of a shift that would suggest that an important reversal of the weakness is at hand.

As such our near-term outlook for the major equity indexes has been lowered to "neutral" from "neutral/positive."

Now let's take a closer look.

What Happened on the Charts?

All of the indices closed lower Tuesday with negative internals on heavier trading volume. No support levels were violated. However, The Dow Jones Industrial Average (see below) closed below its 50-day moving average while the Nasdaq 100 , Dow Transports and Value Line Arithmetic Index closed below their short-term uptrend lines, turning their trends from positive to neutral.

Source: Worden

We also saw bearish stochastic crossover signals registered on the Nasdaq Composite (see below) and Dow Transports. None of the stochastic levels dipped into oversold territory at this point, suggesting there may be more weakness ahead.

Only the Nasdaq Composite and Russell 2000 Index remain in near-term uptrends.

Source: Worden

The cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ have turned neutral from positive but remain above their 50-day moving averages.

What's the Data Say?

The data is almost entirely neutral. All of the McClellan Overbought/Oversold Oscillators are still neutral (All Exchange:-9.86/+36.65 NYSE:-14.4/+37.74 NASDAQ:-6.69/+37.69).

Given the degree of Tuesday's weakness, and similar to the stochastic readings, we are somewhat surprised that oversold levels were not achieved. Like the stochastics, they suggest there may be more downside to come.

The Equity Put/Call (0.65), OEX P/C (1.27), OpenIsider Buy/Sell Ratio (36.5) and new AAII Bear/Bull Ratio (23.33/35.67) are all neutral. Only the Total P/C (contrary indicator) is bullish at 1.09.

S&P 500 Valuation

Valuation did improve a bit as a result of Tuesday's selloff. The forward P/E multiple for the S&P 500 based on 12-month consensus earnings estimates from Bloomberg of $163.23 per share is 16.5x, versus the "rule of 20" implied fair value of 17.2x.

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