Market Forecast Shows Clouds Forming on the Charts

 | Jun 22, 2018 | 12:00 PM EDT
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While the markets are experiencing a bounce Friday after Thursday's decline, chart developments and overly bullish sentiment levels suggest some deterioration and need for caution.

Cloudy With a Chance of Weakness

On the charts, all of the indices closed lower Thursday with negative internals on the NYSE and Nasdaq as volumes dipped below prior levels on the NYSE but rose on the Nasdaq.

Indeed, Thursday's stock market weakness was sufficient to cast several clouds for the near term as follows:

1. Most importantly, the Dow Jones Industrial Average (see below) closed below both near-term support and its 50-day moving average, turning its short-term trend to negative from neutral.

Source: Worden

2. The Nasdaq Composite (see below) closed below its short-term uptrend line for the first time since the beginning of May while also generating a "bearish stochastic crossover signal."

3. Both the Nasdaq 100 and Value Line Arithmetic Index registered "bearish stochastic crossover signals" as well.

4. Regarding near-term trends, the DJIA is now negative with the S&P 500 and Nasdaq Composite neutral. The rest remain in near term uptrends.

Source: Worden

5. Overall breadth weakened with the cumulative advance/decline lines for the All Exchange, NYSE and NASDAQ reversing back to neutral but above their 50 DMAs.

Data Continues to Be Mixed

All of the McClellan OB/OS Oscillators remain neutral (All Exchange:+30.12/-33.0 NYSE:+39.03/-35.72 NASDAQ:+26.66/-30.12). The Equity Put/Call Ratio is neutral as well at 0.56.

The Total P/C (contrary indicator) at 1.03 and OEX P/C, finding the pros flipping from puts yesterday to calls, at 0.96, suggest some bounce potential. However, the Rydex Ratio (contrary indicator) still finds the leveraged ETF traders heavily leveraged long at 1.33.

Valuation

With forward 12-month consensus earnings estimates for the S&P 500 from Bloomberg of $163.37 per share, the index's 16.8x P/E multiple compares to the "rule of 20" implied fair value of 17.1x.

Our Outlook

A number of cautionary signals have appeared on the charts but not quite enough to alter our near-term "neutral" outlook for the major equity indices.

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