Here’s Where the Charts and Data Say the Market Is Headed Next

While it is a bit early to have a high degree of confidence that the recent market correction has been completed, Tuesday’s action, in our opinion, suggests it has become more likely.

Let’s take a deep dive in to the latest charts and data.

On the Charts

Source: Worden

All the major equity indexes closed higher Tuesday with positive internals. The rally left each index near its highs of the day, resulting in some positive technical events being registered.

Both the S&P 500 (see above) and DJIA closed above their near-term downtrend lines and are now neutral while the S&P also closed above its 50-day moving average.

The Nasdaq Composite, Nasdaq 100 and value Line Arithmetic Index all closed above resistance with the Nasdaq 100 moving above its 50 DMA. However, they were unable to violate their downtrends.

As such, we find the S&P 500 and DJIA in neutral short-term trends and the rest still negative.

Cumulative market breadth saw some slight improvement as well with the A/Ds for the All Exchange and NYSE now neutral versus negative. Yet the Nasdaq’s A/D is still in a downtrend.

No stochastic signals were generated.

Market Data

Tuesday’s rally pushed the oversold McClellan 1-Day Overbought/Oversold Oscillators back into neutral territory (All Exchange: -8.26 NYSE: -12.26 Nasdaq: -6.18) after their oversold conditions that suggested Tuesday’s rally.

The percentage of S&P 500 issues trading above their 50-day moving averages rose to 52% and remains neutral.

The Open Insider Buy/Sell Ratio dipped slightly to 57.0 yet remains neutral.

The detrended Rydex Ratio (contrarian indicator), measuring the action of the leveraged ETF traders, up ticked to 0.77, staying neutral as well.

This week’s contrarian AAII Bear/Bull Ratio rose to 1.38 as the crowd became more nervous and continues its bullish implications. Bears now widely outnumber bulls.

The Investors Intelligence Bear/Bull Ratio (25.3/39.8) (contrary indicator) is still neutral but the number of bearish advisors rose significantly to 44.2% versus its prior 25.3% level. So, the sentiment indicators are more encouraging as well.

Valuation and Yields

The forward 12-month consensus earnings estimate for the S&P 500 from Bloomberg dipped to $216.16 per share. As such, the S&P’s forward P/E multiple dropped to 21.5x with the “rule of 20” still finding fair value at approximately 18.5x.

The S&P’s forward earnings yield is 4.65%.

The 10-Year Treasury yield rose to 1.49%. We view support at 1.38/% and resistance at 1.58%.

Near-Term Outlook

While Tuesday’s action was encouraging regarding a possible completion of recent volatility, it is still a bit too early to go out on that limb. Nonetheless, we remain “neutral/positive” in our near-term macro-outlook for equities.

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