Time for a breakout?
While there was no breach of resistance or the established trend on Friday’s rally, some encouraging patterns are emerging on the Nasdaq Composite and Nasdaq 100 (see below).
Meanwhile, the Rydex Ratio turned very positive as leveraged ETF traders bet more on recent market strength. Additionally, valuations through the “rule of 20” continue to show the market is trading at a discount to forward 12-month earnings for the S&P 500.
What is happening on the chart
All major stock indexes closed higher on Friday and near session highs with positive internals on the NYSE and Nasdaq. Despite the strength, however, no one has been able to breach the resistance, leaving all within the short term neutral trend.
We note that the Nasdaq Composite (see above) and the Nasdaq 100 appear to be forming “ascending triangles” patterns that suggest demand is increasing after each drop and if resistance is breached, strength will continue to be maintained.
Market breadth returns to neutral from negative to cumulative bullish/bearish lines on All Exchange, NYSE and Nasdaq.
All random signals are neutral.
Major sentiment indicator
McClellan’s OB/OS Oscillators remain neutral (All exchanges: +20.47 NYSE: +19.97 Nasdaq: +21.68).
The percentage of S&P 500 issues trading above their 50-day moving average (contrast indicator) turned neutral, rising to 26%.
Open Insider Buy/Sell ratio rose to 61.4, also holding neutral.
The Rydex ratio (contrast indicator) tends to drop to -2.33 and is bullish as leveraged ETF traders widen their leveraged short-term exposure.
Last week’s AAII Bear/Bull ratio (contrast indicator) shows the crowd is very scared, at 2.63 and very optimistic.
The Bear/Bull ratio (contrarian indicator) has seen a decline for the bulls and is being very bullish at 40.3/30.5. Three times in the past decade, such results have marked market lows, mostly notable rallies.
Discount trading market
The consensus earnings estimate for the next 12 months from Bloomberg for the S&P 500 fell to $238.63 per share. Thus, the S&P’s forward P/E ratio is 16.2 times and the “rule of 20” fair value discount is 17.1 times.
The S&P forward earnings yield is 6.18%.
The yield on the 10-year Treasury note closed lower at 2.96%. We think the support is at 2.8% and the resistance is at 3.15%.
Our short-term market outlook
We are being more encouraged about the short-term market outlook. Huge investor fear combined with more attractive valuations as breadth improves while the Nasdaq Composite and Nasdaq 100 are seeing increasing demand with each subsequent drop, suggesting upside potential. analysis on their side, implying that the scales are considered for more short-term progress.
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