Violations of Resistance Turn Most Index Charts Bullish

That’s what we were waiting for.

All the major equity indexes saw multiple violations of resistance Friday, which allows us to be more optimistic in our near-term outlook for equities as a whole. Indeed, the violations of resistance turned all but one of the charts into near-term bullish trends.

On the other side of the scale, while contrarian investor sentiment data still find the crowd bearish and thus a positive, the McClellan Oscillators moved into overbought territory as a result of the rally.

Thus, while our caveat of resistance violations has been achieved, we can now see buying weakness when available within an improving market structure.

Violations of Resistance Turn Most Charts Bullish 

Chart Source: Worden

On the charts, all the major equity indexes closed notably higher Friday with strong market internals.

All closed near their intraday highs with only the Nasdaq 100 (QQQ) unable to close above their respective resistance levels.

So, all the index charts except the Nasdaq 100, which is neutral, are in near-term bullish trends as a result of the rally.

Also, the DJIA, MidCap 400 and Value Line Arithmetic Index closed above their 50-day moving averages with the Value Line also lifting above its 200-day moving average.

Cumulative market breadth also improved with the advance/decline lines for the All Exchange, NYSE and Nasdaq now positive.

The MidCap 400 and Value Line index are overbought on their stochastic levels but have not generated bearish crossover signals thus far.

McClellan OB/OS Oscillators Move Into Overbought Territory

On the data front, the McClellan Overbought/Oversold Oscillators moved into overbought territory (All Exchange: +69.52 NYSE: +81.74 Nasdaq: +60.56). They are somewhat cautionary.

The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) rose to 65%, staying neutral.

The Open Insider Buy/Sell Ratio remains neutral as it slipped to 45.2%.

The detrended Rydex Ratio (contrarian indicator) rose to -1.81 as the leveraged ETF traders did some short-covering. It is now on a bullish signal versus very bullish yet remains a potential upside catalyst.

Last week’s AAII Bear/Bull Ratio (contrarian indicator) moved higher to 2.03 as bearish sentiment increased and on a very bullish signal.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) is mildly bullish at 33.3/37.5 as the number of bears rose and bulls declined.

S&P 500 Forward Valuation and Market Yields

The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 dipped to $227.78 per share. As such, its forward P/E multiple rose to 17.1x and remains at a premium to the “rule of 20” ballpark fair value of 16.4x.

The S&P’s forward earnings yield is 5.85%.

The 10-Year Treasury yield closed lower and below support at 3.57%. We view new support as 3.5% and resistance at 3.69%.

Market Outlook

Friday’s strong action dispersed some overhanging market clouds due to meeting our requirement for violations of resistance. Thus, we return to our prior view that weakness can now be bought, preferably near support levels.