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Let's Talk Negative Intraday Reversals and Bearish Engulfing Patterns

The scales may be tilting.
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The overall market picture appears to be deteriorating.

While no support levels were actually violated Tuesday, early morning market gains reversed with most of the major equity indices closing at or near their intraday lows, leaving some at critical near-term support levels. Meanwhile, a few indices have formed "bearish engulfing patterns."

Let's take a closer look.

On the Charts

All of the major indices closed lower Tuesday after giving up their early session gains. Internals were negative on the NYSE and Nasdaq as trading volumes rose from the prior session. All closed at or near their intraday lows.

While no support levels were violated on the charts, the Dow Jones Transports, S&P MidCap 400 Index (see below) and Russell 2000 all closed at what we view to be critical support. The fact that the Transports and MidCap formed "bearish engulfing patterns" (stock or index opens above the prior session open and closes below the prior session close) suggests said supports may be violated in the near future.

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Source: Worden

Cumulative breadth turned negative on the NYSE, joining the All Exchange and Nasdaq.

High "volume at price" (VAP) levels are seen as resistant on the S&P 500, Nasdaq Composite, Transports, MidCap and Value Line Arithmetic Index.

Data

The data remains largely neutral, including all of the one-day McClellan Overbought/Oversold Oscillators (All Exchange:-33.8 NYSE:-35.17 Nasdaq:-33.4).

The detrended Rydex Ratio (contrary indicator) remains neutral at -0.22 as is the percentage of S&P 500 stocks trading above their 50-day moving averages at 32.9.

Tuesday's AAII Bear/Bull Ratio (contrary indicator), however, turned more bullish as the crowd found bears outnumbering bulls 43.67/23.33. This is counterbalanced by the Investor's Intelligence Bear/Bull Ratio (contrary indicator) as investment advisors remained overly optimistic at 17.9/49.1.

The Open Insider Buy/Sell Ratio remains neutral at 63.6.

Valuation

Valuation continues to appear appealing, with the 12-month forward consensus earnings estimate from Bloomberg for the S&P 500 at $172.16 per share, leaving the forward P/E multiple at 16.7x while the "rule of twenty" finds fair value at 18.5x.

The 10-year Treasury yield is 1.49%.

The earnings yield stands at 6.0%.

Our Outlook

While we are maintaining our near-term "neutral" outlook for the major equity indices, chart trends and cumulative breadth suggest the scales are tilting to a more cautionary view.

At the time of publication, Ortmann had no positions in any securities mentioned.