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Market Flirts With Resistance, But Fails the Test in the End

More bullish stochastic crossovers were generated Tuesday.
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All eyes will obviously be watching the 2:00 Fed rate decision Wednesday. How will the markets respond?

The major equity indexes closed higher Tuesday but well off of their significantly higher gap opens in response to the lighter-than-expected CPI report. While several resistance levels were tested, none were violated at the closing bell. However, the charts did register more bullish stochastic crossover signals while one index shifted from neutral to positive.

Meanwhile, the data continue to be non-threatening. 

Given the current state of the charts and data, we remain buyers of weakness near support.

Several Charts Test Resistance but Fail at Close

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Chart Source: Worden

On the charts, all the major equity indexes closed higher Tuesday with positive market internals on higher volume. All closed near their intraday lows after the significantly higher gap opening levels.

While several resistance levels were tested, none were violated on a closing basis. However, the Nasdaq 100 (see above) managed to close back above its near-term uptrend line, thus joining the S&P 500 in a near-term uptrend as the balance remained neutral.

Cumulative market breadth was unchanged with the All Exchange, NYSE and Nasdaq advance/decline lines staying neutral.

Bullish signals were generated on the MidCap 400 and Value Line Arithmetic Index as both generated bullish stochastic crossover signals, following the same signals on the large-cap indexes from the previous session.

Drilling Down on the Data

The McClellan Overbought/Oversold Oscillators remain neutral (All Exchange: +6.03 NYSE: +8.16 Nasdaq: +5.39).

The percentage of S&P 500 issues trading above their 50-day moving averages (contrarian indicator) was unchanged at 81%, staying mildly bearish. 

The Open Insider Buy/Sell Ratio rose again to 64.8% as insiders did a little buying, staying neutral.

The detrended Rydex Ratio (contrarian indicator) rose slightly to -0.85 and remains mildly bullish.

This week's AAII Bear/Bull Ratio (contrarian indicator) moved higher to 1.57 as bearish sentiment increased and remains on a bullish signal.

The Investors Intelligence Bear/Bull Ratio (contrary indicator) saw a rise in bears and bulls, staying neutral at 32.9/43.8.

Estimates Continue Their Slide

The forward 12-month consensus earnings estimate from Bloomberg for the S&P 500 continued to slide down to $224.39 per share. As such, its forward P/E multiple stands at 17.9x and remains at a premium to the "rule of 20" ballpark fair value of 16.5x.

The S&P's forward earnings yield slipped to 5.58%.

The 10-Year Treasury yield closed lower at 3.5%. It is in a neutral trend with support at 3.29% and resistance at 3.69%, by our analysis.

Our Near-Term Outlook

We believe the only fly in the ointment currently is the valuation gap, while the charts and data continue to suggest that buying weakness near support is appropriate until evidence appears to suggest an alteration. The Fed announcement Wednesday afternoon will add more information to the mix.

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