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The Technicals Are Giving Off This Cautious Signal

'Bearish engulfing patterns' are starting to emerge.

Oct 16, 2024, 11:00 AM EDT

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Despite the move down in most major indexes yesterday, support and trends were not violated, leaving near-term bullishness in place. 

But don't get too comfortable. Several charts have now developed cautionary “bearish engulfing patterns” and insiders are continuing to sell. In addition, forward valuation of the S&P based on Bloomberg’s forward 12-month earnings estimates remains extremely extended above ballpark fair value.

Charts and Technicals

On the charts, cumulative breadth remains bullish for the All Exchange, New York Stock Exchange and Nasdaq. But the charts for the S&P, Dow Jones industrials, Nasdaq and Nasdaq 100 formed “bearish engulfing patterns” that are near-term cautionary signals that appear when an index/stock opens above the prior session’s close and closed below the prior open. It suggests a shift in supply/demand to supply. All the stochastic levels are still overbought, but have not yet registered bearish crossover signals.

The data remains mixed but a bit cautionary:

  • The one-day McClellan overbought/oversold oscillators are still only neutral and non-threatening (All Exchange: -0.65; NYSE: -11.75; Nasdaq: 7.1).
  • The percentage of S&P 500 issues trading above their 50-day moving average -- a contrarian indicator -- slipped to 77% but is near the 80% level that has been a prescient signal prior to notable corrections.
  • The detrended Rydex Ratio, another contrarian indicator, is flat at 1.01 and is still on a mildly bearish signal.
  • Of note, the open insider buy/sell ratio dropped to 23.8 and is still bearish as they remain sellers.
  • In contrast, this week’s American Association of Individual Investors Bear/Bull Ratio, a contrarian indicator, turned bearish at 0.53 as the crowd is donning their party hats.
  • Another contrarian indicator, the Investors Intelligence Bear/Bull Ratio, also turned bearish, with bulls overwhelming bears at 21.3/55.7. They suggest there is an excess of bullish expectations currently.
  • Finally, valuation remains a concern. The 12-month consensus earnings estimate for the S&P from Bloomberg rose to $255.60. But its forward price-to-earnings of 22.8 remains well above the “rule of 20” ballpark fair value at 16.0. We believe this premium still presents some real risk.
  • Its earnings yield is 4.4%.

Treasury and the Buck

The 10-year Treasury yield dipped 4.04%. Support is 3.81% with resistance at 4.11%. Its near-term trend is bullish. The U.S. Dollar, via the Dollar Index Bullish fund UUP, closed higher and above resistance at $28.94. Its trend is bullish with support at $28.70 and resistance at $28.96.

Bottom Line

We are becoming more cautious about the near-term prospects for the equities markets. We await better buying opportunities.