CPFL & MAAD Summary for week of Jan.11, 2010

CPFL & MAAD Summary for week of Jan. 11, 2010

After nearly 10 months of strength in the stock market and a recovery of just over 70% from the March 2009 lows, questions have arisen as to the staying power of the historic rally as the number of “retail” bears has plummeted to 23% from a high of 65%. Simply put, there is nothing like higher prices to attract new buyers and prognosticators willing to extol the virtues of an uptrend.

But how long will the bulls continue to be right? To disregard developing negative, statistical divergences as prices reach new highs for the move could be foolish.

When viewing weekly charts since the March lows, one thing that immediately comes to mind is the possible countertrend nature of the rally as reflected in a classic A-B-C chart pattern where the “C” leg of the rally (currently under construction) tends to equal the “A” rally of the formation.


Using strict measurements of the pattern from the March low at 666.79 in the S&P 500 Index to the early June short-term high with another measurement from the July low at the beginning of the “C” leg advance to current price action, an upside price target in the S&P 500 measures to 1158.76. A coincident measurement of a possible “rising wedge” price pattern on the daily (short-term) cycle that has been developing since the end of October, suggests a possible price target on the upside in the S&P 500 Index to 1165.46. Thus a range of 1158 to 1165 into an intermediate-term high is possible.

Underscoring those upside price objectives on the intermediate cycle, short- and intermediate-term “momentum” (10-bar closing price input) peaked on both the A-B-C weekly chart and the “rising wedge” midway through their patterns, a classic momentum phenomenon, to underscore the validity of the price projections.

But subjective projections aside, it is the internal dynamics of the market we find revealing.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL (Weekly chart above, daily below) remains in a defined uptrend initiated after the early March lows (see definition below or click on link for further description, history, and computations of the indicator). No negative divergence, a longer term phenomenon in evidence in the fall of 2007 and earlier in 2000, has yet developed to suggest that options players remain committed to the uptrend. While admittedly the indicator can simply remain in synch with the market into an intermediate-term high, the CPFL ratio on both the minor and intermediate cycles can be a clue as to possible market vulnerability. Currently, since neither ratio is “overbought,” we must presume the odds favor buyers, at least until prices get into the vicinity of our upside price targets on the intermediate cycle or until CPFL breaks break its uptrend, even without a prescient, negative divergence.

McCurtain Most Actives Advance/Decline Line (MAAD)

On the other hand, MAAD (Daily Chart #2 and Weekly Chart #4, below) has remained anemic since the end of August 2009 on the intermediate cycle and since the third week of September 2009 on the minor cycle to suggest that “smart money” has been increasingly skeptical of the “C” leg of the rally and has been selling into strength (see definition of MAAD below or click on link for further description, history, and computations of the indicator).

This not to say big players have not been buying, but without new highs in the indicator, the odds continue to favor a negative market resolution in the direction of the negative MAAD.

What is most worrisome about MAAD is the fact that despite the powerful uptrend in the stock market since last march, MAAD on the intermediate cycle has shown little relative movement off of its lows. In fact, while the A-B-C component of the rally is still visible in MAAD (except to the extent the “C” leg component of the indicator did not make a new intermediate-term high), it wouldn’t take much selling on the intermediate cycle to force the indicator to new long-term lows.

New lows in MAAD could underscore the assumption by some market prognosticators that the rally over the past several months has been nothing but a sharp retracement rally in a major cycle bear market that will inevitably result in new lows. That, in Elliot Wave jargon, strength since last March could prove to be the Wave Four correction of a five-leg bear market.

Conclusion

Regardless of the longer-term consequences for the stock market, the likely completion of an A-B-C intermediate-term rally since the March 2009 lows and the failure of one of our key indicators, the Most Actives Advance/Decline Line (MAAD), suggests that the upward momentum of the market at this point may be in an endgame. In fact there has been evidence of significant distribution into price strength for the past three months via MAAD. The last time such an anomaly developed in that indicator was into the 2007 market highs and again into the 2000 market highs.

Nevertheless, given the fact that, the Call/Put Dollar Value Flow Line (CPFL) remains positive in an intermediate uptrend, we must allow for further market strength toward the upside price targets suggested earlier.

In sum, we suspect an intermediate-term high in the stock market will develop soon and somewhere in the vicinity of 1158 to 1165 in the S&P 500 Index, so long as MAAD remains weak and so long as both MAAD and CPFL develop short- to intermediate-term “overbought” readings. CPFL would also have to break to the downside and fracture its defined uptrend line if it does not lead the market with a negative divergence before the final price highs on the intermediate-term cycle.

McCurtain Call/Put Dollar Value Flow Line (CPFL): CPFL is a dollar-weighted, options-based, divergence indicator that is plotted against an underlying index or issue to determine the “internal” health of the referenced instrument on a daily or weekly basis. So long as the CPFL remains in synch with the issue, the extant trend, bullish or bearish, should continue. When a divergence develops to the extent the CPFL fails to “confirm” price action (for example: the market index makes a new high, but the CPFL does not), the longevity of the underlying trend in the index is in doubt. CPFL can be plotted against any financial instrument that reports call and put data.

McCurtain Most Actives Advance/Decline Line (MAAD): MAAD is an indicator that reflects the market bias of so-called “smart money” to the extent large investors are committing funds, or withdrawing them, as reflected in daily and weekly Most Actives, exchange-based statistics. So long as MAAD continues to move in tandem with the index it is plotted against (the S&P 500 Index for example), the extant market trend should remain intact. But if, for example, MAAD begins to falter as the index continues higher, it should be presumed that astute investors have begun to sell into strength.

Robert McCurtain is a technical analyst, market timer and private investor based in New York City. He can be reached at traderbob@nyc.rr.com.

Robert McCurtain’s CPFL and MAAD indicators, both described in past articles and in his recent I-Trade show presentation, have proven prescient and drawn a lot of attention by traders. Robert will provide a weekly update of both indicators and we will post the daily charts on futuresmag.com so check back to see what these important indicators are telling you.

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