Equity index indicator summary for week of Jan. 18

Market Summary for week ending Jan. 15, 2010

Some sage once said that soldiers in combat experience “periods of pure boredom interspersed with moments of abject terror.” Some might say the same happens with the stock market. They might also argue that it’s the “terror” part that’s the really fun part, but perhaps only if you are either a talented short seller or a masochist. Nonetheless, on the boredom/terror spectrum it might be safe to say that market action over the past few months has been a lot like watching paint drying in a potential combat situation.


Since the early November lows all of the major indexes have been locked in relatively narrow ranges with a slight upward bias. In our Nov. 8 update we alluded to the fact the minor cycle chart pattern could be a classic “ascending wedge” which, historically, has downside implications. But to confirm a reversal of that trend we would need to see the S&P 500 Index sink below its two-month-old short-term uptrend line that was last plotted just a notch above 1,127 (10,500 in the Dow). And then the intermediate-term uptrend that was initiated after the March 6, 2009 low (666.79 in the S&P 500: 6,469.95 in the Dow), would have to decline below the lower edge of a trailing 10-week price “channel” last plotted near 1072 (10,080 in the Dow).


But negativity on the minor and intermediate cycle would probably not lead to a reversal of a now positive, major cycle uptrend. In fact, prices could sell all the way down toward 850 in the S&P 500 Index before the long-term trend might be in jeopardy.

So for the moment and until the markets provide a definitive trend change on the intermediate cycle from positive to negative, we are left with what we “know” and what we “think.”


In the former category, we “know” the short-, intermediate-term, and major cycle trends remain positive. But internal indicators (see MAAD below) and momentum, which peaked back in May on the intermediate cycle continue to hint the 10-month-old uptrend is getting long in the tooth. CPFL remains in an uptrend, but it wouldn’t take much for that indicator to fracture a defined uptrend to underscore a reversal to negative.


On the “think” side, we suspect that when the intermediate cycle does reverse to negative, there will be just enough “terror” injected into the decline to rouse those who have been somewhat bored of late. But that selling will in all likelihood not reverse the positive, major cycle trend. More time would be required before negativity develops on the long-term and there would likely be a re-test of impending intermediate-term highs in the interim.


We also think that the market is working out an end to the “C” leg of an A-B-C rally that has been developing since the March 2009 lows: a big “A” leg up, a small retracement (June/July) and then the final “C”. Simply put, we do not think time is on the side of this intermediate-term advance.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Little has transpired in CPFL (Call/Put $Value Flow Line) over the past five trading sessions except that time has been used up as indicator plots have moved closer to the rising uptrend line that extends back to the March 2009 lows. When that defined uptrend line is terminated either with coincident weakness in prices or preliminary and negative divergent action in the indicator prior to price weakness, the extent to which CPFL declines before an intermediate-term reversal develops will determine the staying power of the larger major cycle uptrend. For now we suspect the March 2009 lows will not be seriously threatened by CPFL.

Below charts track the daily and weekly CPFL (click on charts to show full screen)

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD continues to underscore the fact that “smart money” has been selling, net, into strength since the end of August. In 2007 MAAD peaked nearly three months before the broad market. In 2000, and after the market had been in an uptrend since the 1994 lows, MAAD preceded the market with smart money selling by nearly 10 months. So it’s important to remember that the performance of MAAD is relative: the length of its divergent action can also be in relation to the length of the preceding advance, or decline. The important thing to remember is that if MAAD begins to diverge from extant price action, the smart money is saying something.


Currently the “bigs” are talking again after being wholeheartedly enthusiastic about stocks from the March 2009 lows until the week of Aug.28, 2009, or for nearly six months. Since that August peak the S&P 500 Index has rallied another 10%, hardly a move to assume substantially greater market risk if, indeed, the market is in the last stages of an advance that could eliminate that plodding 10% in a week of concerted selling. Put another way, the prudent investor would be advised not to bet against MAAD at this juncture unless it makes a new intermediate-term high, a highly unlikely possibility.

Below charts track the daily and weekly MAAD (click on charts to show full screen)




Conclusion

While we cannot preclude further marginal gains toward 1,158 to 1,165 in the S&P 500 (as per our commentary last week), the odds continue to favor the completion of an intermediate-term uptrend and a correction of the advance that began 10 months ago. While selling will in all likelihood not result in a serious threat to those March, major cycle lows, we also need to caution that the statistical damage that was incurred by the market in terms of huge downside volume and price deterioration in the 2008 decline suggests that while strength since early 2009 has been historic, it may also not be sustainable on the longer term.

Below tables show the last 30 inputs for the weekly CPFL and MAAD

MAAD data for past 30 Weeks*

Date

NYSE Adv

NYSE Dec

6-26-09

3

16

7-3-09

4

16

7-10-09

2

18

7-17-09

16

4

7-24-09

13

7

7-31-09

15

5

8-7-09

18

2

8-14-09

10

10

8-21-09

15

5

8-28-09

13

7

9-4-09

5

15

9-11-09

11

9

9-18-09

13

7

9-25-09

8

12

10-2-09

4

16

10-9-09

16

4

10-16-09

8

12

10-23-09

6

14

10-30-09

4

16

11-6-09

10

10

11-13-09

13

7

11-20-09

11

9

11-27-09

10

10

12-4-09

13

7

12-11-09

9

11

12-18-09

9

11

12-25-09

14

6

1-1-10

4

16

1-8-10

17

3

1-15-10

5

15

*Note: All data is for week ending on Friday
even though ending date may be a holiday.
Unchanged issues are not counted.


CPFL data for past 30 Weeks*

Date

OEX Call $Volume

OEX Put $Volume

6-26-09

339174

146071

7-3-09

172993

299365

7-10-09

112080

283091

7-17-09

1392618

93906

7-24-09

723868

307762

7-31-09

408723

227672

8-7-09

1004041

164326

8-14-09

272564

163886

8-21-09

1393327

120157

8-28-09

432501

191355

9-4-09

365834

179305

9-11-09

359980

126755

9-18-09

740103

210711

9-25-09

272801

300788

10-2-09

203911

461590

10-9-09

472452

118078

10-16-09

876199

125762

10-23-09

574031

238407

10-30-09

299062

898417

11-6-09

284004

210925

11-13-09

347029

147219

11-20-09

393221

229286

11-27-09

113184

195078

12-4-09

380418

272125

12-11-09

698727

204986

12-18-09

1879248

275057

12-25-09

81225

121215

1-1-10

58023

105653

1-8-10

196161

90275

1-15-10

171920

238731

*Note: All data is for week ending on Friday
even though ending date may be a holiday.

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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