Equity index indicator summary for week of Jan. 25

Market Summary for week ending Jan. 22, 2010

Last week the Dow Jones Industrial Average lost 436.67 points to 10172.98. The S&P 500 Index lost 44.27 to 1091.76. And the NASDAQ Composite Index lost 82.70 to 2205.29. All in all, not a bad week for sellers.


Of course the mainstream financial media attributed weakness to everything from “uncertainty” over the economy, one of their key catchphrases, to the more esoteric such as the failure of a major pharmaceutical company to find a cure for Yak Dung fever. Well, the latter may be a little poetic license on our part, but at some point we wouldn’t be surprised to see the attribution. Bottom line, the financial media ALWAYS has a reason for market action.


But the truth is, simply, that the markets declined last week because there were more sellers than buyers and in the financial marketplace there are only two things that count: where you buy ‘em and where you sell ‘em. Which leads us to one of the key rules for investment success: Knowing when to buy is important, but knowing when to sell is even more critical.


It is into that latter vein, knowing when to sell, that we have been delving over the past few weeks. We continue to think that the intermediate-term advance that began in March 2009 is long overdue for a correction. Last week’s losses were probably the beginning of that reversal. Not only did prices break below defined short-term uptrend lines (1127—S&P 500 Index and 10500—Dow 30), but prices are now poised to threaten trailing 10-week price channels at 1084—S&P 500 and 10140—Dow 30. Put another way, we suspect that the 10 1/2-month-old advance is probably over.


So what happens next?

The bullish camp would like to see at worst a modest pullback so that currently “overbought” readings could be eliminated. A “normal” correction on the order of 40% to 60% would put the Dow at 9025 to 8173 with the S&P 500 at 956 to 860. And notice that we highlighted the word “normal.” Unfortunately, nothing about the stock market over the past two years has been normal. The decline after the October 2007 highs was historic. The rally off of the March 2009 lows was unprecedented. This is not to say that what happens next will also shatter the record books, but it could offer some surprises.

The presumption for the past several months is that the decline that culminated in the spring 2009 lows was the entire bear market. That what should follow is the birth of a new bull with coincident improvement in the economy, the earnings, employment and so on. But what if strength over the past several months proves to be nothing but a reflex rally in a larger bear trend?

McCurtain Most Actives Advance/Decline Line (MAAD)

Our Most Actives Advance/Decline Line (MAAD) on the intermediate-cycle (see weekly chart below) has been suggesting since the end of August that “Smart Money” was become increasingly disenchanted with the stock market. It’s not that they have been outright negative, but after MAAD peaked in the third quarter of 2009, their buying enthusiasm faltered. Historically, that kind of action in MAAD has been an indication that big money has been lightening positions into strength. They did it prior to the 2000 market highs and they did it again just before the 2007 market peak. In fact, the short-term trend in MAAD (see Daily chart below) could break below statistical support put in place in early December with only a little more selling to underscore the ongoing internal weakness of the market.


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

But there is a bigger problem as reflected by MAAD. While we make no superior claims to expertise in Elliott Wave, it is nonetheless true that a classic bear market in Elliott jargon usually consists of five distinct parts: three primary down waves and two countertrend movements. Keeping in mind action in MAAD since October 2007, is it possible that strength since March 2009 was merely a Wave 4 countertrend rally and NOT the beginning of a new bull market? The nature of the “retracement” by MAAD off of the March lows and the lack of upside enthusiasm could be evidence of that possible downside potential. In fact, MAAD on the intermediate cycle (Chart #4) could sink to new major cycle lows with little further effort. Such action would not bode well for the broad market, given the fact the prices could be early in a corrective phase and would highlight the negative bias of big money.


On the flip side, if the market does pull back in earnest and if MAAD holds above its March 2009 lows, that action would be bullish. But of the two scenarios, we favor #1 over #2. Why? Because too many market players continue to believe we are in the early stages of a new bull market. And the crowd is rarely correct when it comes to the stock market.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL daily and weekly charts (below) are currently just a tad behind market action, but it is at the cusp of negativity to the extent just modestly more selling will cause the indicator to drop below a defined up trendline that extends back to the March 2009 lows. However, underscoring the potential for more negativity, the CPFL Ratio on the minor cycle has fallen into negative territory to hint at the potential for further negativity. Since that ratio variation of CPFL is also moving toward short-term “oversold” conditions, we cannot preclude the possibility for some “return action” in market prices after last week’s losses even though the odds are increasingly good that new highs on the intermediate-term cycle will not follow.

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

Last week CPFL Call/Put Dollar Volume statistics were nearly 4 to 1 on the downside. That negative bias is one of the highest unfavorable readings we have seen in some time and simply seconds the tentative nature of current market pricing.

Conclusion

In the wake of last week’s substantial stock market losses, the pendulum has moved further toward the seller’s camp and a negative resolution of the intermediate-term advance that began last March. While we had suggested earlier that “pure” upside measured moves could carry the S&P 500 Index into a range of from 1158 to 1165, the nature of the potential A-B-C rally since those March 2009 lows has continued to suggest prices have been in the final leg of the advance for several weeks. So holding on for a few more percentage points to realize an ephemeral price target could prove to be foolish.


If we are correct, an intermediate-term high was probably put in place via recent market highs. The intermediate-term will probably soon confirm a negative reversal. It is the extent to which that decline develops that will be the issue. A worst case scenario would call for new lows. A best case scenario would indicate a more “normal” pullback and then a resumption of the primary uptrend. In either case, prudence dictates a seller’s mentality in the weeks just ahead.

Below are the data for the last 30 days and weeks for the CPFL and MAAD indicators.

MAAD data for past 30 days* CPFL data for past 30 days

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

12-9-09

8

12

12-9-09

55176

76285

12-10-09

10

10

12-10-09

48812

59311

12-11-09

11

9

12-11-09

44795

55262

12-14-09

14

5

12-14-09

1180510

46201

12-15-09

9

11

12-15-09

419246

76445

12-16-09

11

8

12-16-09

346683

61700

12-17-09

6

13

12-17-09

72777

114014

12-18-09

14

6

12-18-09

42985

60681

12-21-09

13

7

12-21-09

44113

59849

12-22-09

9

10

12-22-09

56358

58155

12-23-09

10

10

12-23-09

22741

71849

12-24-09

14

5

12-24-09

23354

19796

12-25-09

Holiday

12-25-09

Holiday

12-28-09

12

8

12-28-09

38736

27223

12-29-09

6

14

12-29-09

25008

36891

12-30-09

4

15

12-30-09

38511

21322

12-31-09

8

12

12-31-09

23350

40527

1-1-10

Holiday

1-1-10

Holiday

1-4-10

17

3

1-4-10

38165

39249

1-5-10

15

5

1-5-10

41864

20718

1-6-10

12

8

1-6-10

55939

32820

1-7-10

13

7

1-7-10

40339

33414

1-8-10

9

11

1-8-10

55056

31126

1-11-10

11

9

1-11-10

74407

73960

1-12-10

4

16

1-12-10

45919

51588

1-13-10

13

7

1-13-10

71500

56743

1-14-10

10

10

1-14-10

44095

36133

1-15-10

7

13

1-15-10

52195

72640

1-18-20

Holiday

Holiday

1-19-10

12

8

1-19-10

88318

51480

1-20-10

6

14

1-20-10

47829

74153

1-21-10

6

16

1-21-10

41110

141521

1-22-10

4

16

1-22-10

89311

276857

*Note: Unchanged issues are not counted.

MAAD data for past 30 Weeks* CPFL data for past 30 Weeks

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

7-3-09

4

16

7-3-09

172993

299365

7-10-09

2

18

7-10-09

112080

283091

7-17-09

16

4

7-17-09

1392618

93906

7-24-09

13

7

7-24-09

723868

307762

7-31-09

15

5

7-31-09

408723

227672

8-7-09

18

2

8-7-09

1004041

164326

8-14-09

10

10

8-14-09

272564

163886

8-21-09

15

5

8-21-09

1393327

120157

8-28-09

13

7

8-28-09

432501

191355

9-4-09

5

15

9-4-09

365834

179305

9-11-09

11

9

9-11-09

359980

126755

9-18-09

13

7

9-18-09

740103

210711

9-25-09

8

12

9-25-09

272801

300788

10-2-09

4

16

10-2-09

203911

461590

10-9-09

16

4

10-9-09

472452

118078

10-16-09

8

12

10-16-09

876199

125762

10-23-09

6

14

10-23-09

574031

238407

10-30-09

4

16

10-30-09

299062

898417

11-6-09

10

10

11-6-09

284004

210925

11-13-09

13

7

11-13-09

347029

147219

11-20-09

11

9

11-20-09

393221

229286

11-27-09

10

10

11-27-09

113184

195078

12-4-09

13

7

12-4-09

380418

272125

12-11-09

9

11

12-11-09

698727

204986

12-18-09

9

11

12-18-09

1879248

275057

12-25-09

14

6

12-25-09

81225

121215

1-1-10

4

16

1-1-10

58023

105653

1-8-10

17

3

1-8-10

196161

90275

1-15-10

5

15

1-15-10

171920

238731

1-22-10

3

17

1-22-10

166423

728001

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

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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