Equity index indicator summary

Market Summary for week ending February 19, 2010

My wife is a terrific basketball player. When she practices at the gym or on the street hoops she invariably attracts a small crowd because she’s so good at it. She’s especially talented at shots made from just about anywhere on the key. Whenever I play with her I have to operate with a handicap--the ball. But that’s a whole other story….

So what does basketball have to do with the stock market? Imagine the initial arc of the basketball from the shooter’s hands to the basket as the intermediate rally that began after the March 2009 lows. And presume that the touch point when the ball slides into the hoop and net as the January 19, 2009 price highs. Next watch the ball as it drops to the surface and then bounces upward reflexively. That reflex bounce, we suspect, is what the market is undergoing currently. The primary shot has been made, but now the return is underway. The bounce is positive, but we suspect will have nowhere near the staying power of the larger rally that lasted nearly 10 months. And the odds are less than 50-50 that strength will result in new highs relative to those January prices. Ultimately, when the short-term bounce is over, we suspect prices will head lower because buyers will have expended their buying power.

Of course, our premise is that those January 19 index highs will hold and that new highs will not be produced if prices rally further from current levels. Could new intermediate-term highs evolve from here? It’s possible. Many market scenarios are possible. But we do not think such a scenario is probable. As we noted in last week’s commentary, not only is intermediate-term momentum now negative, effectively reversing the positive readings initiated last spring, but our larger cycle intermediate-term Trading Oscillator is also negative in all of those same indexes.

This leaves us with the suspicion that any short-term strength that develops in the sessions just ahead could prove to be a rally within the context of a developing intermediate-term negative.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD on the short-term cycle improved marginally last week with the Daily MAAD Ratio easing back above neutral (1.00) by fractions (daily and weekly charts below). What we would like to see in the sessions just ahead is for that ratio to work back to moderately overbought territory while the S & P 500 Index fails to exceed its Jan.19 peak at 1150.45 before reversing to negative on the minor cycle. Such action would satisfy the requirements of a reflex rally from short-term oversold conditions and set the market up for another decline within the context of a still negative intermediate-term cycle.

On that intermediate-term trend, MAAD remains within shooting range of its Mar. 6, 2009 statistical low (support) to underscore the fact that Smart Money has been selling, net, since late August/early September 2009. It’s not that this group of sophisticated investors is rousingly negative on the market, but is nonetheless a fact they have been selling slightly more than they have been buying over the past five months. That bias has left Weekly MAAD statistics in a vulnerable state. If new lows in the indicator are hit, such action would not bode well for the broad market since we cannot remember an instance in over 30 years of data collection for that indicator where a lingering unfavorable reading in MAAD did not eventually weigh heavily on stock market prices.

Click on charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Short-term CPFL numbers continue to hold not far below their statistical extremes created toward mid-December after also failing to break below the early December statistical lows (daily and weekly charts below). That action is contrary to what stock prices have done even though CPFL also fractured its intermediate-term uptrend that stretches back to those March lows.

Nonetheless, for us to become less bearish on the stock market, CPFL would have to rally back above its December highs. With the Daily CPFL Ratio now back toward neutral, the indicator could soon run out of time and steam on the upside. In addition, since the Weekly CPFL Ratio has not dipped into oversold territory, there is the lingering suggestion that any strength that develops could be occurring within a larger context. In the current framework that larger bias is negative.

Click on charts to enlarge

Conclusion

Equity prices made some headway last week, but we continue to suspect that any strength that develops will do so within the context of the next larger intermediate cycle negative. Both Daily MAAD and CPFL ratios have moved back toward neutral while neither ratio on the Weekly, or intermediate-term, has yet dipped into oversold territory. That combination could be an indication that once the short-term reflex rally has ended within the next several sessions, the larger downtrend could re-assert itself.

As a consequence, we suspect it would be good strategy to think in terms of liquidation of equities on strength rather than using strength to add to positions. Hanging in the balance is the major cycle viability of the uptrend that began in March 2009 that many continue to think is the initial rally in a new bull market. While we cannot preclude such optimism, there are a variety of reasons to exert extreme caution in this environment since there is still a possibility those March lows could be “tested” in earnest.

Below are the raw data for the indicators and definitions along with links to the original stories. Robert also describes these indicators in a recent I-Trade show presentation available online.

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

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

7-31-09

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

1-29-10

8

12

1-29-10

230439

706372

2-5-10

7

13

2-5-10

393336

868741

2-12-10

10

10

2-12-10

252621

233578

2-19-10

15

5

2-19-10

308216

96223

*Note: Unchanged issues are not counted.

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

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

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

1-18-10

Holiday

1-18-10

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

1-25-10

8

12

1-25-10

92904

140582

1-26-10

5

15

1-26-10

92447

152344

1-27-10

11

9

1-27-10

50997

76384

1-28-10

8

12

1-28-10

71376

145871

1-29-10

5

15

1-29-10

90158

163007

2-1-10

19

1

2-1-10

99416

150782

2-2-10

15

5

2-2-10

54523

84015

2-3-10

4

16

2-3-10

123257

79222

2-4-10

0

20

2-4-10

167554

245460

2-5-10

11

9

2-5-10

127615

253841

2-8-10

8

12

2-8-10

39731

74195

2-9-10

13

6

2-9-10

52146

97166

2-10-10

9

11

2-10-10

52253

90331

2-11-10

13

7

2-11-10

64247

47084

2-12-10

4

15

2-12-10

58269

61976

2-15-10

Holiday

2-15-10

Holiday

2-16-10

16

4

2-16-10

116077

60130

2-17-10

12

8

2-17-10

171751

50568

2-18-10

14

6

2-18-10

62422

42204

2-19-10

10

9

2-19-10

103190

51380

*Note: Unchanged issues 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 described the CPFL in the November 2008 issue of Futures: “Options redux: 25 years into the revolution.” The indicator can also be referenced in “The Encyclopedia of Technical Market Indicators,” Second Edition by Robert W. Colby, CMT. McGraw Hill. 2003.

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.

McCurtain described the MAAD in the June 2009 issue of Futures: “As smart money goes, so goes the market.”

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.

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