Equity index indicator summary

Market Summary for week ending April 2, 2010

Bear Trap: Occurs during a bear market reversal when short sellers believe the market will sink back to its declining ways. If the market continues to rise, short sellers get trapped and are forced to cover their positions at higher prices. (Source: Investopedia)

Back in the 1980s as the stock market was entering a new and massive bull run, there was a classic cartoon published that could be used during any ongoing bull move — intermediate or major. Two bears (of the Smokey the Bear variety with a strong Wall Street psychological profile) found themselves, much to their chagrin, in a circus. Racing around in a circle in a motorcycle with a sidecar and tethered to a circus performer with a long rope, one bear turns to the other and says, “’Looks like a trap,’ I said. ‘Nonsense,’ you said. ‘No one would set a trap way out here in the woods,’ you said.’”

Put another way, disbelief is one of the characteristics of an advance following a period of sustained market weakness. Such was the case into the 1982 stock market lows and the new bull uptrend. And similarly, after 13 months of buying, there is still doubt as to how far this bull move will continue. In one camp are the bears who, like our friends in the circus, have maintained their disbelief and have paid the price. On the other hand, there are bulls who range from those suspecting strength is a powerful countertrend rally to those certain a new bullish paradigm has been entered.

Of course, only time will determine where on opinion continuum recent strength will fall and whether strength since March 2009 proves to be merely a powerful countertrend rally or more. But one thing is certain: to have maintained a short seller’s stance over the past year was definitely a position that has proven unhealthy to profits.

So what’s to be done now?

All market cycles operate within a context. The long-term cycle functions in relation to the massive, long-term moves that preceded the current environment. The intermediate trend functions within the context of the major cycle and the minor cycle within the framework of the intermediate trend. Currently, the short- and intermediate-term cycles remain positive within the context of a major cycle positive.

And while prices of the major indexes have all demonstrated strong gains since March 2009, only the Value Line Arithmetic Index ($VAY) has rallied to a new all-time high. The Dow 30, 20, and 15, the S&P 500 Index, OEX 100, Russell 2000, and the NASDAQ Composite have not. Is the solo move by the Value Line Index in the face of failure by the other bellwether indexes still justification to suggest the bull market will continue? The bears would say no, probably. The bulls would say yes, probably.

The fact is that so long as market breadth remains positive and so long as short- to intermediate-term “overbought” statistics continue to “correct” from upside extremes to “oversold” conditions, as was the case with our intermediate-term Oscillator from late January to early February, the bull will remain in charge. In addition, both the Call/Put $Value Flow Line (CPFL) and the Most Actives Advance/Decline Line (MAAD) Ratios on the minor cycle have corrected recent short-term “overbought” conditions by moving into “oversold” territory. That corrective action occurred without coincident market weakness. In other words, both indicators “reset.”

How long will such corrective actions continue? The easy answer is “until they don’t” or until significant negative divergences develop to suggest a longer-term top. But for the moment even though momentum on both the short and intermediate-term cycles continues to exhibit negativity to the extent neither cycle has confirmed new market highs and even though major cycle momentum is at its highest levels since 1920, so long as prices do not break below initial and key price channel support points (1155 — S&P 500 daily and 1070 — S&P 500 weekly) and our intermediate and major cycle Timing Oscillator remains favorable, the uptrend will remain intact and the two bears in the sidecar will continue to race around in circles having been frustrated yet again.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD on the short-term cycle rallied to a new minor cycle high last week. But while larger and more important weekly data confirmed directional strength, MAAD on the intermediate-term cycle has yet to second those new highs established by the more volatile daily data. Admittedly, it wouldn’t take much more general market strength for weekly MAAD data to create a new high and its best levels since Aug. 28, 2009 when MAAD peaked for the first time following the March 2009 lows.

Now that short-term oversold statistics in the indicator have substantially reversed recent “overbought” conditions and were last poised toward “oversold” territory, it is quite possible that more market strength could force the indicator into new high territory on the more important intermediate cycle. Of course, the fact that such action has been a struggle only underscores our suggestion that the so-called Smart Money has remained less enthusiastic about market strength than index prices for the past six months. Nonetheless, lest we also get stuck like our two friends in the circus, it is important, as always, to remain on the side of the extant trends that are currently still positive on all cycles, short, intermediate, and major.

Click on chart to enlarge


McCurtain Call/Put Dollar Value Flow Line (CPFL)


The Call/Put Dollar Value Flow Line rallied to new short- and intermediate-term highs last week and the best levels, net, since the stock market began rallying following the spring 2009 lows. Simply put, options players remain optimistic about market prospects lacking any negative or divergent action in the indicator.

The Daily CPFL Ratio has moved back into a zone of opportunity from “overbought” conditions that prevailed in late March with the weekly CPFL Ratio data acting similarly.

Click on chart to enlarge

Conclusion

The proof of any market move is the underlying direction of prices, bull or bear, regardless of the bias of individual indicators that are no more than possible barometers of future price action. In that context net bias of stock market action for the past 13 months, aside from more pronounced short-term pullbacks in June/July of 2009 and late January/early February 2010, has been up.

At some point the larger uptrend will end. If history is a guide, the eventual top will be preceded by a series of non-confirmations. Such was the case into the 2000 and 2007 market highs. The next significant high will probably prove to be no different. But for the meantime, and since the major cycle trend remains positive, we will continue to accept “internal” corrective action on the indicator front as merely a part of the bull trend. So long as there is no price weakness of larger negative importance, the long-term trend will remain intact.

Click here for definitions of the indicators 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

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

2-26-10

7

13

2-26-10

259727

180469

3-5-10

16

4

3-5-10

447149

104117

3-12-10

17

3

3-12-10

1828237

111309

3-19-10

9

11

3-19-10

656439

147348

3-26-10

15

5

3-26-10

232614

113862

4-2-10

13

7

4-2-10

153692

138948


*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.

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

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

2-19-10

10

9

2-19-10

103190

51380

2-22-10

13

7

2-22-10

139899

35443

2-23-10

6

14

2-23-10

69573

74660

2-24-10

16

4

2-24-10

36350

29770

2-25-10

8

11

2-25-10

69545

64565

2-26-10

9

11

2-26-10

32711

30467

3-1-10

16

4

3-1-10

60014

38638

3-2-10

10

9

3-2-10

117313

51165

3-3-10

11

7

3-3-10

72093

33556

3-4-10

16

4

3-4-10

36815

42016

3-5-10

16

4

3-5-10

152611

37485

3-8-10

10

10

3-8-10

1507185

41172

3-9-10

15

5

3-9-10

89372

45511

3-10-10

15

5

3-10-10

93774

34334

3-11-10

11

7

3-11-10

47087

26732

3-12-10

5

15

3-12-10

72878

37903

3-15-10

9

10

3-15-10

172130

58620

3-16-10

16

3

3-16-10

80479

27525

3-17-10

13

6

3-17-10

276597

63778

3-18-10

6

14

3-17-10

118571

40039

3-19-10

7

13

3-19-10

189269

47595

3-22-10

14

5

3-22-10

32251

29750

3-23-10

17

3

3-23-10

128223

27766

3-24-10

12

7

3-24-10

55275

24882

3-25-10

6

13

3-25-10

61158

45267

3-26-10

13

6

3-26-10

19788

29395

3-29-10

11

9

3-29-10

137740

105076

3-30-10

6

14

3-30-10

15633

31967

3-31-10

7

13

3-31-10

61075

42805

4-1-10

17

3

4-1-10

36215

26434

4-2-10

Holiday

4-2-10

Holiday

*Note: Unchanged issues are not counted.

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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