“In a bull market what goes down must go back up”
OK, we’ll admit we haven’t been particularly thrilled by the rally that began just over a year ago. But while that statement is no excuse not to have been awed by a power move in the stock market that resulted in a gain of just under 83% in the S&P 500 Index from March 6, 2009, to the close and recent high on April 26 (74% in the Dow 30), moves off of bear market lows have always had, by definition, loads of investors waiting in the wings to get even. Seems some got even last week.
And whether or not it turns out that last Thursday’s stunning 1000 point decline in the Dow Jones Industrials with commensurate losses and recovery in the sister indexes was the result of a “big thumb” trader who happened to enter the wrong number of shares into a sell order, or not, the markets have been badly mauled. Moreover, we wonder why, if Thursday’s selling was merely a one-day phenomenon, was there follow-through selling on Friday to the tune of another 17 points in the S&P and nearly 140 Dow points?
It’s true that following the “near catastrophe” prices have stabilized toward 200-day moving averages and it’s also true that while our CPFL and MAAD Daily Ratios were “oversold” going into Thursday’s debacle, they are definitely oversold now. But there’s another problem. Notice in the chart below that measures volume relative to price (NCV or Net Change Times Volume) that “Cumulative Volume” in the S&P 500 Index not only declined sharply on heavy volume late last week, but NCV is now below the November 2009 and early February 2010 price lows in the S&P. Similar action has developed in the Dow 30. In fact, after showing early weakness in February, the indicator has been progressively weaker over the past few months despite index prices to new intermediate (weekly data) highs. That significant divergence suggests that many market players have been selling into strength. Such was also the case into the 2000 and 2007 major cycle highs.
Click chart to enlarge
Underscoring that negative market tone has been the action of our MAAD series. While both daily and weekly data for MAAD perked to new highs for the year-long move over the past few weeks, relative to the 2007 bull market highs, MAAD has been unenthusiastic at least and pathetic at worst. That negative divergence has continued to suggest that while “Smart Money” has participated in the 13-month-old uptrend, they have not done so with enthusiasm. Moreover, if the market should turn down in earnest, it would not take much selling pressure to cause MAAD to sink to a new major cycle low on both the daily and weekly cycles.
There is also another factor now in play. While we cannot yet rule out the possibility that last week’s selling was merely a severe downdraft in a larger cycle uptrend caused by trader error, it is also now true that the bulls have a big point to prove: the market MUST make new highs to reassert the bullish trend. And to do so in the face of extreme market uncertainty now amplified by nearly a thousand Dow points of overhead resistance could make for some very interesting sessions over the next several weeks. In other words, what was yesterday’s “floor” will now act as tomorrow’s “ceiling.”
In sum, while we suggested in last week’s commentary that the short-term trend that began after the February lows was probably over and that a period of market retrenchment could follow, we had no idea that pullback would occur within a 10-minute time frame on massive downside volume. Or that the major indexes would sustain so much chart damage. But what is the essence of last week’s 75.80 point decline in the S&P 500 Index and the 628.48 point drop in the Dow 30 is that both of those indexes and the other major bellwethers must now recover all of those losses and a bit more to reassert the uptrend that began in March 2009.
McCurtain Most Actives Advance/Decline Line (MAAD)
Following its short-term peak on April 14, MAAD continued to move lower via both its advance/decline and Daily ratio on both the daily and weekly cycles last week. And while the daily series is now even more “oversold” than it was at the end of the previous five days, the weekly series could still allow for more corrective action.
Nonetheless, what remains as a primary concern in the wake of last week’s phenomenal market action is the fact that while MAAD remains positive on a cumulative basis to the extent it remains above the March 2009 lows and the last major support point of significance, it wouldn’t take much selling to terminate that lukewarm tone. In other words, if the stock market meets with more serious selling and our “Smart Money” indicator begins to give more ground on the downside, we would be less than optimistic about the positive longer-term prospects for the stock market.
In short, once a minor cycle (daily data) low is put in place and a market recovery begins, MAAD must hit new highs with the broad indexes to reassert the bull market uptrend.
Click charts to enlarge
McCurtain Call/Put Dollar Value Flow Line (CPFL)
CPFL gave us a small “head fake” after the close last Wednesday, and just before Thursday’s market debacle, by rallying to a fractional new high for the move on the daily trend after two large options contracts caused the Dollar Value Flow Line to post a slightly higher high. Via weekly data, however, that movement was not confirmed.
And while the CPFL Ratio on the minor cycle (daily data) is now in deeply “oversold” territory like its MAAD counterpart, the Weekly Ratio remains moderately “overbought.” Put another way, while the minor cycle could allow for some price rebounding, the intermediate trend remains somewhat vulnerable.
Net, as with MAAD, CPFL must rally to new highs with market prices once a short-term low is created and last week’s losses are addressed by buyers. If the market rallies to new highs and CPFL does not, or if the market rallies and CPFL begins to erode, the implications would suggest much the same: the internal condition of the market would be suspect.
Click charts to enlarge
Conclusion
Last Thursday’s extraordinary selling with follow on weakness on Friday underscored our suspicions from the week before that market vulnerability was developing. While we had no idea selling would be so severe, now that significant chart damage has developed, what is now important is that chart damage is repaired. And the only way to do that is for the market to rally to new highs for the move and the best levels since the March 2009 lows. If it does not, or cannot, then the odds would substantially increase that the 13-month-old rally is in an endgame.
Over the course of the next week, on the minor cycle buying above a progressively lower price channel plots (1208-1182) on the S&P 500 Index and (11183-10984) for the Dow 30 would be required to suggest a positive trend and a reversal of recent net negativity. On the larger intermediate cycle, the S&P would have to better 1162 and the Dow 10772 to indicate a resumption of the intermediate uptrend began after the February lows. Given the fact that both indexes are currently below intermediate price channels and are threatening to create negative momentum and a negative intermediate-term via our proprietary Trading Oscillator is not a good sign. Nonetheless, there is still time and room for the market to reverse last week’s debacle. But not much.
MAAD data for past 30 Weeks* CPFL data for past 30 Weeks
|
Date |
NYSE Adv |
NYSE Dec |
Date |
OEX Call $Volume |
OEX Put $Volume |
|
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 |
|
4-9-10 |
17 |
3 |
4-9-10 |
310430 |
99415 |
|
4-16-10 |
11 |
9 |
4-16-10 |
684317 |
282231 |
|
4-23-10 |
15 |
5 |
4-23-10 |
1049228 |
141637 |
|
4-30-10 |
2 |
18 |
4-30-10 |
139488 |
363448 |
|
5-7-10 |
3 |
17 |
5-7-10 |
929902 |
2329559 |
*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 |
|
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 | ||
|
4-5-10 |
17 |
3 |
4-5-10 |
66102 |
42763 |
|
4-6-10 |
14 |
6 |
4-6-10 |
71074 |
26189 |
|
4-7-10 |
8 |
11 |
4-7-10 |
63920 |
36679 |
|
4-8-10 |
15 |
5 |
4-8-10 |
74032 |
22170 |
|
4-9-10 |
13 |
7 |
4-9-10 |
51056 |
38095 |
|
4-12-10 |
19 |
1 |
4-12-10 |
167776 |
34077 |
|
4-13-10 |
7 |
12 |
4-13-10 |
96123 |
32036 |
|
4-14-10 |
15 |
3 |
4-14-10 |
177119 |
27271 |
|
4-15-10 |
9 |
10 |
4-15-10 |
142310 |
41992 |
|
4-16-10 |
2 |
18 |
4-16-10 |
295642 |
140482 |
|
4-19-10 |
10 |
10 |
4-19-10 |
88196 |
42859 |
|
4-20-10 |
13 |
7 |
4-20-10 |
44729 |
35845 |
|
4-21-10 |
7 |
13 |
4-21-10 |
24734 |
48409 |
|
4-22-10 |
7 |
13 |
4-22-10 |
191965 |
48573 |
|
4-23-10 |
12 |
8 |
4-23-10 |
739177 |
32764 |
|
4-26-10 |
10 |
10 |
4-26-10 |
62430 |
39865 |
|
4-27-10 |
3 |
17 |
4-27-10 |
63683 |
270410 |
|
4-28-10 |
13 |
7 |
4-28-10 |
9375 |
81124 |
|
4-29-10 |
12 |
8 |
4-29-10 |
32945 |
31353 |
|
4-30-10 |
2 |
18 |
4-30-10 |
32835 |
174894 |
|
5-3-10 |
15 |
5 |
5-3-10 |
43077 |
47782 |
|
5-4-10 |
5 |
15 |
5-4-10 |
102186 |
192407 |
|
5-5-10 |
9 |
11 |
5-5-10 |
663717 |
159880 |
|
5-6-10 |
4 |
16 |
5-6-10 |
277786 |
908812 |
|
5-7-10 |
7 |
13 |
5-7-10 |
203860 |
595031 |
*Note: Unchanged issues are not counted.
Robert McCurtain is a technical analyst, market timer and private investor based in New York City. If you would like to read more about how the CPFL is constructed, click here to read a Futures article on the concept. For the MAAD, click here. Robert can be reached at traderbob@nyc.rr.com.
