Stocks turn, stage low-volume rally

How ‘bout that? Who says the market isn’t perverse? Just days after we suggested in our commentary for the week ending July 2 that “oversold” is not always oversold, the market stages a holiday week rally from lingering “oversold” readings that lifts the S&P 500 Index 55.39 points, or 5.4%, with the Dow 30 rallying 511.55, or 5.2%. The one big drawback to strength, however, was that hardly anybody showed up. Activity over the four day session was only about 50% of normal. Question now is with a lot of traders heading back to work this week, will the market have the horses to keep pulling prices higher, or was strength merely a countertrend bounce in a larger Intermediate-term decline initiated at the late April highs.

We could see a couple of scenarios playing out:

First, there is upside follow-through when volume normalizes. Prices in the S&P 500 move above the upper edge of a defined 10-week price channel at 1145 (10650—Dow 30) and the rally not only continues on the short-term cycle, but the larger Intermediate trend reverses its current negative to positive and the April 26 highs at 1219.80—S&P 500 and 11258.01—Dow 30 are then seriously challenged. Strength above those levels would then re-assert the bull trend that was initiated in March 2009 and weakness since late April would be viewed in retrospect as merely a corrective phase in that bull trend. Given current readings toward “oversold” territory on that larger cycle, there is a possibility the Intermediate trend could have seen its nadir.

Backing up the bullish potential on the Intermediate Cycle, both MAAD and CPFL continue to exhibit relative strength in that neither indicator declined below February supports even though prices in the major indexes sold below those levels. That divergence suggests our indicators could rally to new highs more easily than the broad market while giving index prices positive backing with “internal” strength.

Or second…. Last week’s rally was merely a bounce in an otherwise negative Intermediate-term downtrend that began after those late April prices highs. The first stage of the decline was traced out via an A-B-C corrective phase that culminated in the late May early June short-term lows, the “A” leg down. Prices then rallied to the June 21 highs, the “B” leg retracement. Weakness since June 21 into the “C” leg of the larger A-B-C also, like the first leg down of the larger pattern, has potential smaller cycle symmetry as was the case in the “A” leg down. The “C” leg may also have three parts, an a-b-c, with the “b” part now nearing completion. Consistency would then call for a final “c” down as part of the larger “C.”

So what does all that mumbo-jumbo mean? Simply put, the market may have bounced a bit last week prior to more selling to new Intermediate-term lows that would put the S&P toward 955 and the Dow 30 toward 9220. At that point there could prove to be some positive momentum divergences to underscore upside potential and a more solid, volume driven rally. Then the larger issue would be the market’s ability to rally to new highs on an Intermediate-term up or would retracement strength simply result in another failed rally?

Regardless of whichever scenario ultimately plays out over the next few to several weeks, one thing is absolutely certain: to re-assert the longer-term uptrend that was initiated in March 2009, the major indexes must rally to new highs. Is that possible? Yes, but considering some of the internal statistical damage the market has suffered since late April, especially with Cumulative Volume that is currently back toward those March 2009 lows in the S&P 500, the longer the bulls take getting the job done, the greater the odds they will fail to get the job done at all.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD sold right down to its longer-term uptrend line the week ending July 2 and then pushed up from that level last week. While lesser cycle daily MAAD data fractured the same line several days ago, it is the larger cycle that is more important.

Nonetheless, last week’s low volume rally in the stock market did bring MAAD plots back from the brink, albeit not by much. And while admittedly MAAD has not shown weakness since those late April highs like the major indexes to the extent MAAD did not decline below support levels created last February while index prices did, new highs by MAAD and the broad market are now required to underscore a resumption of the major trend initiated in early 2009.

Hanging in the balance in the event of upside failure is the fact that it would take little more selling to propel MAAD downward and below is year-old uptrend on the larger weekly cycle. Weakness would also cause the indicator to seriously threaten the March 2009 lows since MAAD has also shown little upside enthusiasm over the past 16-plus months as reflected by the buying tendencies of Smart Money.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL perked higher last week with the Flow Line last plotted marginally above its June 21 highs even though prices in the broad market have a fair stretch to go before reaching similar levels (S&P 500 last at 1077.96 needing to rally above 1131.23 and Dow 30 last at 10198.03 and needing to move above 10594.16).

While it’s possible CPFL action since the late April Intermediate-term highs will prove in retrospect to have been a bullish sign to the extent options players have remained relatively optimistic despite index pricing weakness, we would need to see new highs in CPFL with commensurate upside follow through in the major indexes to suggest a resumption of the move begun in March 2009.

Click charts to enlarge

Conclusion

Market bulls scored a few points last week, but it remains to be seen if gains will prove to be short-lived. While the low volume holiday rally moved index prices upward and away from recent lows, strength brought those bids back a normal 40% to 60% (55.8%--S&P 500 and 59.9%--Dow 30) of the decline since June 21.

If last week’s advance had occurred on normal trading volume we would be more optimistic about a continuation of buying. But since it did not, we are suggesting that when the “cats” return from their holiday play, recent and normal distribution selling could take hold once again and drive prices back toward recent lows (1010.91—S&P 500 and 9614.32—Dow 30) and perhaps downward to those measured move targets via a larger A-B-C pattern (955—S&P 500 and 9220—Dow 30).

The amount of upside follow through this week, or lack of it, will determine the issue.

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

Date NYSE Adv NYSE Dec Date OEX Call $Volume OEX Put $Volume
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
5-14-10 14 6 5-14-10 263151 730414
5-21-10 5 15 5-21-10 1172844 1654053
5-28-10 10 10 5-28-10 477797 584893
6-4-10 5 15 6-4-10 265339 515370
6-11-10 12 8 6-11-10 263791 544655
6-18-10 11 9 6-18-10 357965 119532
6-25-10 5 15 6-25-10 91068 599114
7-2-10 4 16 7-2-10 1034509 771231
7-9-10 18 2 7-9-10 635690 110808

*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
5-27-10 16 4 5-27-10 112601 59778
5-28-10 5 15 5-28-10 48142 61489
5-31-10 Holiday 5-31-10 Holiday
6-1-10 3 17 6-1-10 70492 99096
6-2-10 16 4 6-2-10 59135 60801
6-3-10 10 10 6-3-10 74934 57933
6-4-10 4 16 6-4-10 131598 195508
6-7-10 6 14 6-7-10 27214 126032
6-8-10 15 5 6-8-10 71740 101066
6-9-10 5 15 6-9-10 38268 132742
6-10-10 17 3 6-10-10 47815 82263
6-11-10 12 8 6-11-10 78754 102552
6-14-10 6 13 6-14-10 33551 107330
6-15-10 16 4 6-15-10 99458 54784
6-16-10 10 9 6-16-10 69893 48908
6-17-10 4 16 6-17-10 63125 35382
6-18-10 11 8 6-18-10 120041 42191
6-21-10 12 8 6-21-10 39892 80710
6-22-10 3 17 6-22-10 46561 146059
6-23-10 10 10 6-23-10 19864 59747
6-24-10 5 15 6-24-10 43700 95557
6-25-10 10 10 6-25-10 36868 87412
6-28-10 11 9 6-28-10 53951 43956
6-29-10 4 16 6-29-10 826774 273776
6-30-10 4 16 6-30-10 65241 115908
7-1-10 7 12 7-1-10 101383 158080
7-2-10 6 13 7-2-10 210967 130326
7-5-10 Holiday 7-5-10 Holiday
7-6-10 12 6 7-6-10 47780 102195
7-7-10 17 3 7-7-10 156524 74778
7-8-10 14 6 7-8-10 113395 43732
7-9-10 12 8 7-9-10 106386 32027

**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, read a Futures article on the concept. This will take you to the MAAD article. Robert can be reached at traderbob@nyc.rr.com.

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