Greek lore is resurrected in current stock market

While the phrase “to be between a rock and a hard place” sounds like it might have been minted in a classic Louie L’Amour or Jack London novel, in fact the phrase has roots in Homer’s 3000-year-old “Odyssey” where Odysseus had at one point to sail between Scylla, a man-eating monster hiding on a rock island on one side, and Charybdis, a lethal whirlpool on the other. In other words, when stuck between one extreme and another, Homer had a dilemma.

Not a lot has changed over nearly 30 centuries. The classic dilemma can still be found in today’s stock market. On one hand we might have the investor who went long after the February 2010 lows and who experienced a relatively orderly uptrend for the next 2 ½ months. Then weakness set in after the April 26 highs followed by the “heavy-fingered” trader 1000 point down day on May 6. The long investor then found himself back at the starting gate and the February lows. Since prices are about where they were nearly six months ago, the long investor is stuck “between” -- does he exit or does he look for improvement and a resumption of the long-term uptrend begun in March 2009?

On the other hand, there’s the nervous short seller who sold into that early May decline and who has undergone two nail-biting short-term rallies with subsequent retracements. That trader is also in a quandary because he too remains within range of even and will soon have to decide if its worth to risk to stay short. The bulls could decide that outcome.

And then we have the market itself. The Major Cycle remains positive, but the next smaller Intermediate Cycle continues to threaten on the downside while using up precious time. In other words, the longer the Intermediate trend continues to tread water between the late April price highs and recent lows, the odds increase that the market could ultimately resolve the issue on the downside. Why? Because it takes volume to drive market prices higher while bids can simply fall of their own weight. For the past several weeks share volume has been subpar.

Adding concern to the mix, we know for a fact that nothing but new highs and bids above those April 26 peaks (1219.80—S&P 500, 11258.01—Dow Jones Industrial Average) will re-assert the longer-term uptrend. This side of there, the inability of the bullish camp to drive prices higher and above the April highs would be a psychological victory for the bears. With the short-term cycle now modestly overextended on the upside, “overbought,” prices are once again positioned to weaken to the extent the July 2 lows could be tested (1010.91—S&P 500, 9614.32—Dow 30). If new lows are made, the context of the ongoing dilemma continues.

On the bright side of the equation, there are a few points of light. First, with Intermediate Cycle “oversold” conditions lingering (we should note that “oversold” levels on the Intermediate trend “lingered” for nearly five months into the March 2009 lows), there is some potential for an upside resolution of the current puzzle. In addition, as we’ve noted before both our MAAD and CPFL statistics failed to sink below their February 2010 support lows in the face of weaker index pricing below similar levels. That downside hesitation by both CPFL and MAAD could be an indication that some of the market internals are stronger than external pricing would have us believe. Of course, ongoing failure by MAAD and CPFL to better their April plot highs would leave the indicators in much the same position as the broad market that also has failed, so far, to recommit to the upside.

In sum, carrying forth with our Greek legend, the bullish camp currently finds itself in much the same position as Odysseus as he attempted to navigate between two threats. In the market those concerns would be the failure to make new highs and the potential for making new lows. Neither case would be helpful for longs. In other words, even though we know how the journey of Odysseus ultimately played out favorably in the saga, there are no such guarantees with this new version of history as Scylla and Charybdis continue to sit on the sidelines only just a nudge out of sight.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD improved for the better part of last week and was then plotted lower on Friday. Nonetheless, using daily data the indicator popped up above a defined Intermediate-term downtrend line that stretches back to the indicator’s April 14 highs. Somewhat more reliable weekly statistics have left MAAD within the context of a defined and rising “channel” encompassing three points of contact on the downside and three on the upside over the past 15 months.

That’s the good news. On the unfavorable side, we continue to note the relative lack of enthusiasm exhibited by Smart Money since the March 2009 lows. Whereas index pricing rallied sharply from March 2009 through late April 2009 and nearly 60%, a classic retracement, MAAD came back from its March 2009 lows a paltry 20%. The indicator has exhibited an upside bias over that time frame, but the worrisome part is that it wouldn’t take much selling to drive MAAD to new long-term lows. Such action would definitely not bode well for bulls.

So, as has been the case for several months, MAAD and the market continue to share the same problem -- both must rally to new long-term highs and above the April price and plot peaks to re-assert a bullish bias even though MAAD would apparently be doing so without much enthusiasm.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL moved marginally higher most of last week before pulling back via Friday’s sharp losses. CPFL remains somewhat above its June 25 plot lows and minor cycle support point while still holding below its May 5 high and the best level reached since the March 2009 lows. Like the broad market indexes, CPFL must rally to new highs to re-assert the long-term uptrend and must hold above its support lows and uptrends to ward off a bearish bias. Given the fact that, like MAAD, the indicator did not break supports with index pricing last February, but held above those levels, there is some optimism about the internal bias of options trading on a Dollar Weighted basis. Given the extant Intermediate Cycle negative that is still influencing the broad market, it is all the more important for CPFL, and MAAD, to remain firm—at least.

Conclusion

Its possible stock market indexes as measured by the bellwether S&P 500 index and the Dow Jones Industrial Average are in the latter stages of a negative Intermediate Cycle retracement that commenced after the April highs. Internal indicators like MAAD and CPFL have shown some improvement after failing to break February supports coincident with prices. The major indexes have demonstrated some stability toward the bottom of 10-week price channels (1009.98—S&P 500, 9438.20—Dow 30) over the past few weeks. Those levels which are moving averages of the lows (a moving average of highs in an uptrend) over the past 10 weeks that are then “moved ahead” 5 weeks have a better record of picking the spots where prices can reverse than simple moving averages, depending on the larger extant trend which is, in this case, the major cycle.

But, and that’s the key word, here, given the fact that “oversold” conditions can persist for weeks, if not months, (see our July 2 Market Summary: “Market Conundrum: When is ‘oversold’ not ‘oversold’?”), the mere fact that the market currently appears “oversold” on the Intermediate-term is no guarantee that prices will launch themselves upward. Simply put, there is still the potential a developing larger cycle negative could ultimately overwhelm the lesser cycles and new lows could follow, despite “oversold” conditions. That is the worry here as the giant with the club and a whirlpool wait in the wings.

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

*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

**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.