Market indecision: Be a rock or a helium-filled balloon?

For nearly three months stock market prices, as measured by the bellwether S&P 500 and the Dow Jones Industrial Average, have remained below the late April price highs (1219.80 and 11258.01, respectively). And following the July 6 short-term lows (1010.91—S&P, 9614.32—Dow 30) and the lowest levels since intermediate-term weakness began, prices have rebounded to recover just under 50% of the losses sustained since April. But despite recent gains, there is that remaining 50% to be recovered before new highs could be made to reassert the larger uptrend begun in March 2009.

While such strength is possible in the days and weeks just ahead, what is also true is that while the larger Intermediate Cycle remains modestly “oversold” (see our article in the July 2 issue of Futures Online: “Market Conundrum: When is ‘oversold’ not ‘oversold’?”), at the same time the smaller Short-term Cycle has begun to exhibit some signs of overheating. In fact, the minor cycle is now as overdone on the upside as it was in late June and just prior to selling down to those early July lows.

What is relevant about the status of the Short and Intermediate Cycles is that the larger of the two remains negative so any shorter-term improvement is developing within that larger negative context. If it turns out the bulls do not have the “horses” to pull prices higher to reverse that Intermediate Cycle to positive, there is nothing to preclude further weakness on the intermediate cycle which would include additional short-term selling that could involve a “test” of the early July price lows.

If that bearish scenario proves to be, well, too bearish, and the short-term trend does not roll over to the downside just yet, we would first need to see strength above trailing 10-week price channels that will be effective this week until 1132—S&P 500 and 10555—Dow 30 AND a reversal to positive by Intermediate-term Momentum, Our Timing Oscillator, and our modified Stochastics. But even if a positive signal is registered with all those inputs, nothing less than new highs above the late April index highs will reassert the major cycle uptrend. In fact, an upside failure would be a suggestion, yet again, that the bullish camp simply does not have the buying power to prove its bullish case.

And while we must admit that our CPFL and MAAD indicators did not exhibit the weakness of index prices following the April highs to the extent the major indexes sold below the February price lows with CPFL and MAAD holding above those support levels, it’s also true CPFL and MAAD must confirm any further market strength that develops. Given their current positioning and presuming the market continues to improve, CPFL and MAAD would be required to make new highs with the market. There is no middle ground for those indicators since a failure to verify new market highs would be a very large point on the bearish side of the ledger.

There is one more scenario we must re-address. Several weeks ago we suggested the major indexes could be tracing out a Head and Shoulders distribution top defined on the left side of the pattern by the January 2010 highs (Left Shoulder) the peak in April (Head) and the ongoing construction of the right portion (Right Shoulder) of the pattern currently. In fact the “Neckline” of the potential formation may have been initially broken via weakness in early July while current price action could be merely staging a feeble “return action” rally. The definition of that potential H&S pattern would come with an upside failure on the minor cycle followed by a resumption of selling on the intermediate term with new lows below the early July lows.

In sum, market indecision despite modest gains over the past few weeks has left us with much the same scenario we’ve been pondering since those late April peaks -- either prices make new highs to re-assert the uptrend initiated in March 2009, or they do not. The choices are relatively simple. It is the execution that is proving bothersome. In the meantime the market continues to vacillate between assuming the roll of a rock, or a balloon filled with helium. It is a sure thing that relatively soon we will have the answer.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD posted modest gains last week and rallied via plot highs back above its late June short-term peak even though the broad market has yet to follow suit. In fact, the indicator is now decidedly above a defined downtrend line stretching back to its peak reached on April 14 and nearly two weeks before the major indexes peaked out and headed lower into early July.

At the same time, however, the indicator has moved back into moderately “overbought” territory on the minor cycle. Larger weekly cycle data remains modestly “oversold” to suggest that while the lesser minor cycle could weaken, the bigger intermediate trend could add some statistical “support.”

Nonetheless, there is one overriding weakness we must continue to note. While MAAD has improved over the past few weeks, the defined uptrend line that was launched after the March 2009 lows could be breached with relative ease on resumed selling while the late April highs are still a fair distance from current levels.

Click charts to enlarge.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL gained last week on both the Short- and Intermediate-term Cycles. But without enthusiasm. And while CPFL has moved higher from “oversold” levels on the minor cycle over the past few weeks, it remains modestly “oversold” on the larger intermediate trend. The condition of those two cycles could be a suggestion that there is more room for market prices to expand, or it could be a suggestion that options players have yet to make up their minds about what they want to do.

In any case, it is a certainty that if the broad market rallies to new highs at some point in the not too distant future, CPFL must confirm that action. If it does, so much the better for the bullish cause. If it does not, such a negative divergence would not bode well for buyers. If neither the indexes nor CPFL is able to sustain upside momentum and prices begin another selling spree, it’s a good bet the indicator would make new lows with prices with relative ease even though the indicator has performed relatively well to the extent it did not recently break supports created last February’s.

Click charts to enlarge.

Conclusion

The major indexes as measured by the S&P 500 and the Dow Jones Industrial Average gained 37.78 points and 326.72 points, respectively, last week to advance gains on the Minor Cycle. In conjunction with those gains, however, the short-term trend has moved back into “overbought” territory. While those readings do not mean that the market will turn on a dime and head decidedly lower, it is nevertheless and indication that some caution may be warranted in the sessions just ahead, given the fact the market has retraced just under 50% of the decline since the late April price highs. In other words, despite strength since the July 2 lows, the Intermediate-term Cycle remains negative.

And while we cannot rule out the possibility that weakness over the past three months will prove to be nothing but a corrective phase in the uptrend that began after the March 2009 price lows, until new highs are created, we must regard all strength up to that point as potentially “return action” that could ultimately fail.

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

Date NYSE Adv NYSE Dec Date OEX Call $Volume OEX Put $Volume
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
7-16-10 9 11 7-16-10 171633 445073
7-23-10 16 4 7-23-10 322870 174663

*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
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
7-12-10 12 8 7-12-10 70843 33999
7-13-10 16 4 7-13-10 153048 59755
7-14-10 8 11 7-14-10 74345 55723
7-15-10 14 6 7-15-10 123102 53228
7-16-10 3 17 7-16-10 34284 99379
7-19-10 14 6 7-19-10 198424 67821
7-20-10 13 7 7-20-10 30569 72125
7-21-10 6 14 7-21-10 30453 61597
7-22-10 17 3 7-22-10 121027 58361
7-23-10 14 6 7-23-10 38486 39440

**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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