Stock market goes fishing; traders try to hook each other

It has been 13 weeks and change and counting since the major indexes reached Intermediate Cycle price highs (1219.80 in the S&P 500, 11258.01 in the Dow Jones Industrials) back on April 26. Or, to put it another way, for nearly one half of the year’s trading to date, the market has remained stuck between “there” and a variety of maybes.

On one portion of the “maybe” list bulls continue to believe that weakness over the past few months will prove to be merely a consolidation within the context of a Major Cycle advance that began after the March 2009 index lows. On the other side of the ledger are the bears who believe that the April highs were “the” highs of a countertrend move that will ultimately resolve itself on the downside with a possible “test” of the spring 2009 lows. Some big name gurus have even been suggesting a market cataclysm that will not only lead to new lows but some sort of financial Armageddon that will shake the pillars of finance in the western world. And then there are the “inbetweens” who have somehow survived by perpetually predicting that the “Dow Jones Industrial Average” will fluctuate within a 150-point trading range over the balance of the year with interest rates holding within 25 basis points of current levels.”

It’s probably safe to throw out the third option for now even though the “inbetweens” have been sort of correct for nearly three months, but until the market makes new highs above those April levels, the bears still have a case and the bulls continue to have a few big points to prove. Pun intended. And what makes it increasingly difficult for market optimists is that the more time used up with the market going not much of any place in particular (the S&P is currently levels put in place last November), the odds increase that sellers will continue to overwhelm buyers on each upward thrust. Add in a low volume summer season and you have a very nice setup for a fall debacle, one of history’s set points for some of the biggest declines in market history (1929, 1987, 2007).

Nonetheless, even though the short-term cycle is now was “overbought” as it was into the April and June short-term highs, we must continue to point out that “overbought” (or “oversold”) is only valuable as a market barometer to the extent it actually kicks in at the appropriate moment to reflect market sentiment. For example, the short-term trend was first “overbought” after the February 2010 lows with an “overbought” peak in early March. But “overbought” readings persisted another six weeks until the April highs. On the other hand, the April highs were accompanied by quickly evolving “overbought” measurements and the market turned lower almost immediately. So, in the current environment, is the current “overbought” condition of the February through April variety or of the three-week type created in early June?

A bear might also point out that Cumulative Volume in the S&P 500 and the Dow 30 is currently plotted back at levels not seen since July 2009. In other words, CV has given back nearly three quarters of its gains since the March 2009 lows while external prices have only faded about one quarter of that distance. Which is correct, prices or CV?

We also continue to observe that our Call/Put Dollar Value Flow Line (CPFL) and our Most Actives Advance/Decline Line (MAAD) have not only been more resilient since those April highs to the extent that neither broke below their February supports as did index prices, but both are positioned to rally to new highs above those April peaks with greater advantage because of that positioning. At the same time, both CPFL and MAAD remain modestly “oversold,” a condition which could add to the bullish fire.

As has been the case for the past several weeks, we remain locked between two points of view as measured by the April highs that must be broken on the upside to confirm a resumption of the longer-term uptrend and recent lows that must hold if that bullish point-of-view is to take hold.

And we have the bearish case which could also involve the finalization of a Head and Shoulders Intermediate Cycle distribution top that, if resolved on the downside, would not bode well for the overall market considering the extensive damage suffered by Cumulative Volume in the 2008 decline and then again on the lesser cycle via the breakdown in early May.

In sum, we are left with ambiguities and that old and frustrating market adage: “If the prices don’t go up then they will go down.” We do know for a certainty, however, that the longer it takes to resolve this issue relative to those April highs, the greater the odds the resolution will be in favor of the bears since time used up with no upside resolution can be an indication the bulls simply do not have the power to drive the market higher.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD posted gains last week and was last plotted about 50% of the distance between recent short-term lows and the late April index price highs. If the indicator continues to do well such action would suggest relatively solid market underpinnings despite the fact that the MAAD Daily Ratio and overall market conditions on the short-term have moved back toward “overbought” zones. Given the fact that Weekly Cycle data remain modestly “oversold”,” there is the possibility MAAD could simply “correct” on the smaller daily cycle while the larger intermediate trend remains viable.

But there is one worrisome point that has persisted for months and which we have continued to note – while MAAD has moved upward with the broad market over the past 16 months and since the March 2009 lows, the indicator has recovered nowhere near the amount of territory as has the broad market. While the S&P 500 index retraced nearly 60% of the losses incurred during the 2008 bear market, MAAD has only recovered about one quarter of that distance to suggest that while Smart Money participated in the rally since the March 2009 lows, that group has not done so with overwhelming enthusiasm. Adding to that onerous mix, it wouldn’t take much broad market selling to create new lows in MAAD, a potentially devastating prospect for the broad market and for those who continue to suggest there is no chance of a “double dip” in the economy which would follow the market on the downside.

Click charts to enlarge.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was on the negative side last week, despite gains in MAAD. Nonetheless, like MAAD CPFL remains well positioned relative to its late April highs after failing to dip below its February price supports even though the broad market averages suffered such damage. Put another way, if bulls are able to muster enough strength to push prices higher and possibly back above those April highs, CPFL could be well positioned to confirm such action.

But there is a “but” here. CPFL MUST confirm market action on the upside if new highs are made. If it does not such action would not be a good omen for buyers since we have never seen an instance where CPFL failed to confirm market action where market prices did not ultimately get in line with the indicator. Such was the case into the 2000 highs and again in 2007.

Click charts to enlarge.

Conclusion

It’s still a tossup. We cannot preclude the possibility that the stock market will rally further and even challenge the late April price highs. But since the stock market is a forward-looking discounting mechanism, we continue to wonder what happened to all that predicted dramatic economic growth and higher interest rates in the wake of the powerful rally that began in March 2009. Since a growing economy creates a demand for money, rates should have been going higher as consumers bought houses and cars and headed for the mall. That hasn’t been happening. In other words, the market rallied and then looked back over its shoulder at the economy and said, “You coming?” So far the only answer has been an anemic, “Sort of.”

So, from a purely practical point-of-view, after giving the upside its best shot, the market clock continues to use up time on the Major Cycle and the longer it takes for that trend to resume, the greater the odds it won’t.

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.