Stock market stalemate begs to be broken

There are times after you’ve watched a snail’s race long enough and the boredom is creating extreme, mental fatigue when you yearn for some excitement like, for example, the bearish mayhem of 2008 or maybe even a little financial flagellation as in 1987. Let’s be honest, we may yearn for the poetry of a stable market at times, a Longfellow or a Keats trading range, but eventually enough is enough. Time comes when we’re ready to rock and roll with R-A-M-B-O! At least volatility and a little pricing terror will help to break the boredom of a range bound market. Until then, we’ll co-opt an old Hennie Youngman line, “Take this market. Please, somebody take this market!”

While the bearish camp solidified its “gains” last week with a 5.75 point loss in the S&P 500 to 1070.25 and a drop of 89.53 points in the Dow Jones Industrial Average, it is nonetheless true that the major indexes remain locked between the late April highs at 1219.80—S&P 500 and 11258.01—Dow 30 and the early July lows at 9614.32—S&P and 1010.91—Dow 30.

And while it is also true that the trading range stalemate that has been in effect for the better part of the past year (the S&P was last quoted at levels equal to bids in October 2009) will be resolved, it also remains to be seen how that resolution will ultimately affect the major cycle trend that was initiated following the March 2009 price lows.

One camp, the bullish crowd, continues to believe that the tedious trading range in effect for nearly a year and net weakness since the late April highs will prove to be nothing but an hesitation in a primary uptrend. They are confident that once the excesses developed from March 2009 through April 2010 are eliminated, higher stock prices will reflect a buyer’s market and movement above those April peaks will follow. We must admit, based on analysis of our Call/Put Dollar Value Advance Decline/Line (CPFL) and our Most Actives Advance/Decline Line (MAAD) that there is a possibility for upside resolution once the current downdraft is over. Not only have both indicators remained relatively resilient to the extent they did not sink below plot supports back in February along with index prices, but both have continued to hold not far below their April highs. Put another way, concerted upside activity in the broad market could cause both to hit new highs to re-assert the primary uptrend.

On the other hand, bears continue to assert that buying since March 2009 has been narrowly focused and will prove to be nothing but a bear market retracement in the wake of the devastating decline that lasted from October 2007 to early March 2009. Underscoring that supposition we continue to note deteriorating upside volume statistics that peaked nearly a year ago with increasing downside acceleration during the May 2010 mini-Crash. In addition, while MAAD has confirmed market strength since March 2009 to the extent it continued to make new highs with index prices, the overall performance of the indicator has left a lot to be desired. Not only has MAAD recovered only about 20-25% of the losses suffered in the 2008/2008 bear market, but given the lack of upside “enthusiasm” by Smart Money players, it wouldn’t take much overall net market selling to push MAAD to new plot lows. Such weakness in MAAD to new lows would definitely not be a good omen for the broad market.

So, last week the bears gained a few yards in heavy traffic. But the game continues to hold near the 50-yard line with ball possession flipping back and forth between the two sides. Ultimately one team will gain the upper and drive the ball forward, but at this juncture we can only keep a close eye on the fulcrum of the market to see which side is favored. Currently it is a bit more negative that not, but that action is certainly not enough to suggest that the uptrend initiated in March 2009 is over.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD finished the week about where it began. The indicator has a net negative bias on the short-term cycle, but is also flirting with “oversold” levels to the extent that “oversold” can be reliable as a zone of opportunity. Given the fact that the indicator continues to hold about mid-range between its February 2010 plot lows and the late April indicator highs and still looks better than index pricing, we cannot preclude the possibility that MAAD will ultimately resolve the recent stalemate by moving to the upside to new highs for the move that began in March 2009.

A negative theme would suggest an upside failure, given the fact the indicator has shown little positive enthusiasm since the March 2009 lows and could make new indicator lows with relative ease if concerted market selling develops.

In either case it is a veritable certainty that MAAD will either lead the market or confirm whatever action does develop. It is also a certainty that MAAD must confirm whatever moves develops, or the staying power of that move would be highly suspect.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL weakened marginally last week, but that change did virtually nothing to change the indicator’s overall noncommittal status in that it continues to remain in the upper 1/3 of its trading range defined by the February plot lows and the late April indicator highs.

CPFL remains “oversold” on the minor cycle and moderately so on the intermediate trend, but as we’ve noted in the past “oversold” levels can persist over relatively long periods of time. This indicator, as with the broad market will ultimately resolve its range bound position and will either confirm or deny overall market action.

Click charts to enlarge

Conclusion

The negative Short-term Cycle gained somewhat more credence last week with more selling in the major indexes. That action developed within the context of a still negative Intermediate-term trend that was initiated after the late April price highs. What now remains to be seen is how much more short-term selling will develop before the market rebounds on that smaller cycle and how much more selling occurs before the negative intermediate trend becomes washed out on the downside. And how such action would affect the lingering Major Cycle positive.

Whatever the final resolution of the several-months-old stalemate, time as reflected by moving averages and Cumulative Volume data is ticking forward on the long-term trend and will eventually require higher prices and movement above the April peak to re-assert the bigger cycle positive. Or not, at which point the odds would increase that a retest of the March 2009 lows could not be ruled out.

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.