Indecisive market encourages omens, signs and coin flipping

Ever notice that when the frustration levels in an indecisive market increase, so also do the “ifs.” “If only I had done this” or “What if I had done that?” Or “If I had written those calls instead of putting on that go nowhere short….” In fact, “if only” there were a way to quantify the “ifs” into an objective indicator we might have a clearer idea of when the market was near a major turning point. “If wishes were horses we’d all be kings.” Or filthy rich and we wouldn’t need the market. Uh-huh…. But for the moment we’ll have to toss in some more of that old shopworn subjectivity.

Stock market prices were modestly negative again last week. The short-term daily cycle lost some more ground even though Friday’s rally moderated the losses somewhat. Nonetheless, on the week the S&P 500 Index dropped about 7 points with the Dow Jones Industrials down just over 62 points.

On the positive side of the ledger, the minor cycle that has been negative since the August 5 highs has dipped into “oversold” territory even though we must point out again our discussion of several weeks ago when we noted that “oversold” levels can be misleading and can persist. Sometimes markets stay “oversold” and more losses develop. On the charts major index prices have settled down onto the “top” of a descending trendline that stretches back to the late April high with an interim peak at the late June high. That chart “support” line could mean that the relatively low volume decline over the past few weeks could be near a termination point.

We’ve also been noticing something else of the charts that requires some focus. While the broad market on the larger Intermediate cycle has been tracing out what could still prove to be an important Head and Shoulders top since earlier this year with a defined Left Shoulder, Head, and now a Right Shoulder, we need to see concerted downside pressure to resolve the pattern. So far that has not happened. But what has been occurring is the possible construction of a short-term term Head and Shoulders bottom since the end of May. There is a defined Left Shoulder, a Head at the July 6 lows, and now a possible Right Shoulder in the latter stages of development. If prices do not weaken much from current levels and some concerted buying comes into the market to the extent there is strength back above the “Neckline” of the formation just above 1131 in the S&P 500 Index, not only would the larger Head and Shoulders pattern on the Intermediate cycle be negated, but there would be a chance weakness since the end of April could prove to be nothing but a corrective phase in the Major Cycle uptrend that was initiated after the March 2009 price lows.

Looking over to our Most Actives Advance/Decline Line (MAAD) and the Call/Put Dollar Value Flow Line (CPFL), we must admit that the potential for an upside resolution of the current market frustration remains. Neither indicator demonstrated as much weakness into the early July price lows as did index prices. That is a bullish sign to the extent that market internals were not demonstrating the same fear as pricing that is obvious. On the other hand, given all the current “ifs,” nothing but strength to new highs by the major indexes with confirmatory action by our key indicators would give us the confidence to suggest a resumption of the primary uptrend.

In sum, while it is a virtual certainty that the recent low volume, low volatility trading range will end, the evidence to suggest extreme market drama is not yet apparent. Each time there has been larger cycle definition, smaller cycle strength, or weakness, has erased the intent of the bigger trend. Case in point is the recent short-term decline that appeared to re-assert the larger Intermediate Cycle down. But what happened to counter that bearish “optimism” was the tracing out of a potential short-term bottom with coincident “oversold” conditions. More time will be required to resolve this dilemma, but it will be resolved. In short, as we’ve suggested before, nothing but strength above the April highs at 1219.80—S&P 500 and 11258.01—Dow 30 with indicator confirmation, or weakness below 1010.91—S&P and 9614.32—Dow 30, also in synch with the indicators, will break the deadlock of the past several months.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD lost ground last week, but not by much. While the indicator admittedly moved lower toward its July 2 nadir that was in synch with the short-term low in the broad market, the Advance/Decline Line for MAAD on the larger Intermediate Cycle remains positive in a defined, albeit anemic, longer-term uptrend.

As we have mentioned before, while MAAD, a measurement of Smart Money, has participated on the upside since the bigger cycle rally began in March 2009, the extent of the uptrend has left a lot to be desired. While the broad market retraced nearly 60% of its decline since the October 2007 highs, MAAD has only recovered about one quarter of the decline. Clearly, while big money participated in the advance, it has done so without enthusiasm. Could that dynamic change? Of course, but so long as the negative disparity continues, doubt remains as to the longer-term viability of this market since we have never seen an instance where the market powered higher without the participation of MAAD.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL lost inches last week and remains locked about one half way between its April high and July low. Like many market participants, options players have continued to adopt a wait and see approach. And while it is also true that a major disparity between price action and CPFL has historically accrued to the advantage of CPFL, lacking any decisive evidence in this current environment, CPFL has been little help of late except for the fact that it did not decline below its February lows with index prices during the May/July downturn, an indication that market internals could be a bit stronger than index prices. Nonetheless, nothing but strength to new highs by the broad market with CPFL either leading, or in tow, will reassert the larger cycle uptrend initiated in March 2009.

While strength by CPFL to new highs is a possibility in this environment, given the relatively neutral stance of the indicator recently, nothing but concerted market action will ultimately resolve this issue. Whichever shoe finally drops, bull or bear, it is a certainty that CPFL will be on board or market action will be suspect.

Click charts to enlarge

Conclusion

It was more of the same last week with a few twists. The short-term cycle weakened a bit more, but not enough to resolve the larger Intermediate trend which continues to exhibit a negative bias. But given the potential for some positive action on the short-term cycle because of developing minor cycle “oversold” conditions and some favorable smaller cycle pattern developments, the current market nonetheless continues to look like a “play within a play within a play.” At some point that indecisiveness will end. Since the market is about to enter an historically volatile time of year, we must nonetheless remain open to the possibility that recent bearish sentiment could continue even though there are some short-term signs the market could be overdone on the downside.

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

Date NYSE Adv NYSE Dec Date OEX Call $Volume OEX Put $Volume
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
7-30-10 15 5 7-30-10 199970 217368
8-6-10 15 5 8-6-10 271701 115037
8-13-10 3 16 8-13-10 132060 409972
8-20-10 8 12 8-20-10 176830 488032
8-27-10 6 14 8-27-10 207995 222943

*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
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
7-26-10 18 2 7-26-10 51374 63509
7-27-10 14 6 7-27-10 70850 59758
7-28-10 7 13 7-28-10 17125 48089
7-29-10 8 12 7-29-10 74444 40451
7-30-10 7 12 7-30-10 41025 42071
8-2-10 15 4 8-2-10 141725 31355
8-3-10 5 14 8-3-10 47386 35459
8-4-10 10 10 8-4-10 52252 20624
8-5-10 6 14 8-5-10 31608 23941
8-6-10 8 12 8-6-10 76376 35429
8-9-10 11 9 8-9-10 45247 19760
8-10-10 5 15 8-10-10 54235 52153
8-11-10 3 17 8-11-10 69487. 107497
8-12-10 11 9 8-12-10 52311 72308
8-13-10 10 9 8-13-10 31747 51598
8-16-10 10 9 8-16-10 21782 67573
8-17-10 15 5 8-17-10 99035 95632
8-18-10 14 6 8-18-10 52063 68877
8-19-10 5 15 8-19-10 146897 226482
8-20-10 6 14 8-20-10 77321 72273
8-23-10 4 14 8-23-10 29601 63019
8-24-10 1 19 8-24-10 86432 149165
8-25-10 12 6 8-25-10 63569 70929
8-26-10 1 18 8-26-10 62080 78690
8-27-10 18 2 8-27-10 40020 40885

**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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