Today's stock market is like poker and romance -- getting clues

How many times have we been told that the stock market is a psychological game? That because humans are involved in that game all we have to do to come up winners is to understand the psychological part of the contest. It’s a sort of “he knows that I know that he knows that I know….” Or maybe “I know that he knows that I know that he knows.” How about “she loves me, she loves me not, she love me, she….” Anyway, you get the idea and sooner or later you come to that last entry on the chart and its “decision time.” Big time. Then the game becomes luck or science, or both.

So here we are, once again, at the last bar of the chart. Major index prices were up last week with the S&P 500 Index rallying just under 40 points to 1104.51 for a gain of 3.7% on the week. The Dow Jones Industrial average added about 300 points to 10447.93 for a gain of nearly 3%. But where do those gains leave us?

First, the odds are pretty good the short term downtrend begun after the early August highs is over. Prices settled back down onto the upper edge of a defined downtrend put in place by the April and June short-term highs. That line was broken on the upside with a rally that lasted into early August. Then the decline to last week’s levels and support back at the trendline. Call that market symmetry.

Second, now that the early July price lows have been “tested” via recent selling and then recovery, there is a possibility we have seen the end of the intermediate-term correction that began at the end of April. Maybe…. First we would have to see strength back above the early August short-term high at 1129.24—S&P and 10719.94—Dow 30. Such strength would also be good enough to push prices above the trendline that now connects the highs of late April and early August. Call that more symmetry plus necessity.

Third, it would only take a bit more price improvement to not only turn Momentum on the Intermediate-term Cycle positive, but modest buying would also turn our proprietary Timing Oscillator higher and move it upward from “oversold” levels that have persisted for weeks. Scored against the background of a still positive Major Cycle, we suspect the odds for further price recovery in this environment are probably the best they have been for many weeks. Whether such strength would be good enough to push index prices back above the late April highs at 1219.80—S&P 500 and 11258.01—Dow 30 to break the stalemate that has plagued this market for the past four months remains to be seen, but suffice to say there is now there’s a good chance for some upside follow through.

Fourth, given the fact that our Call/Put Dollar Value Flow Line (CPFL) and Most Actives Advance/Decline Line (MAAD) have continued to hold well above their February lows even though index prices did not hold as they faded into those July lows, is still a positive sign. In addition, both indicators are positioned much better than index prices to make new highs for the move initiated in March 2009. While we continue to note the overall reluctance of MAAD to participate on the upside since that 2009 low, there is no denying the indicator has confirmed all of the strength since then as has CPFL.

So, in sum, despite some of the prognostications calling for market catastrophe, there’s nothing like a fairly strong rally to temper negativity, especially when market internals confirm the move. In short, we could see a final resolution of the intermediate decline that has persisted since late April. Of course, our lingering caveat is that no matter what suppositions we make at this point, nothing, and we underscore that word, nothing but strength to new highs will reassert the bull trend but new highs above those April peaks. Nothing…. And that’s definitely market symmetry.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD rallied last week following what could turn out to be the creation of a short-term low back on August 26. The indicator plots currently remain below a defined downtrend line reaching back to the April 14 short and intermediate high and the July 27 minor cycle high. Both points when created led market action by several days before the key indexes sold lower. Current market strength could be a repeat of earlier instances when MAAD led the market on the upside.

But just as with the broad indexes, MAAD must break its downtrend line and it must punch above that April plot high to reassert the uptrend initiated in March 2009. While we remain concerned about the lack of relative upside participation by the indicator since early 2009 to the extent it has recovered nowhere near the ground that the index have, we cannot deny that it has confirmed all new highs during that time frame.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

Like MAAD, CPFL gained last week. Also like MAAD, CPFL must rally above Intermediate-term highs put in place four months ago to reassert the bull market, or to at least suggest the underpinnings of this recently challenged market are stronger than many have suspected. Since CPFL has remained relatively sanguine since late April to the extent it did not weaken as much as stock market prices when there was selling, this could be a sign that options players remain a bit more optimistic about the market’s upside prospects than some other market players.

In short, CPFL upside and downside boundaries are defined. Nothing but strength to new highs will underscore the bull trend while weakness back below the July lows would ring the death knell on a potential price recovery.

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Conclusion

The stock market rallied well last week and was up four of the past five sessions. The big question now is whether there is going to be enough “oomph” to keep the rally going, terminate downtrends going back to the late April peaks, and then create new bull market highs. For the bullish cause the stakes couldn’t be higher since another upside failure developing into the dangerous and volatile fall season would not be a good thing for market optimists. In addition, there must be indicator confirmation in the event index prices are to achieve upside goals. CPFL and MAAD would both have to make new highs with index prices.

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.