Stock indexes eye last hurdle to big bullish signal

'Grab it, rabbit, run,' or not, as market gets less unstuck

Well that was fun! After running around in the forest without an apparent clue for the past several months, it finally looks like the bullish rabbit may have a chance to see daylight. Not only did the major indexes gain ground last week with the S&P 500 index rallying 5.96 to 1142.71 and the Dow Jones Industrial Average up 106.64 to 10753.62, but strength put both bellwethers back into a price zone not seen since the middle of last May.

From the bullish point-of-view what should be especially encouraging is the fact that the only major obstacle still facing the S&P and the Dow 30 before new highs could be created is the April price highs at 1219.80 (S&P) and 11258.01 (Dow 30). In other words, the rabbit is positioned to break out of the woods -- or not.

Of course, we suspect that the rambling bearish wolf isn’t going to simply step aside and let our little furry friend “go for it” without some resistance. The biggest reason we think that is because Cumulative Volume on the two major indexes is still landlocked back at the statistical highs put in place at the late June short-term high. In other words, while prices have made two successively higher highs (August and currently), CV continues to suggest that strength has been fueled by weaker players each time the market has perked to a short term high. Can that anemic volume performance be eliminated and can prices power higher to break the stalemate? Perhaps.

On another front we continue to monitor the progress of our Call/Put $Value Flow Line (CPFL) and the Most Actives Advance/Decline Line (MAAD). Whereas MAAD has moved to a new short-term high above its late July peak and now has only the April 2010 to better before new highs follow, CPFL remains somewhat indecisive. First, the indicator has not bettered its July highs while holding not much above its August lows. Nonetheless, despite the small disparity between the two indicators, both still remain well positioned relative to the late February lows in that neither declined to new plot lows along with the major indexes.

There are some other concerns, however.

In our September 10 Market Summary we suggested three possible market scenarios. One involved a straight move upward to better the April highs. We still cannot rule that possibility out. The bull market initiated in March 2009 would be re-asserted and the “longs” would be back in Nirvana. The second possibility suggested a rally back above the August highs, but then a failure to better the April highs. That would heighten the bearish case. The third scenario would involve an accelerating move down, new lows below the July price levels, and then the completion of a “C” leg in a large decline initiated in April 2010. Such action could carry the S&P toward 875 and the Dow 30 toward 8740 via bearish measured moves.

Currently, and despite last week’s strength, the market is still positioned to fulfill scenarios #2 and #3 – failure to make new bull market highs with the possibility of a larger cycle decline. Here’s why. Naturally, the consequences of an upside market failure and the lack of new highs are self evident. It’s still possible prices in the major indexes are tracing out and a-b-c correction with current strength developing the final “c” leg of the pattern. No new high would follow. Since the “a” leg is usually equal to the “c” leg in terms of duration and extent, we could see the S&P hit 1158 with the Dow toward 1160. Unfortunately for the bullish camp neither level would be good enough for vote of confidence on the long term trend. In other words, a short-term peak and an upside failure, given recent anemic volume, would almost be a guarantee of a sell off.

In sum, last week’s gains helped the bullish cause. But there is still a big hurdle to overcome. More volume must come into the market to underscore any further gains that might develop. Acting as a drag on prices is the fact that short-term momentum peaked back on September 17. And even though prices in both the S&P and the Dow rallied to their best levels in four months, momentum has suggested that the upside impetus of this rally has abated. So we are left with pretty much the same scenario we have fallen back on for the past several months. Yes, it’s possible for prices to go higher and take out the late April price highs, but it is an upside failure that is the issue.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD rallied to a new short-term high last Monday, but refused to confirm strength in the Dow and the S&P 500 on Friday when both indexes rallied to new short-term highs. That disparity is worrisome but not critical since more market gains could cause MAAD to confirm with a new short-term high.

At the same time, The MAAD Daily Ratio has moved back toward neutral territory over the past two weeks so there is some technical underpinning in the indicator to the extent it is no longer ”overbought.”

Nonetheless, it is the larger Intermediate Cycle in MAAD that continues to worry us. As we have noted often over the past several months, MAAD has steadfastly refused to confirm upside market strength since the March 2009 lows to the extent the indicator has only retraced about 25% of its bear market decline while the broad market has performed much better with the S&P and the Dow recouping nearly 50% of their losses since the October 2007 highs. That divergence is important since we have never seen an instance where MAAD continued to diverge from the market that the divergence didn’t ultimately weigh heavily on the market.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied a bit last week, but unlike MAAD did not make a new short-term high above its August plot highs. While that disparity could be eliminated with more index strength as more options players climb on board the bullish band wagon, the fact that they have yet to confirm market strength, despite a gain of more than 100 S&P points over the past month is nonetheless a cause for concern since, as with MAAD, a continuing upside failure of CPFL would not underscore continued longer-term strength.

Nonetheless, CPFL remains not far below its late April highs in relative terms while continuing to highlight the disparity between index prices and the indicator into the February lows when the indexes made new lows and CPFL did not. That bullish divergence in favor of CPFL underscored the unwillingness of options players to believe in a market cataclysm. It remains to be seen, however, whether or not they believe in a powerful longer-term rally.

Click charts to enlarge

Conclusion

The stock market rallied last week. Both the S&P 500 and the Dow Jones Industrial Average bettered their June and August short-term highs. Unfortunately, Cumulative Volume and short-term momentum did not confirm strength. Nor did CPFL. In addition, the short-term cycle is now “overbought” to the extent broad statistics have returned to the same overheated levels seen at the April, June, and August minor cycle highs. And, prices have yet to better the Intermediate Cycle peaks put in place at the end of April.

While last week’s strength is reason for bulls to feel encouraged, it remains to be seen whether our not our rabbit friend will ultimately make his break into sunlight and out of the forest, or if he will be turned into a rabbit’s foot on the key chain of the still lurking wolf.

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

Date NYSE Adv NYSE Dec Date OEX Call $Volume OEX Put $Volume
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
9-3-10 17 3 9-3-10 488323 102016
9-10-10 12 7 9-10-10 287697 82863
9-17-10 15 5 9-17-10 289703 112410
9-24-10 12 8 9-24-10 209124 100570

*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
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
8-30-10 6 14 8-30-10 19791 51145
8-31-10 11 9 8-31-10 25663 67903
9-1-10 15 5 9-1-10 119254 49407
9-2-10 17 3 9-2-10 65874 27545
9-3-10 15 4 9-3-10 110203 49266
9-7-10 6 14 9-7-10 117904 30367
9-8-10 16 3 9-8-10 28574 24874
9-9-10 16 3 9-9-10 75428 56235
9-10-10 12 7 9-10-10 50482 44100
9-13-10 18 2 9-13-10 135619 55066
9-14-10 11 9 9-14-10 36948 18317
9-15-10 13 7 9-15-10 22693 23282
9-16-10 10 10 9-16-10 16858 13219
9-17-10 15 5 9-17-10 25975 9379
9-20-10 19 1 9-20-10 33678 64438
9-21-10 4 16 9-21-10 23912 20088
9-22-10 8 12 9-22-10 12657 10963
9-23-10 6 14 9-23-10 17041 13044
9-24-10 18 2 9-24-10 32460 13474

**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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