Stock market bullish action backed by MAAD/CPFL indicators

Things got more interesting last week when the buying spigots were turned on a bit more. The S&P 500 index rallied 18.91 points while the Dow Jones Industrial average gained 176.80. The S&P was last just 54.65 points from exceeding its April 2010 peak at 1219.80 with the Dow 30 only needing another 251.53 points to better its April level. Strength in those bellwether issues to new highs would re-assert the major uptrend initiated in March 2009.

But while there still remains some doubt between “here” and “there” as to the ultimate outcome of the uptrend since early July, something important happened to one of our key indicators last week that may ultimately give this rally further upside impetus – the Weekly Most Actives Advance/Decline Line rallied to a new high and its best levels since the March 2009 lows to underscore the apparent willingness of Big Money to participate in this rally. The new peak registered new highs by only a few notches and the Daily MAAD Line has yet to confirm strength in the larger indicator, but it wouldn’t take much more buying to push the daily series to a new high also. In fact, one strong up day in the market could lead to new highs for the major averages while a plurality of plusses in daily MAAD data would put that indicator right at its April 2010 highs with only a small nudge needed to push it over the top.

There are also some other positive forces at work -- options buying as measured by our Call/Put Dollar Value Flow Line has been decidedly positive on a daily basis since September 20. In other words, for the past 14 sessions, or nearly three full weeks, Daily CPFL has been on the buy side and moving higher. In addition, last weeks data alone were positive by nearly 4 to 1 on the Call Dollar Value side of the equation.

Positive action by MAAD and CPFL, with the former rallying to a new long-term peak, highlights the fact that both indicators have held up well over the past several months even though it looked back in the spring and early summer as if new short-term lows in the broad market would generate longer-term stock market concerns. Not so. Neither CPFL nor MAAD confirmed that weakness and both held up well into the July lows while also maintaining strategic positioning not far below the April highs. Those neutral ranges have allowed both indicators to move higher over the past two months with Weekly MAAD now leading on the upside to new highs.

On the charts, while the short-term rally that began after the late August lows has shown signs of deteriorating Momentum and near-term “overbought” conditions while still demonstrating less than stellar upside volume, there is no denying that prices have been working higher, net, since the July lows. Simply put, it wouldn’t take much buying to create new major cycle highs. And while the potential Head and Shoulders pattern we outlined in commentaries over the past several months has not yet been fully negated, the odds of a downside resolution of that historical distribution topping formation are dimming by the day.

So despite some lingering concerns on the minor cycle, what could be a “stealth rally” continues. And as history has often made painfully clear to those who have maintained a bearish stance too long after market lows have been created, there is nothing like higher prices to redefine a bullish trend fraught with doubts throughout a consolidation that continued to tweak the bearish consciousness.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD on the weekly cycle rallied last week to a new high for the move that began after the March 2009 indicator and major average lows. Daily data have yet to confirm weekly indicator movement, but it wouldn’t take much for produce upside follow through on that lesser cycle.

What could also be helpful to a higher prices mentality is that neither Daily nor Weekly MAAD Ratios are “overbought.” Both series are marginally overheated, but given the fact that neither series is near an upside historical extreme, there is still room to expand statistically without creating upside excesses. If new highs in the indicator and the averages occur before such readings develop, prices could pull back a bit, the indicator could correct a bit, and the market could then be repositioned for further gains.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL has been net positive for the past 14 market sessions. Last week Call Dollar Volume was positive by a ratio of nearly 4 to 1. In fact, it appears that options buyers have been moving toward a decidedly positive market attitude.

While Daily CPFL data is modestly overdone on the upside, the Weekly CPFL Ratio is not and continues to hold just a notch above neutral. The lack of excesses on that larger cycle, the proximity of the Advance/Decline line in the indicator to the April highs, and new enthusiasm from options buyers could lead to a continuation of options buying with blow over into the broad market with commensurate index movement back above those April resistance highs.

Click charts to enlarge

Conclusion

The worm may be turning in favor of the bulls considering last weeks strength in the broad averages, the proximity of those prices to the late April 2010 price highs, and movement ion some of our key indicators, especially Weekly MAAD which rallied to its best level since March 2009. While we have continued to note the overall lack of enthusiasm in MAAD, there is no denying the direction of the indicator that has been decidedly on the plus side over the past several weeks and since March 2009.

Despite some doubts about the sustainable power of this rally and its ability to keep moving higher despite low volume numbers, it’s also possible that a lack of broad interest is exactly what this market may have needed to turn the corner. It’s when a lot of folks get excited about a trend that caution is warranted. That is currently not the case because many players may not be paying attention or remain in deep doubt as to the viability of the rally.

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.