Stock market intermediate-term bull in doubt

While it’s probably premature to suggest that recent stock market weakness, despite recent strength above resistance at the late April highs in early November, is the beginning of a Sisyphean conspiracy, we must admit we are beginning to wonder if lingering selling pressures could prove to ultimately be more disruptive than many think, given the performance of the major indexes over the past year.

While it’s true that the S&P 500 Index has gained 6.6% since its close at 1115.10 on December 31, 2009, the bellwether has also lost 2.4% since the April 26 peak at 1219.80. For the Dow Jones Industrial Average there has been a 6.3% gain since last December’s close at 10428.05 with a fade of 1.4% since the April highs. And while both indexes surpassed the April levels with strength to new short and intermediate-term highs the week ending November 5, the current short-term pullback has pushed prices lower, and back below the April highs, to put the larger Intermediate-term Cycle in doubt once again.

Underscoring our lingering concerns about the viability of the Intermediate-term uptrend that began after the early July lows (1010.91—S&P 500 and 9614.32—Dow 30) is the fact that Cumulative Volume numbers remain weak. In fact, CV in both the S&P and the Dow has performed poorly since the April highs and notably since the mini-Crash in May. While prices in both indexes exceeded the late April highs before failing over the past several sessions, Cumulative Volume has only recovered about 50% of its losses since July and continues to demonstrate little inclination to do better. All that would be required currently to put a major dent in the bullish case would be for the market to sell lower on increasing volume, action which would almost certainly force CV lower and possibly back below the early July lows.

Also of concern is the fact that our Most Actives Advance/Decline Line (MAAD) on the Daily Cycle continues to work lower. The Daily MAAD A/D Line was last at levels not seen since early September when the S&P was near 1100 and the Dow toward 10250. That failure on the smaller cycle comes on the heels of the inability of Daily MAAD cumulative data to better the April highs along with Weekly MAAD statistics back on November 5. In fact, Daily MAAD data peaked on October 12 and has been moving lower ever since.

While our Call/Put Dollar Value Flow Line (CPFL) has continued to hold toward its new Intermediate Cycle highs reached on November 11 with the Daily CPFL Ratio currently deeply "oversold," downside extremes in the ratio on both the daily and weekly time frames have proven to be historically unreliable. In late 2008 the weekly series dipped into "oversold" territory, but the broad market continued to decline for another five months. The Ratio simply became more "oversold."

So, notwithstanding strength in the major averages in early November to their best levels since the uptrend began after the March 2009 lows, we are left with yet another minor cycle correction. This time the pullback is the second since the early July price lows. While near-term weakness could prove to be a brief corrective phase within the context of that otherwise positive trend, we know for a certainty that the time will come when the market will peak simultaneously on the short, intermediate, and major trends. Given the status of our key indicators and of Cumulative Volume, the lingering question as to whether or not the rally since March 2009 is merely a countertrend rally in a primary bear or something better will inevitably be answered. In the meantime, will Sisyphus be able to push the rock upward into new high territory yet again – or not?

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily and Weekly MAAD data moved lower last week to confirm market direction with the daily series declining to its lowest levels since early September. On the larger Weekly Cycle, MAAD faded even though the weekly series rallied to new highs and its best levels since the March 2009 lows during the week ending November 5.

While MAAD Daily and Weekly Cycle Ratios tend to be somewhat more reliable when they become "oversold," what remains to be seen is if MAAD will confirm strength by price action if the broad market rallies to new highs. Given the fact the Daily MAAD failed on the first try, we wonder if it will be able to overcome statistical resistance the second time around. Not only has the indicator on that smaller cycle given back nearly 50% of its gains since the late August lows, but it would have to recoup all of that ground plus a bit more to make new highs with market prices.

Is such movement possible? Yes, but another upside failure of MAAD on the short-term cycle would not bode well for a continuation of better market prices since history has shown that when Smart Mooney begins selling in earnest, it is almost impossible for the broad market to remain bullish much longer.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily and Weekly CPFL data continue to hold up well relative to the new cycle highs made over the past two weeks. Corrective price action since the November 5 highs in the S&P and the Dow 30 has forced CPFL Overbought/Oversold Ratios lower and toward downside "oversold" territory, but as we’ve mentioned before, while the somewhat positive status of the indicator is important and the Daily CPFL Ratio is now reflecting "oversold" conditions, such movement may not necessarily be an indication index prices are poised to move higher. Penetration of upside price resistance and the penetration of defined price channels are a better way to suggest a reversal of the short-term negative to positive.

So for the moment CPFL as a measurement of options buying and selling isn’t saying much except that the overall uptrend begun after the early July Intermediate Cycle lows remains intact. The indicator rallied to new highs for the move above the late April market price highs and not far from levels reached nearly three weeks before the broad market confirmed CPFL strength. That action reflects a bullish tone by options buyers. The market must confirm by also reaching new price highs.

Click charts to enlarge

Conclusion

Short-term price weakness continued for the second week in a row into last week via light Thanksgiving Holiday trading. The S&P 500 Index faded 7.33 points, or less than 1% while the Dow Jones Industrials was down 111.55 points, or just under 1%.

While we think that weakness over the past several sessions could prove to be merely a hesitation in the larger intermediate uptrend begun after the early July price lows, what remains to be seen in the face of anemic upside volume, is just how much further this rally will carry before its death knell is rung. As we have noted recently, the longer it takes the market to move to the upside and the less enthusiasm emanates from the bullish camp, the more difficult it will be to sustain the Major Cycle uptrend which continues to hint that strength over the past 21 months could ultimately prove to be nothing but a powerful countertrend rally in a larger bear market.

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.