Short-term stock market trend on shaky ground

The stock market went a bit wobbly on the short-term cycle last week with the S&P 500 Index, the NASDAQ Composite, and the Value Line Index all losing ground. The three bellwethers were lower by .7%, 2.3%, and 2.4%, respectively. But Super Blue Mama Dow bucked the trend by gaining just under a percentage point on the week while rallying to a new high for the move last Friday following index peaks in the other bellwethers last Tuesday. Adding to the short-term concern both the NASDAQ and the Value Line fractured on the downside trailing 10-day Price Channels that have remained intact since the near-term rally began the first week of December.

So which index has credibility at this point? The venerable Dow or the more broadly weighted indexes?

While we know that the next larger Intermediate and Major Cycles remain positive in all four indexes, we have been suggesting over the past couple of weeks that the smallest short-term trend has begun to look tired. Last week’s challenge to that uptrend could be an indication that the broad market is on the verge of a near-term pullback. Selling below defined Price Channels (see Table Below) with developing negativity in our proprietary Trading Oscillators would ring the death knell on that smaller trend. How such a pullback/consolidation plays out would then determine the staying power of the larger Intermediate Cycle that began after the early July lows. At this juncture that larger trend wouldn’t be in jeopardy, however, unless index prices faded between 5% and 6% from current levels (again see Table Below).

On the indicator front, while Cumulative Volume in the S&P, Dow, and NASDAQ bettered the early November highs via strength off those December lows to simply confirm the last little uptrend, CV in none of those indexes has been able to rise above the late April highs that developed before the May/June pullback that encompassed the Flash Crash and its CV damage. As we have pointed out before, we continue to wonder if market participation since the July lows has been of poor quality relative to other bull moves because those April CV highs have yet to be surpassed.

There is also Momentum on all cycles that hasn’t made new highs on the Minor Cycle since mid-December with coincident failures on the larger trends. It would only take a small downside nudge to push lesser cycle Momentum numbers into the negative column for the first time since early December. The near-term Momentum failure simply underscores the fact that the market has been losing upside steam as the rally has progressed.

Nonetheless, our Call/Put Dollar Value Flow Line (CPFL) that has been reflecting the optimism of options players spiked to a new high last Friday and on the week. In fact, Friday’s Dollar Value numbers were nearly 9 to 1 on the upside. Clearly this indicator has yet to take on a bearish tone. And given the fact that CPFL created a noticeable bullish divergence into the July lows, we can only surmise that any short-term pullback in market prices, if it develops, will not be seconded in terms of any current bearish potential by CPFL. Nothing but a failure by the indicator and then a non-confirmed rally by prices would change that outlook.

And last, while our Most Actives Advance/Decline Line (MAAD) held below its highs reached the week ending January 14 last week on both the Daily and Weekly Cycles, it wouldn’t take much for MAAD to hit new highs. Naturally it would succumb to index selling pressures with the broad market, but with the Daily MAAD Ratio already correcting back into "oversold" territory after just a week of nearly lateral movement on the smallest cycle, we wonder if any weakness in the broad market could turn out to be muted. The MAAD Weekly Ratio is only modestly "Overbought" after seven months of the larger cycle rally and after one "internal" correction of "Overbought" levels.

Net, we now hold out the possibility that the short-term trend, the trend that can last from a few weeks to a couple of months may be on the verge of a corrective phase. But given the bias of the overall market since July, let alone since March 2009, we suspect that any pullback could turn out to be of relatively minor importance to the extent such selling leaves the larger Intermediate Cycle intact. If we might be underestimating the determination of sellers relative to that Intermediate trend, then we would have to take a more serious look at the Major Cycle that has been underway for the better part of the past 22 months.

Note: Stop levels, a function of the extant trend, are based on the trailing moving average price channels for the Highs or the Lows of an index and presume a continuation of recent market momentum and volatility. Stop levels should only be used as an entry or exit guide and in conjunction with other market entry and exit strategies.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD on both the Daily and Weekly Cycles held below its January 14 plot highs last week, but it wouldn’t take much to push the indicator to its best levels since the March 2009 lows. Nonetheless, it’s also possible that MAAD has begun to presage a short-term pullback in the major indexes within the context of a still positive Intermediate Cycle uptrend.