Short-term uptrend likely over for equities

The broad stock market has probably reversed the short-term uptrend began in early December. It’s likely that the peak the S&P 500 index put in place last Friday at 1302.67 will prove to be its best level for at least a few weeks. With broader coincidence the Dow Jones Industrials made a high on January 26 at 12020.52; the NASDAQ Composite and the Value Line indexes on January 18 at 2766.17 and 2954.24, respectively. The extent to which those major indexes deteriorate and whether market action proves to be merely a brief hesitation or a larger drawdown will determine the staying power of the larger Intermediate Cycle and subsequently the Major Cycle.

While we have continued to suggest that strength since the July lows has been suspect because of the lack of upside volume follow-through, we have also pointed out that price is the ultimate arbiter. In that vein, new highs for the move that has evolved since the March 2009 lows cannot be denied. Nonetheless, while it’s unlikely that this short-term high will prove to be the high for the 22-month-old bull trend, it is still important because it will use up time. When a series of trailing moving averages are poised to generate negative signals to the extent they need room to move in a bull trend, time used up is not a good thing.

So, we wait and watch….

Underscoring that watchful mode, we again note that Cumulative Volume in all of the major indexes has yet to better its April high. Thus, we remain concerned about the quality of the activity which has driven prices higher over the past several months.

A classic indicator like the ARMS index, a short-term measurement of market breadth, is currently "Overbought." The Dow Jones Industrial Average and the Dow Jones Transportation Average, two key components of the venerable Dow Theory are at odds in that the Dow 20 failed to confirm the new high in the Dow 30 and was moved to at a new short-term last Friday.

Our trusty Most Actives Advance/Decline indicator (MAAD) peaked back on January 14 and has been unable to better that level over the past two weeks. Since MAAD has had a tendency to lead prices into short-term market tops over the past several years, there is no reason to suspect that it is going to act differently this time around. One note in favor of the market, however, is that the Daily MAAD Ratio remains more "Oversold" than not on that smaller trend to suggest that weakness could be limited. The larger Weekly MAAD Ratio is moderately overheated, however.

And then we come to options activity as reflected in our Call/Put Dollar Value Flow Line (CPFL) which hit a new high for the move last Thursday, albeit on shrinking call and put volume. It then took a thumping on Friday. But CPFL has yet to reflect a negative divergence to presage a significant market decline.

Net, the big question is not so much "is the market going to correct on a smaller cycle basis," but "how much" is it going to pull back? The answer to the latter part of that question will determine the longer-term viability of the Major Cycle uptrend.

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. Whether or not a specific index is suggesting a "Buy" or Sell" is determined by whether or not index prices are above or below the current channel Stop levels. Stop levels should only be used as an entry or exit guide and in conjunction with other market entry and exit strategies.