Market reports of bull's death appear exaggerated

Last week’s headline on our Market Summary read: "Short-term uptrend likely over for equities." Guess not since the major indexes all rallied upward from the January 28 intraday bottom with the Dow Jones Industrials gaining 2.2% on the low side the NASDAQ Composite adding 3.3% on the high side. Plus, all of the major indexes made new highs for the move and penetrated upside "failsafe" Price Channels after those same trailing levels were fractured via selling several days ago.

But lest we be pilloried for an oversight after suggesting that a beautiful little "bear trap" on January 28 probably ended the short-term uptrend that began in early December, we would like to present another quote which may put our error into a somewhat better light:

"Stocks have reached what looks like a permanently high plateau." – An economist, 1929.

Oh boy!

So, somewhere between a short-term top which is all but inevitable even if prices gain a bit more before falling back, and a major market call which proved to be simply disastrous, we can only suggest that context will ultimately decide the issue. In addition, that downside feint on January 28 provided yet one more point of support for the intermediate-term advance which began back at the July 2010 intermediate-term lows. We now have three, short-term support lows in evidence: July and December 2010 and then the low made on January 28.

It is important to view the short-term cycle within the framework of the larger intermediate and major trends. While it goes without saying that the smaller trend is overbought with Momentum and Cumulative Volume failures across the board in the S&P, Dow, and NASDAQ, negative divergences are also evident on the Intermediate and Major Cycles.

Click chart to enlarge

Notice the accompanying chart of Cumulative Volume relative to the S&P 500 Index that stretches back nearly five years. CV kept up nicely with the index following the March 2009 lows. But into the April 2010 highs the indicator began to fail. When the "Flash Crash" hit the market in May 2010, CV was hurt badly and it has not recovered since then despite strength and new highs in the broad market. In fact, Cumulative Volume is now weaker than it was into the October 2007 highs and just prior to the second worst decline in stock market history. Similar upside failures are also now evident in Momentum on all three cycles. And for those students of the market who follow the venerable Dow Theory, the Dow Jones Transportation Average is now at odds with the Industrials in that the former peaked back on January 18 with the latter making a new high last Friday.

The bright spots in this market? Obviously prices have yet to weaken significantly as evidenced by the rapid short-term recovery following that January 28 low to reflect the fact that there are apparently still buyers on weakness. In addition, our Call/Put Dollar Value Flow Line (CPFL) on both the Daily and Weekly cycles continues to make new highs for the move initiated in March 2009. Clearly, options buyers, a notoriously fickle crowd, remain onboard.

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