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.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied to new highs on both the Minor and Intermediate Cycles last week. Those levels are the best plot points since the longer-term uptrend began at the March 2009 market lows. At this juncture, CPFL is simply in synch with the broad market. If the time comes, however, that the indicator begins to falter on market strength, or if the indicator pulls back on the next short-term retreat and then fails to advance with prices once the correction is over, as was the case into the late 2000 market highs, then we would suggest that the longevity of the Major Cycle would be seriously in doubt.

Currently, however, there is no such divergence evident so we must presume that to suggest anything but a smaller cycle pull back for the market in general would be premature.

Click charts to enlarge

Conclusion

Despite what looked like the beginning of a Minor Cycle drawdown following concerted weakness on January 28, the broad stock market rallied last week to indicate that while lingering negative divergences could come back to eventually haunt the market, there apparently seem to be enough buyers waiting in the wings to buoy prices following smallest cycle weakness. At least for the moment….

The time will come, however, when buyers will be on the short end of the short term stick. At that inflexion point, the Short-term Cycle will turn negative and then it will be a matter of determining how such weakness will then affect the larger Intermediate and Major Cycles.

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.