Intermediate upside targets in sight for stocks

More buying in the major indexes last week propelled the S&P 500, Dow Jones Industrial Average, NASDAQ Composite, and the Value Line Index to their best levels since March 2009 with gains of 1.0%, .9%, .8%, and 1.4%, respectively. Adding to the bullish side of the equation, although Cumulative volume has yet to confirm index strength by bettering those late April 2010 CV plot highs, the indicator is nonetheless well positioned and threatening on the upside.

Also on the positive front, our Call/Put $Value Flow Line (CPFL) spiked substantially higher last week along with the Most Actives Advance/Decline Line (MAAD). CPFL data reached its best level since November 2007, just several weeks after the October 2007 bull market peak. While MAAD continues to underscore market action it remains weaker than CPFL and has only been able to equal levels put in place in June 2008.

Since it is inevitable that the Intermediate-term advance begun following the July 2010 lows will come to an end, it is now our job to do our best to determine at what level that top might occur. Using the early July and late August prices lows we are now able to create two upside targets and a range into which prices could "nest" prior to a meaningful pullback.

To create upside price targets for the four indexes, we calculated from the July and August 2010 lows (see Table above) to the November 2010 highs and then the beginning of the correction that lasted until early December 2010. We then took the difference between those two sets of calculations and added them onto the price lows made in December. Extrapolating those numbers forward we establish two sets of upside targets that range from 1360-1389 in the S&P, 12444-12766 in the Dow 30, 2953-2991 in the NASDAQ, and 3107-3150 in the Value Line. Clearly, if those calculations are correct, index prices may still have some room on the upside before this Intermediate-term advance is over.

There is another reason we suspect the eventual peak in the Intermediate Cycle that is now nearly eight months old could end toward our calculated targets. Our "half span" moving averages (see Market Summary for week ending November 12, 2010 and a discussion of J.M. Hurst’s "Profit Magic of Stock Transaction Timing") are giving indications that the "midway" point of the Intermediate-term rally could prove to be somewhere near that November/December consolidation level.

While there is certainly no guarantee that the two half-span moving averages will stage a "crossover" at that midway juncture, given the relatively orderly nature of the advance since last summer and the status of the two averages currently, we wouldn’t be surprised to see this Intermediate uptrend end somewhat higher than current levels and toward our upside targets with the crossover points on course, or close to the price targets. Of course, we must also not rule out the possibility that prices could stall this side of their objectives since the lion’s share of this rally has been achieved relative to upside measurements.

In sum, the Short, Intermediate, and Major Cycle trends remain intact. Of the three, the smallest Minor Cycle will turn lower first and then the Intermediate trend. The extent to which the latter gives ground on the downside will determine the staying power of the Major Cycle that has been developing since March 2009 and nearly two years ago. To keep the Intermediate trend intact we would not want to see index prices sink below defined 10-week Price Channels (see table below). When the Intermediate trend does eventually turn down, however, Major Cycle Price channels must hold to maintain the longer term trend.

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.