Stock market minor cycle dicey

Some years ago in high school sophomore math we were being instructed in how to compute an algebraic equation. Very carefully the teacher went through each procedural step as she worked toward the final result. Finally, the multi-stepped problem was complete. But alas, the work of the class had only begun since a pop quiz was presented to a collective groan. To give confidence to some students, such as your intrepid writer, the instructor said, "Don’t worry. Simply complete the algorithm like I did with the example on the blackboard."

That’s just what most of us did. We sought to work out the problem just as the teacher had done. Unfortunately, when the test papers were distributed many of the answers were wrong, including ours, even thought the solution to the second equation looked as if it ought to follow the same route to completion as the first.

The market has often proven to be a bit like that old algebraic problem in high school math. It looks like it ought to play out the same way, but sometimes it doesn’t. In fact, the pullback that developed last week and which followed the February 18 index highs looks at this point a lot like the little bear trap that culminated in the January 31 interim low that was then followed by strength to new highs for the move.

So what does the down move last week have in common with the weakness a month ago? First, index prices settled back onto a defined Intermediate-term uptrend line that stretches back to the late August "pullback" lows that were a test of the absolute Intermediate-term lows put in place in early July. That trendline gained definition with the December lows and held through the late January pullback.

Second, one of our key indicators, the Call/Put $Value Flow Line (CPFL) gave no ground on the downside last week and rallied to new highs using both Daily and Weekly data on Friday. Clearly, options players remain positive on the market and apparently think that pullbacks should be used to accumulate shares.

And third, albeit at "Overbought" levels, the larger Intermediate Cycle that has remained positive for several months continues to remain positive. Put another way, until proven otherwise, short-term selling could be viewed as mere weakness within the context of that larger trend.

But there are negatives, some new, some old. First, unlike during the January drawdown, Short-term Momentum turned negative this time for the first time since the month-long correction that began early last November and which lead to the December lows.

Second, one of our two key Trading Oscillators turned negative last Thursday after remaining positive since December 2. The other Oscillator remains positive, but not by much.

Third, Cumulative Volume on the Daily Cycle has stubbornly refused to better its late April plot highs (See chart Below) as that indicator has continued to suggest that despite new highs in the market for the move that began in March 2009, the rally from the July lows has been spurred by weaker players. Such underpinnings do not make for a warm and fuzzy feeling on the Major Cycle.

Click chart to enlarge

Fourth, 10 Day Price Channels, the first "failsafe" levels in our Timing Model after the realization of initial upside Profit Targets were met, were fractured last week in all of the major indexes. The Price Channel relationship to index prices has now flipped back to the Buy side in the event confirmatory action of a short-term negative is not forthcoming and more strength develops.

Coming in on the side of Neutrality, however, our Most Actives Advance/Decline Line (MAAD) hit a high back on February 17 using Daily data and on February 18 using Weekly data. No downside supports were broken on either cycle to suggest that the market is currently "sorta maybe" until further price definition unfolds.

So, given the evidence, we are left with three possible scenarios:

First, the near-term trendline supports hold, the market stabilizes further after a bit of bottom testing above last Thursday’s lows, and then resumes its upward trek while working toward those projected Intermediate Cycle and measured move highs we suggested as possibilities last week (1360-1389—S&P 500, 12444-12766—Dow 30, 2953-2991—NASDAQ, and 3107-3150—Value Line).

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