Market internals weaker than major index prices -- again

Some sage once wrote that if you’ve looked into the abyss once and survived, looking into the void a second time is easier. Maybe in a metaphorical sense, but with the stock market the redux can get a bit more difficult, not easier.

What we’re alluding to here is that for the second time in several weeks equities as measured by the major indexes have moved lower. After that first look and the downside tease into the January 28 lows, prices rallied to new highs for the move that began in March 2009. Then came the second downside look that we are in the midst of now. The big difference between the two events is that the January 28 drawdown did not follow through to cause selling to fracture the Intermediate-term uptrend that stretches back to the July/August 2010 lows.

That is not the case currently. Not only did index prices post losses last week ranging from a drop of 2.4% in the NASDAQ Composite to a low of minus 1.0% in the Dow Jones Industrial Average, but all the major indexes are now below defined Intermediate-term uptrend lines. Adding to the negative mix, Cumulative Volume has been leading this move lower. Whereas index pricing fractured uptrends last week, CV dropped below similar Intermediate lines back on February 18.

In addition, Short-term Momentum and now both of our Timing Model Oscillators are negative on the smaller cycle. And while the market is also somewhat "oversold," such readings early in a move can be vague since "oversold" can stay that way. Put another way, if there is more selling "oversold" readings can persist and even work lower.

Click chart to enlarge

Then there are our Most Actives Advance/Decline Line (MAAD) and the Call/Put Dollar Value Flow Line (CPFL) which remain in uptrends, but fading. While those indicators have led the market (MAAD) to a greater or lesser extent (CPFL) recently, there is the potential for more weakness in both. But since neither indicator has traced out a negative divergence prior to recent weakness we must continue to presume that current selling is not of a larger cycle nature to the extent it will seriously damage the Major Cycle uptrend that has been in effect since March 2009. At least not yet. At most over the next several weeks we could see prices work lower toward Major Cycle Price Channel support points (see Table below).

But once corrective action ends, the status of the Major Cycle would then hang in the balance since a failure of prices to create new highs would suggest that the two-year-old uptrend is in an endgame. While its possible net selling over the past few weeks could prove to be the initiation point of larger cycle weakness, we suspect the highs made back on February 18 will have to be tested at some point to determine the viability of the Major Cycle.

So, what we look for is more short-term weakness that could result in a near-term low over the next several sessions. Then a short-term rebound could develop. That rally would probably not result in new Intermediate-term highs since the larger Intermediate-term Cycle ought to remain negative for several weeks. But as the Intermediate Cycle unwinds, the point will come when that Intermediate trend will become "oversold." What happens after those readings becomes critical to the Major trend. As a rebound unfolds, the market must make new highs or the long-term cycle could be in jeopardy.

Index

Daily stops

Weekly Monthly
3/7 3/8 3/9 3/10 3/11 3/11 3/31

S&P

Last
1304.28

%Chg
-1.2%

BUY
1326.28

BUY
1326.32

BUY
1326.14

BUY
1324.49

BUY
1321.42

SELL
1272.41

SELL
1067.15

Dow 30

Last
12044.40

%Chg
-1.0%

BUY
12227.56

BUY
12231.4

BUY
12238.96

BUY
12237.41

BUY
12211.76

SELL
11741.56

SELL
9977.84

NASDAQ

Last
2715.61

%Chg
-2.4%

BUY
2787.79

BUY
2786.14

BUY
2782.60

BUY
2771.68

BUY
2761.82

SELL
2684.82

SELL
2145.96

Val. Line

Last
2954,82

%Chg
-1.8%

BUY
3015.38

BUY
3016.53

BUY
3017.35

BUY
3012.1

BUY
3003.31

SELL
2908.12

SELL
2241.20

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.

McCurtain Most Actives Advance/Decline Line (MAAD)

The Most Actives Advance/Decline Line (MAAD) on both the Daily and Weekly cycles worked lower last week. And while the smaller cycle using Daily data has moved back into "oversold" territory via the MAAD Daily Ratio, the larger Weekly trend remains somewhat vulnerable just above neutral.

It is the short-term bias of MAAD that is currently worrisome, however. After peaking over the past few weeks on both cycles, MAAD is currently back to levels not seen since January 19, or nearly 2% below the latest bids in the S&P 500. Put another way, as measured by this indicator, market internals are weaker than market pricing to suggest more selling could develop, near-term.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

The Call/Put Dollar Value Advance/Decline Line (CPFL) worked lower last week, but relative to the highs put in place back on February 25, the indicator has yet to give up as much ground as index pricing. While options traders are notoriously fickle and could flip on a dime to the sell side, the fact that CPFL continues to hold up relatively well could be a sign that the market will not give much ground before there is a rebound.

Once a short-term low is put in place and some price improvement develops, the extent to which CPFL rallies relative to prices will be important since an upside failure in the face of price improvement would be bearish.

Click charts to enlarge

Conclusion

Stock market weakness last week not only reinforced vulnerability on the smaller short-term trend, it also put more nails in the lid of the Intermediate-term uptrend which began last summer after the July/August price lows. Even though we have yet to see index prices sink below defined Price Channels (see Table above) with coincident negativity from Intermediate-term Momentum and both Oscillators in our Timing Model, there is now a negative tone to the market which could soon result in a confirmed reversal to negative of the Intermediate trend.

Underscoring the currently negative market bias is the fact that Cumulative Volume has exhibited weaker characteristics than index prices. That variance suggests the market may be increasingly vulnerable on the Short to Intermediate Cycles.

MAAD data for past 30 Weeks* CPFL data for past 30 Weeks

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

8-20-10

8

12

8-20-10

176830

488032

8-27-10

6

14

8-27-10

207995

222943

9-3-10

17

3

9-3-10

488323

102016

9-10-10

12

7

9-10-10

287697

82863

9-17-10

15

5

9-17-10

289703

112410

9-24-10

12

8

9-24-10

209124

100570

10-1-10

9

11

10-1-10

145020

121894

10-8-10

14

6

10-8-10

394156

98483

10-15-10

10

10

10-15-10

476975

115923

10-22-10

11

9

10-22-10

2575024

116468

10-29-10

10

10

10-29-10

376133

120924

11-5-10

13

7

11-5-10

547056

71345

11-12-10

5

15

11-12-10

203906

305387

11-19-10

7

13

11-19-10

241420

143672

11-26-10

5

15

11-26-10

116916

149196

12-3-10

16

4

12-3-10

701973

55878

12-10-10

15

5

12-10-10

395991

42814

12-17-10

9

11

12-17-10

441634

61008

12-24-10

17

3

12-24-10

177600

88159

12-31-10

16

4

12-31-10

154527

60647

1-7-11

16

4

1-7-11

458733

97512

1-14-11

12

7

1-14-11

327777

49317

1-21-11

5

15

1-21-11

376104

106618

1-28-11

6

14

1-28-11

227154

249821

2-4-11

17

3

2-4-11

590448

67646

2-11-11

13

7

2-11-11

514220

98361

2-18-11

12

8

2-18-11

2557718

102605

2-25-11

5

15

2-25-11

893080

195746

3-4-11

8

12

3-4-11

170888

225359

3-11-11

10

10

3-11-11

149920

275062



*Note: All data is for calendar 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

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

1-28-11

6

14

1-28-11

49833

103507

1-31-11

14

6

1-31-11

241142

34874

2-1-11

14

6

2-1-11

120947

37779

2-2-11

8

12

2-2-11

133037

16643

2-3-11

9

9

2-3-11

28978

24133

2-4-11

9

11

2-4-11

121512

15259

2-7-11

14

5

2-7-11

92432

24561

2-8-11

13

7

2-8-11

94867

28120

2-9-11

10

10

2-9-11

147855

29984

2-10-11

6

14

2-10-11

133883

37629

2-11-11

12

7

2-11-11

63818

24031

2-14-11

12

8

2-14-11

34610

20791

2-15-11

5

13

2-15-11

2061666

22531

2-16-11

13

7

2-16-11

68997

38095

2-17-11

12

7

2-17-11

282423

21138

2-18-11

7

13

2-18-11

85240

56972

2-21-11

Holiday

2-21-11

Holiday

2-22-11

6

14

2-22-11

752594

117396

2-23-11

9

11

2-23-11

100127

60064

2-24-11

7

13

2-24-11

34581

94353

2-25-11

16

4

2-25-11

35547

26744

2-28-11

14

6

2-28-11

26249

47221

3-1-11

4

16

3-1-11

51170

81255

3-2-11

11

8

3-2-11

48382

51999

3-3-11

16

4

3-3-11

54859

38442

3-4-11

5

15

3-4-11

40515

64053

3-7-11

7

13

3-7-11

39388

58429

3-8-11

14

6

3-8-11

29015

38093

3-9-11

11

8

3-9-11

32783

44973

3-10-11

3

17

3-10-11

68929

155154

3-11-11

4

16

3-11-11

56311

47769



**Note: Unchanged issues are not counted.

Robert McCurtain is a technical analyst, market timer and private investor based in New York City. He is a member of the Market Technicians Association and can be reached at traderbob@nyc.rr.com. 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.

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