Oversold stock market sentiment has caveat

McCurtain Most Actives Advance/Decline Line (MAAD)

Despite the development of net selling in the broad market over the past month and since the mid-February Minor and Intermediate Cycle highs, MAAD has merely kept pace with the broad market. The indicator is neither weaker nor stronger than the major indexes to suggest that this market internal hasn’t much to say about recent selling except to indicate that selling is "normal" and corrective within the context of a longer-term uptrend.

MAAD on the short-term trend as reflected in the MAAD Ratio has dipped into "oversold" territory to hint that a near-term rebound could soon develop. Since index pricing bounced upward from the lower edge of Intermediate Cycle Price Channels, it could be a good bet that MAAD is acting somewhat presciently. MAAD on the Intermediate Cycle is not "oversold" and could still allow for further weakness once a short-term rally has played itself out.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL sold lower last week consistent with market action. But while the broad market has lost nearly one-half its value since the December lows, CPFL has only fallen abut 10% from its recent highs. That lack of pessimism in the indicator suggests that options players remain relatively optimistic on the market and maybe viewing recent weakness as merely an interim corrective gesture. We should note, however, that this group can be fickle.

What will prove to be important in the weeks ahead will be how CPFL unfolds once a meaningful Intermediate Cycle low is put in place. If the market is strong and rallies to new highs and CPFL does not, such action would be consistent with longer-term bearish divergences and major highs like those which developed into the 2000 and 2007 bull market highs. Such a disparity would suggest that options players were developing net selling strategies in the face of statistically unwarranted and higher stock market prices that should inevitably turn lower on the longer term.

A more bullish scenario would call for CPFL and the broad market to make new highs together to simply underscore a resumption of the primary advance.

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Conclusion

While we cannot rule out the possibility that the relative stability which developed in the major indexes last week following penetration of and then some recovery near defined 10-week Price Channels at statistical support (see Table above) could turn out to be the low of the correction that began over a month ago, we doubt it. A more likely scenario would call for prices to rebound somewhat and then sink again within the context of a larger Intermediate Cycle downtrend, but within the context of a still positive Major uptrend.

And while "oversold" conditions are now evident on the shorter trend than Intermediate, history has shown that "oversold" can stay that way as prices sink further. As a consequence we will remain very wary of this market until we see the larger trend is finally "oversold."

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

*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

**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.