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.

Click charts to enlarge

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.

Click charts to enlarge

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

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

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

3-18-11

5

15

3-18-11

280218

482751



*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

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

3-14-11

7

13

3-14-11

32388

125685

3-15-11

6

14

3-15-11

95729

156286

3-16-11

2

18

3-16-11

78661

306662

3-17-11

3

17

3-17-11

90132

90977

3-18-11

13

7

3-18-11

52893

64412

**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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