Stock market continues advance after short-term lows

Since the Intermediate Cycle low was put in place nine months ago via the intraday bottom on July 1, 2010, there have been four defined Minor Cycle rallies, or uptrends, and three Minor Cycle declines, or pullbacks. Also since the Major Cycle lows were put in place March 6, 2009 just over 25 months ago, there have been three statistically measured Intermediate Cycle uptrends and two corrective phases.

In the current Intermediate phase, the mid-February highs were "Overbought" in terms of Short-term Momentum and our proprietary Trading Oscillators and there was deterioration in one of our key market indicators, the Most Actives Advance/Decline Line (MAAD). But after just a few weeks off net selling, virtually all of the smaller cycle indicators moved into "Oversold" territory and potential zones of short-term opportunity.

At the same time, after threatening to turn negative while Minor Cycle negativity was developing from mid-February to mid-March, the larger Intermediate Cycle failed to confirm a negative reversal to suggest Short-Term weakness could prove to be nothing but a mere pullback within the context of that positive Intermediate trend that was still positive within the context of the still favorable Major Cycle uptrend.

And so it was.

Last week both the Dow Jones Industrial Average and the Value Index rallied to their best levels since March 2009 with gains of 1.2% and 2.2% respectively. The S&P 500 and the NASDAQ Composite gained 1.4% and 1.6% although both indexes remain somewhat shy of making new highs.

So once again we are left with a market which has refused to succumb to significant selling pressures except insofar as short-term profit-taking is concerned. In fact, this most recent corrective phase has many of the earmarks of the January/February 2010 pullback and the somewhat smaller corrective phase this past November that preceded the rally off of the December 2010 lows.

Of course, coming with a resumption of the larger cycle uptrends is the fact that "Overbought" readings can apparently continue to persist on those larger cycles. Coming off of the March 2009 lows the Intermediate Cycle popped into "Overbought" territory and stayed there until the January 2010 highs, pulled back to neutral and then took a run again at upside statistical extremes which lasted until the April 2010 highs. The current Intermediate uptrend which followed the July 2010 lows developed "Overbought" levels by mid-October 2010. Except for brief, near-term downside flutters the upper extremes have held for months. That bias could continue.

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In the background the Major Cycle remains positive. Since that bigger trend continues to spur prices higher after each smaller cycle pullback by simply offering yet another near-term buying opportunity, we wonder where this bull trend will end.

But Major Cycle Momentum could offer some clues to the inevitable finale since it is Momentum that historically tends to peak about one half way through a sustainable trend. In the case of the longer-term rally, we have yet to see Momentum get back above its April 2010 prices highs, despite strength in the major indexes to new price peaks. If we presume that Momentum will continue to fail on the upside and that the April 2010 highs were the one-half way point of this bull trend then we can make some upside projections as calculated from the March 2009 lows to the April 2010 highs and beyond.

We could see prices top out 16% (Dow 30 at 14402), 17% (S&P 500 at 1564), 19.4% (NASDAQ Composite at 3330) to 26% (Value Line at 3868) by sometime in the third quarter of 2011. Those measured move levels and the time symmetry involved would be consistent with the historical requirements of Momentum.

Put another way, while further short-term corrections will certainly develop in the months ahead, Major and Intermediate Cycle trends should continue to positively influence prices on the immediate horizon. But if we are correct that the failure of Major Cycle Momentum since April 2010 could be predicting the ultimate failure in prices, we could be looking toward Major Cycle highs before the end of this year.

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)

Despite the fact that the major market indexes have recovered nearly all of the losses incurred since the mid-February price highs, the Most Actives Advance/Decline Line (MAAD) has demonstrated little upside enthusiasm over the past three weeks. In fact, while the Dow Jones Industrial Average and the Value Line Index rallied to their best levels since March 2009, MAAD has only retraced about one quarter of its losses since mid-February.

That divergence in our "Smart Money" indicator could ultimately prove to be worrisome, especially if the market continues upward to new highs and MAAD does not. The last time such a negative divergence developed was into the October 2007 highs when the indictor peaked the week of July 13, 2007 and nearly three months before the broad market put in place its final bull market peak.

Put another way, nothing but strength by MAAD to new highs along with market prices would pull it away from its currently negative bias. With the Daily and Weekly MAAD Ratios now both near neutral to offer upside potential, we cannot rule out improvement, but such a positive trend is now mandatory.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

While the Call/Put Dollar Value Flow Line (CPFL) did not demonstrate much deterioration during the February/March pullback, it has also demonstrated little upside enthusiasm since the March 16 lows. And while it would take little net call buying on a Dollar Volume basis to push the indicator to new highs, the lack of upside follow-through would be an ill omen for the market’s longer-term prospects.

The last time a major divergence developed between CPFL and index prices was the week of July 7, 2007 and nearly three months before the market reached its bull market highs.

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Conclusion

The stock market continued its recovery last week after what now looks like yet another short-term low and pullback within the context of a lingering Intermediate to Major Cycle uptrend. In fact, market weakness from mid-February to Mid-March has many of the earmarks of previous corrective phases in this bull market now in its 25th month. Each of the previous Minor Cycle declines has been characterized by short-term "Overbought" conditions followed by several weeks of weakness that resulted in short-term "Oversold" conditions. Recently, as corrective action developed, the larger Intermediate trend refused to turn negative to suggest lesser cycle action was merely an hesitation in the larger trend.

But with Major Cycle Momentum still failing to make new highs (see discussion above) and with both MAAD and CPFL now both failing to confirm market strength, so far, we wonder if the development of further, negative market internals could lead to an important longer-term high.

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.