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.

Click chart to enlarge

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.

Index Daily Stops Weekly Monthly
4/4 4/5 4/6 4/7 4/8 4/8 4/30

S&P

Last
1332.41

%Chg
1.4%

SELL
1292.30

SELL
1296.45

SELL
1302.82

SELL
1308.44

SELL
1313.60

SELL
1293.20

SELL
1086.00

Dow 30

Last
12376.72

%Chg
1.2%

SELL
12001.85

SELL
12052.76

SELL
12114.36

SELL
12169.86

SELL
12212.93

SELL
11936.79

SELL
10253.64

NASDAQ

Last
2789.60

%Chg
+1.6%

SELL
2690.10

SELL
2699.50

SELL
2714.98

SELL
2728.59

SELL
2741.59

SELL
2720.16

SELL
2229.49

Val. Line

Last
3072.05

%Chg
+2.2%

SELL
2947.72

SELL 2958.66

SELL
2973.82

SELL
2990.59

SELL
3006.52

SELL
2924.78

SELL
2340.83

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.

Click charts to enlarge

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.

Click charts to enlarge

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

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

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

3-25-11

13

7

3-25-11

202631

142789

4-1-11

16

4

4-11-11

209146

104628



*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

2-18-11

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

3-21-11

10

10

3-21-11

28622

55081

3-22-11

4

16

3-22-11

35199

23573

3-23-11

11

9

3-23-11

29479

67825

3-24-11

13

7

3-24-11

54166

30110

3-25-11

13

7

3-25-11

63815

50668

3-28-11

11

8

3-28-11

46232

26249

3-29-11

8

12

3-29-11

76894

22596

3-30-11

12

7

3-30-11

40045

47020

3-31-11

6

14

3-31-11

26567

22852

4-1-11

17

3

4-1-11

38507

41917

**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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