Stock market range bound, between extremes

The stock market, like social history, ultimately reflects extremes, the high and low points in its evolution. What is significantly remembered are those times in market history like the Crash of 1987, the "irrational exuberance" and tech bubble that preceded the market highs in 2000, and most recently the top in October 2007 that was followed by the second worst decline in stock market history. In other markets there was the Tulip Bulb Mania in 1637, the big markup in gold that lead to the highs of 1980, and most recently the 2006 peak in real estate market prices.

These are the dates that are easy to remember and which have become generational.

But there are other times which can be called the "in betweens," those periods when the markets are not at one end of the spectrum or another, but are simply evolving toward those resolution points. Such periods are usually characterized by an apparent lack of definition by price action and when investors can become frustrated. On a very grand scale the massive 16 year sideways consolidation in the stock market from 1966 through mid-1982 suggested to many at that time that equities would remain perpetually "range-bound." Obviously that was not the case.

But cycles can also be compressed into much shorter periods like the one the market has been confined to since mid-February and during which only short-term victories, up or down, have been scored. It is these kind of "in betweens" that become the most difficult to analyze. In fact, some years ago, one market analyst tired of writing essentially the same commentary week after week about a dull market eventually wrote a short commentary in which he said, "I really have nothing more to say right now."

We probably won’t ever get to that zone of analytical frustration because we know the financial markets are a lot like war when periods of sheer boredom are interspersed by moments of abject terror. Like all market junkies, that is what keeps us coming back, recent market history notwithstanding.

In that latter vein, despite the fact that the mid-February highs were bettered two weeks ago by the Dow Jones Industrial Average and the Value Line Index, those same highs were not surpassed by either the S&P 500 Index or the NASDAQ Composite. So the market’s verdict on the underlying Intermediate Cycle trend remains unresolved. While it may be safe to say the market has been locked within a broadly defined trading range for the past two months, it’s also true that there has been weakness on the smallest Minor Cycle. Adding to the mix, Short-term Momentum turned negative last Friday. That knowledge, when coupled with that fact only a bit more weakness on the larger Intermediate Cycle could turn Momentum negative, the trading range of the past two months takes on a bit more ominous tone.

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We also have the failure of our Most Actives Advance/Decline Line (MAAD) to respond to the recent short-term rally that culminated in those mid-March short-term highs which created new highs for the move, or not, depending on the index. That upside failure in MAAD suggests Smart Money has become increasingly skeptical of this market over the past several weeks and reluctant to buy on strength.

Then there is our Call/Put $Value Flow Line (CPFL) that peaked back on February 25 and which subsequently failed to demonstrate much weakness into the mid-February/mid-March decline. But it then also demonstrated virtually no upside strength into the April 8 short-term highs. At this point, it would not take much selling to force CPFL below its mid-March minor support lows.

In sum, this market is clearly at one of those "in between" moments. While the Short-term Cycle has taken on a somewhat unfavorable tone, it’s still possible that near-term bias could prove to be yet another hesitation in the larger Intermediate Cycle uptrend that has been in effect since last July. But given the fact that Intermediate trend is getting very long in the tooth, we cannot rule out the possibility THIS short-term down could be THE down to terminate the Intermediate uptrend in effect for the past nine months.

Oh, and then there’s the Major Cycle which remains positive but with its own set of defined neuroses like deteriorating Momentum…. Stay tuned.

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)

MAAD looks weak compared to the broad market. After peaking several weeks ago the indicator sank toward trendline support into the mid-March lows while also creating a Short-term "Oversold" condition. Then MAAD enthusiasm crumbled. While the market indexes rallied toward or just beyond the mid-February highs and the best levels since March 2009, MAAD fell asleep.

Currently MAAD is back to levels, using daily data, not seen since last December. And while we must note that larger cycle Weekly MAAD data equaled its mid-February highs two weeks ago, that series also demonstrated deterioration last week. Like the broad market, MAAD is also currently stuck in an "in between" zone.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

Since the late February highs options players have remained non-plussed about the stock market, or at least remain about evenly divided relative to where they think equity prices are headed. Not only did CPFL fail to give up much ground during the mid-February/mid-March downtrend, but there was little enthusiasm during the reflex rally. Since the April 8 highs CPFL has been fading back toward its March 23 support lows that were actually made a week after the broad market bottomed on March 16. And it wouldn’t take much more options selling to breach those support lows.

Clearly, options players remain uncertain. But there is also a somewhat negative and internal statistical undertone developing which could ultimately manifest itself in market prices. This would especially be the case if CPFL plots break supports at the recent lows.

Click charts to enlarge