Stock indexes to new highs, indicators don't confirm

While we must admit that we have not liked the "feel" of this market for months, it’s true that higher prices have overcome negative thinking and the "Wall of Worry" by rallying lockstep to new highs. That is why we have erred on the side of positive possibilities while also suggesting protection against the downside. But, come to think of it, protecting against the downside is always a good idea.

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)

A marked divergence currently exists between Daily and Weekly data in our MAAD indicator. While the Weekly series rallied to a new high and its best levels last week and since the March 2009 market lows, Daily data remains back at levels not seen since early January.

While we tend to prefer the more sensitive smaller cycle series, the fact that Weekly MAAD has demonstrated strength by re-asserting its longer-term uptrend is cause to wonder at the failure of the shorter-term data. While several positive sessions in Daily MAAD statistics would be enough to create new highs for the indicator and to confirm recent short-term index strength, we suspect that the recent Daily MAAD failure relative to new highs in index prices could be preliminary to a negative change in the overall market. If so, positive strength in Weekly MAAD data could prove to be an anomaly.

Nonetheless, with the upside failure of Daily MAAD data, there is a suggestion Smart Money continues to have reservations about this market.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

While CPFL perked a bit higher last week, the bellwether indicator continues to hold below plot highs made back on February 25 and despite strength by the major indexes that have exceeded the February index price highs. While it’s true that CPFL has been confined to a very narrow range for the past two months and could punch out to a new plot high with relative ease, the fact that it has not confirmed recent strength is a cause for worry from a bullish point of view. That upside failure is an indication options players have been buying enough puts on a dollar value basis to offset call buying by other options players.

While it’s always true that the net of Call $Volume vs. Put $Volume can be the result of a variety of hedging strategies, from a historical perspective we believe that a negative divergence by CPFL in a bull trend is not a good thing for the sustenance of a rally.

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Conclusion

Market index prices rallied to new highs and their best levels last week relative to the March 2009 highs. But the majority of our market indicators did not confirm that movement. The lone exception was Weekly MAAD which bettered its mid-February plot highs by a small margin.

While there is nothing like higher prices to negate the implications of negative market internals, we have come to learn that prescient and unfavorable indicators are eventually resolved via lower market prices. Clearly we would like to see higher prices accompanied by positive market internals. It is when negative market divergences develop that caution is warranted. This remains one of those times.

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.