Key reversal in equities? Markets eerily similar to 2007 top

In sum, although we are not prepared to suggest that the May 2 Short-term highs were the top of the bull move that began in March 2009, the striking similarities to the earlier bull market highs with coincident indicator divergences makes us wonder if the market could be on the verge of at least an Intermediate-term pullback of some significance. In terms of the market being ripe for a pullback, it is certainly a fact that the Intermediate Cycle uptrend that began in July 2010 has gotten very long in the tooth.

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)

Both MAAD on the Daily and Weekly cycles moved lower last week, but only MAAD on the Daily Cycle remains noticeably weaker than market prices after peaking back on March 3. Weekly MAAD made a new high the week ending April 29.

What is interesting about MAAD on the Daily Cycle is the nature of the chart pattern than has been developing since the mid-March lows. Smaller cycle plots have been tracing out what could prove to be a bear flag substantially below the March plot highs. That pattern suggests that Smart Money remains wary of this market and could be easily prompted toward more selling. Naturally such action would underscore other negative market internals.

What is now true with MAAD is that so long as the indicator remains below recent indicator plot highs it will continue to exert negative pressure on index prices and market psychology for those attuned to the subtleties of this indicator. That is classic. Put another way, unless MAAD makes new highs, the major indexes will be hard pressed to make a bullish case.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Despite higher highs by the broad market into the mid-April price pullback that followed the mid-March lows, CPFL not only dipped to a new short-term low back on April 19, but that bottom was broken last Friday via renewed options selling which was negative by a ratio of nearly 3 to 1 on a Dollar Value basis. Options players clearly remain skeptical of this market.

While we must admit that the lateral narrowness of the chart pattern using daily CPFL data could allow for new highs above the February 25 plot highs, the fact that CPFL has been unable to better those levels for more than two months despite net strength by the major indexes to new peaks in the same time frame makes us wonder what new selling pressures would do to the indicator. Last Friday’s net losses in CPFL in the face of market gains could be a clue.

Click charts to enlarge

Conclusion

All markets at some point bear resemblances to other historical markets. Current comparisons to the market highs in 2007 are no exception. Not only have both markets, using the S&P 500 Index and the Dow 30 rallied nearly identical percentages, but negative indicator divergence similarities have also cropped up. Poor Cumulative Volume, fading Momentum, plus negative divergences in MAAD and CPFL make us wonder if the market could be at the beginning of a replay of 2007.

Naturally time will be required to resolve the matter, but even so we are reminded of the old saying that goes something like, "the more things change, the more they stay the same (Jean-Baptiste Alphonse Karr,1908 – 1990)." The stock market is no exception to that rule.

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.