Mixed major indexes reflect weaker market internals

Stock market action last week in the face of still weak market internals underscored the potential for further weakness in the sessions just ahead. And while the major indexes were up three of last week’s five sessions, two days of negativity were good enough to push our Most Actives Advance/Decline Line (MAAD) to its lowest level since April 25 with the Call/Put Dollar Value Flow Line (CPFL) registering its lowest plot since February 16. The latter indicator broke minor support yet again.

At the same time, Short-term Momentum dipped into negative territory for the first time since April 13 while Cumulative Volume in the major indexes continues to exhibit two significant divergence points -- first, the April 2010 CV plot high that has not been surpassed despite a year of market action and second, the recent CV high which failed to better its February 18 peak even though index prices rallied to new price peaks back on April 26.

Clearly, that strength to new index highs with coincident indicator failures two weeks ago has many of the earmarks of a classic "draw play" in which some market players are suckered into buying a weak market that then reversed in the face of fragile underpinnings. Strength was simply unjustified. But to confirm a larger negative trend, we would need to see market prices sink below defined Short-term uptrend lines (near 1330—S&P 500) stretching back about two months to the March 16 short-term lows. Such negativity would not only underscore current unfavorable readings in volume and momentum, but would also likely turn the second of our two proprietary Trading Oscillators negative. More importantly, the larger Intermediate Cycle would also probably register a negative reading after holding positive for nearly nine months.

Click chart to enlarge

But there is no denying that for the better part of the past year buyers have eagerly bought shares following each market pullback and new highs have evolved. Of course that bias will end at some point and the market will stage a significant correction. But until we see index quotes dip below defined trailing price channels on the Intermediate Cycle (see accompanying Table), we must be prepared for more head fakes.

What makes current market action more interesting that other downside feints since last July is the deteriorating status of CPFL and MAAD. Both indicators steadfastly refused to confirm market strength to new highs earlier this month. The last time such a notable disparity between those two key indicators and the major indexes developed was into the October 2007 market highs when both indicators registered significant divergences three months (MAAD) and four months (CPFL) before the final highs in the market that preceded the second worst decline in U.S. stock market history.

Clearly the so-called Smart Money crowd as reflected in MAAD data and the attitude of options players as shown in CPFL have taken a modest turn for the worse. When coupled with failing Momentum on all cycles and the failure of Cumulative Volume since April 2010 and then recently, we can only wonder how much longer this market will defy ongoing and increasingly negative market internals.

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 on both the Daily and Weekly cycles worked lower last week. Data on the smaller daily trend was last at its lowest levels since April 25. Daily MAAD could drop below the lower boundary of a defined "bear flag" with only modest selling. Such action would simply underscore the negative drift of the indicator for the better part of the past two months and despite strength in the major indexes to new highs in early May.