Rangebound market continues to look vulnerable

Last week the major indexes in the stock market closed about where they were three months ago. All, including the S&P 500 Index, the Dow Jones Industrial Average, NASDAQ Composite, and the Value Line Index were down fractionally on the week in the face of a Short-term technical picture that continues to look bleak. Friday’s losses not only reversed a slight upward rebound that began after Tuesday’s intraday lows, but a resumption of selling may be underscoring the potential for further larger cycle weakness.

While it’s true that the S&P has rallied 10% over the past 13-plus months and since the April 2010 price highs when Cumulative Volume made plot highs, virtually all of the gain occurred during the ten months after the S&P bettered its April 2010 highs. Same goes for the Dow Jones Industrials (up 11.6%), the NASDAQ Composite (up 11.1%), and the Value Line Index (up 13.9%). Put another, long investors have made virtually nothing since mid-February of this year.

So in this nowhere market we’re left with the first couple of lines of that classic Beatles song, "Nowhere Man":

"He’s a real nowhere man
Sitting in his nowhere land…."

Clearly this market has to get off the dime to reassert the Major Cycle uptrend initiated in March 2009 and the secondary Intermediate Cycle begun in July 2010. But with the Short-term Cycle negative, more selling near-term would only put renewed pressure on the Intermediate Cycle which is now just shy of a year old. But increasingly this intermediate trend is assuming wrinkles, Geritol, and a cane.

Underscoring market concerns, we continue to note the potential for a slide into negativity by Momentum on the Intermediate Cycle. Into the May highs Intermediate Momentum registered a plus reading of 147.25. It was last plotted at plus 18.25. Just a bit more selling would nudge Intermediate Momentum over the precipice and into negative territory for the first time in several months.

At the same time, our Most Actives Advance/Decline Line (MAAD) is not looking all that chipper. After failing to make new highs with index prices into the May highs, MAAD has been tracing out a bear flag after its downside break in early March. Last Friday’s selling forced MAAD below the lower trendline of the flag formation to suggest more market weakness could follow. In addition, our Call/Out Dollar Value Flow Line (CPFL) hit a new short-term low last week, perked up a bit for two sessions then faded again last Friday.

Click chart to enlarge

There is another chart observation we find interesting. MAAD, via its late April (April 29) weekly plot highs, has traced out a nearly perfect 50% retracement of its decline since its prescient peak in July 2007 (three months before index prices) until the March 2009 market lows. In classic technical analysis a retracement of 40% to 60% of previous losses can develop.

And then there is the ongoing failure of Cumulative Volume we have referred to repeatedly over the past several months. Not only has CV failed to better its April 2010 highs, but the indicator has steadfastly refused to rally above those levels for the past 13 months! And then there is the most recent time frame during which CV failed to move to new highs relative to the February 2011 plot highs and even though index prices yet again reached new peaks in early May.

In sum, as market internals continue to exit the stage via developing weakness, we continue to wonder how much longer this index price charade can continue. In the meantime, we may settle back to listen to some old Beatles songs. One we remember is "I’ve got a feeling"...

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 using Daily data sold down last Friday through the lower trendline of a potential "bear flag" that has been developing since mid-March. The pattern has been unfolding for the better part of the past two months and is decidedly negative in terms of its market implications since it suggests Smart Money continues to view this market with suspicion.

The last time MAAD diverged noticeably from index prices was into its July 2007 plot highs and nearly three months before the broad market headed decidedly lower. The current divergence using daily data is approaching the end of its third month.

Given the history of MAAD, while we cannot preclude buyer’s attempts to push index prices higher in this currently uncertain and range bound market, history suggests that a leading negative divergence by MAAD is not a vote of confidence for the bullish cause.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL attempted to perk higher last Wednesday and Thursday following weakness to new Short-term lows the previous week, but renewed market weakness last Friday pushed the indicator back toward those previous short-term lows.

In the wake of the failure of CPFL to move to new highs with index prices in early May, it’s clear that options players have begun to shift their bets from net positive on a Dollar Value basis to net negative. Although the variance between the two tendencies is relatively narrow, the failure of the indicator to underscore the most recent market strength is the issue.

As with MAAD, CPFL peaked before the October 2007 market highs and created its best levels for the bull market the week ending June 15, 2007. That level was just shy of four months before the eventual top in the broad market.

Click charts to enlarge

Conclusion

Another three months have elapsed with virtually no gains in the major market indexes. While there have been similar instances of market hesitation in this bull market that began in March 2009 (June 2009 and May/June 2010), none of those earlier periods were marked by negative divergences in MAAD or CPFL.

And while it’s still possible the two indicators will stabilize and rally to underscore new buying in the broad market to new highs, we suspect that the failure of CPFL and MAAD to rally into early May with index prices could be the negative divergences we have been looking for that could precede a market pullback of some importance. How such a correction develops would then have implications for the bull trend that has been underway for more than 26 months.

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. 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. Robert can be reached at traderbob@nyc.rr.com.