S&P E-mini Cumulative Volume moves into danger zone

Depending on one’s longer-term outlook as a bull or a bear, selling in the stock market over the past several weeks may be “just a pullback” within the context of an ongoing bull trend or the “start of something larger and more negative.” Whatever the point-of-view, selling since the early May index highs and the best levels since the bull trend began in March 2009 has resulted in net losses of 7.1% in the Dow 30, 7.2% in the S&P 500 Index, 8.4% in the NASDAQ Composite, and 9.0% in the Value Line Index.

But just as the headlines from the financial press have become more ominous as “The Market Swoons” and worries about the “economy” have begun to proliferate, the stock market has also dipped into Short-term “Oversold” territory and levels not seen since mid-March or into the July 2010 lows. At the same time, major index prices are currently just a stone’s throw from 200-day Moving Averages which can act as long-term support. The last time the 200-day line was relevant was into the July/August 2010 Intermediate Cycle lows when prices stabilized following a two-month pullback and then rallied to new highs.

But what is also true about the recent decline is that prices are now decidedly below the lower boundary of defined 10-Week Price Channels (see table below) our proprietary Trading Oscillator is negative, and the larger Intermediate Cycle appears to have reversed the uptrend initiated nearly a year ago. It is also a virtual certainty that overall market weakness will do nothing to help the Major Cycle unless prices soon stabilize and then began to rally with nothing less than new highs following to re-assert the long-term bull.

But with the clock ticking how is such sustained buying possible in this negative market environment? As our readers know, two of our main market indicators, the Most Actives Advance/Decline Line (MAAD) and the Call/Put Dollar Value Flow Line (CPFL) peaked back in March and late February with both indicators steadfastly refusing to make new highs with indexes even though those bellwethers rallied to new highs in early May. The last time such a negative indicator divergence developed was into the October 2007 market highs and just prior to the second worst decline in stock market history.

There is also the problem with Cumulative Volume. We have noted often over the past several months how CV in the major indexes has not only failed to better its April 2010 plot highs, but it also failed on the upside yet again into the May 2011 price highs.

There’s also another volume problem. Take a look at the accompanying chart of Cumulative Volume as derived from activity in the broadly traded S&P 500 Emini futures contract. The Emini price chart with CV, a reflection of the underlying cash S&P, could be a disaster waiting to happen. For the second time since the March 2009 price lows, CV for the Emini is on the verge of making new lows by declining below its March 2009 plot bottom. Also, notice how the amount of upside activity over the past 27 months has grown weaker and weaker.

S & P 500 Emini Futures contract with Cumulative Volume
Danger of a New Low in Emini CV?

Click on chart to open in full screen

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