Stock market still unraveling short-term oversold positions

Having corroborated the negative tendencies of MAAD for the better part of the past four months, our Call/Put Dollar Value Advance/Decline Line (CPFL) could also make new short-term lows with ease. While the indicator, unlike MAAD, remains somewhat above a longer-term trendline, it wouldn’t take much selling to fracture that line also stretching back to the March 2009 plot and index lows.

S & P 500 Index with Cumulative Volume

And then there is Cumulative Volume. As we pointed out a few weeks ago, CV on the S&P 500 Emini contract (see accompanying chart) has slipped back to plot levels not seen since March 2009. Put another way, if CV in the cash S&P 500 sinks below its uptrend line stretching back to March 2009, CV in the S&P Emini will confirm. But when Emini CV cracks its defined uptrend, the indicator could also make a new cumulative low BELOW its lowest point at the nadir of the bear market in March 2009. Not only have traders of the most widely traded futures contract in the world shown reluctance on the upside for more than a year, their actions since the April 2010 have been more indicative of distribution than accumulation into a bull move that continues to look statistically weak.

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.

In sum, stock market price action seems to be playing out on a relatively predictable note. Short-term "Oversold" conditions are disappearing as prices have stabilized over the past several sessions. But we continue to think that once statistics move back to "Neutral" to slightly "Overbought" zones, the larger Intermediate Cycle will re-assert itself on the downside and more selling will develop. If this scenario unfolds, how Cumulative Volume in both the cash indexes and the S&P Emini futures contract evolve could determine how serious ongoing selling will be relative to the Major Cycle trend.

McCurtain Most Actives Advance/Decline Line (MAAD)

Despite some market hesitation and stabs at improvement the past several days, MAAD on both the Daily and Weekly cycles remains unimpressed. Daily MAAD put in place an interim low June 8, improved slightly, then headed lower the majority of sessions this past week. The indicator was last poised to make a new short-term low with relative ease.

Since MAAD is already positioned below a long-term uptrend stretching back to the July 2010 market lows, the indicator is suggesting that not only is Smart Money selling into strength, but that more weakness could position the indicator to crack the major uptrend line that extends back to the March 2009 plot and price lows.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

While CPFL has not demonstrated as much overt weakness as MAAD since creating new indicator highs at the end of February, the tone of the bellwether has nonetheless been decidedly negative. In fact, given proximity of a defined uptrend line stretching back to the March 2009 indicator lows, it wouldn’t take much more selling to move CPFL to new short-term lows with coincident weakness below a key uptrend.

Given the unfavorable bias of the indicator for the past four months, it seems evident options players remain skeptical of the market’s upside prospects. They underscored those doubts into the May highs when index prices reached new peaks for the bull move, but CPFL statistics faltered and did not confirm strength.

Click charts to enlarge

Conclusion

Lateral movement with a slight upward bias in the major indexes since the mid-June interim lows has eliminated some of the "Oversold" bias of the market, but we continue to suspect this relatively positive price action will prove to be nothing but a breather in a larger Intermediate Cycle downtrend that has not yet run its full downward course. Once the near-term hesitation has ended and the Intermediate Cycle reasserts itself, the extent to which selling develops will determine the staying power of the Major Cycle trend which is about to enter its 29th month.

In addition, the extent to which Cumulative Volume deteriorates will provide significant clues as to what market players should expect over the next several weeks, especially if CV in the S&P Emini futures contract makes a new low.

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

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.