With stocks near May highs, indicators dragging

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.

New index highs could follow. We must offer that as a possibility, given the market drift over the past two weeks. But we are less concerned with whether the market makes new highs or not than we are focused on what these key indicators do from here on. Either they will also make new highs or they will not. If index prices rally to new highs and CV, CPFL, and MAAD confirm that action by following suit then the bull trend will be re-asserted in full. Or the indexes make new highs and the indicators fail to confirm. Or there is another possibility – prices and indicators fail to make new highs and selling pressures re-assert themselves.

In sum, index prices gained fractions last week while Minor Cycle statistics have returned to "Overbought" territory. At the same time, our key indicators, CV, CPFL, and MAAD, have all improved over the past three weeks since the mid-June lows, but none are anywhere near making new highs. As a consequence, we suspect that index prices could fail anywhere this side of the May highs with indicator confirmation or, if new highs in prices do follow, our indicators would fail to follow to new highs. Such a negative divergence would suggest longer-term problems for the stock market similar to the 2000 and 2007 highs.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD using Daily data attempted to improve last week, but after four days of trading the indicator was marginally lower on the week and continues to look weak despite strength by the major indexes back toward the May highs. In fact, MAAD has already declined below its Intermediate Cycle uptrend line that stretches back to the July 2010 lows. But it’s also true that the Weekly MAAD Ratio has dipped into deeply "Oversold" territory to suggest that both the indicator and the broad market could be in a zone of "opportunity." Question is, how long will that opportunity last and how much more "Oversold" could the indicator get before reversing to the upside?

Underscoring both MAAD’s shorter-term struggles and its longer-term outlook, the fact lingers that Smart Money has not been enamored of this market for some time. We wonder how much longer that disenchantment will continue.

Click charts to enlarge

Next page: CPFL indicator charts

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL data continued to perk higher last week, but while the major indexes have moved within a stone’s throw of the May highs, for CPFL to become synchronous with market movement, options players would have to abandon their current lethargy, albeit with a somewhat positive flavor. While they have been buying more calls on a dollar value basis than puts since the June lows, whereas the indexes have recovered about 90% of the losses since the May highs, CPFL has only come back about 25%. Clearly, call buyers have remained unimpressed with index gains gains over the past three weeks.

Unfortunately for the major indexes if they do rally to new highs, the failure of CPFL to confirm that strength would be a bad omen for the ongoing price strength of the market.

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Conclusion

The major market indexes gained fractions last week with the S&P 500 up .3%, the Dow Industrials ahead .5%, the NASDAQ a gainer by 1.5%, and the Value Line index by .7%. All indexes are currently within range of the May 2011 price highs. Whether they will better those levels remains to be seen. At the same time, while our key indicators, CV, CPFL, and MAAD, have also rallied since the June lows, we suspect that none will rally enough to confirm market strength even if the indexes better their May highs and move to their best levels since March 2009. Such a negative divergence would not bode well for a continuation of the longer-term bull trend.

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.