Market weakness threatens support, defined uptrends

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, after hitting statistical resistance in the form of the upper edge of 10-Week price channels while developing symmetry into what could prove to be the Right Shoulder of a potential Head and Shoulders top on the Intermediate Cycle, weaker index prices last week simply continued to underscore what could prove to be yet another distribution phase in the stock market. The proof of that assertion will be whether or not more selling develops and if such weakness would be enough to cause index prices to decline below the July 2010 and then the March 2009 price lows at what could prove to be the Neckline of the H&S top. The key to the current environment will be determined ultimately by a breakdown in prices with indicator confirmation. Lacking such action, we cannot rule out the possibility market action since February could prove to be merely a consolidation within the context of a still positive Major Cycle advance.

McCurtain Most Actives Advance/Decline Line (MAAD)

Net selling by Smart Money last week forced MAAD on both the Daily and Weekly cycles lower. Both cycles could make new lows relative to the June statistical lows with relative ease in the event only marginally more selling unfolds in the broad market.

Since the end of February MAAD has consistently failed to support market strength. The last time such a significant divergence relative to price action developed was into the market highs of October 2007. Then and now the lead time to the final highs was about four months. While history never repeats exactly the same, we find it interesting that the current negative divergence has continued to develop in MAAD while market prices have made virtually no headway on the upside for most of this year.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

Options players continue to regard the stock market with skepticism. That lack of faith was underscored yet again last week when CPFL data finished the five trading sessions with net lower results.

While we must admit that the proximity of CPFL to its late February highs could be an indication activity in the indicator for the past four months could prove to be merely a hesitation in the larger bull trend, it is also true that only modestly more selling would force CPFL to not only new short-term lows. Such weakness would also cause the indicator to sink below an uptrend line stretching back to the March 2009 price lows. In the event such indicator weakness develops it would almost certainly cause options players to accelerate their selling by purchasing more puts at the expense of call buying. The combination of the two would force CPFL lower.

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Conclusion

As selling pressures surfaced again last week, all of our key indicators including short-term Momentum, Cumulative Volume, MAAD, and CPFL also worked lower. CV, MAAD, and CPFL especially are poised to break below critical indicator supports and trendlines just as index prices could add weight to a bear move by breaking below critical supports at the July 2010 and March 2009 lows.

If, however, there is no downside follow through we would be forced to suggest that the trading range that has persisted for the better part of this year could prove to be a hesitation in the primary bull market trend which currently remains positive.

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.