Market weakness threatens support, defined uptrends

The bears won a round last week. The bulls lost. When the dust settled the S&P 500 index was down for the five day period by 2.0%, the Dow Jones Industrial Average by 1.4%, the NASDAQ by 2.4% with the Value Line Index the biggest loser by 2.7%. In addition, last week’s losses gave a bit more credence to our recent suggestion that the stock market could be tracing out what could prove to be a distribution Head and Shoulders top with the Left Shoulder of the pattern plotted at last February’s highs and the Head at the May highs. The Right shoulder currently under development may be ultimately measured by the short-term highs put in place by the major indexes several days ago at levels roughly equal to the February price highs. Thus, a degree of symmetry may be developing.

But for this market to fully play out the H&S top idea, we would need to see index prices decline below key support levels marked by a slightly upsloping Neckline" in the S&P at the March and June short-term lows (1249.05 and 1258.07). Selling on increasing activity would suggest a resolution of the pattern on the downside, as would be the case with a classic H&S top. At the same time, Intermediate Cycle negativity would resume and the Major Cycle trend could then become an issue.

S & P 500 Emini Futures contract with Cumulative Volume

What is important to take note of as this scenario unfolds is how our key indicators respond. While short-term Momentum remains marginally positive after some upward movement into the recent Minor Cycle rally, it wouldn’t take much selling to flip Momentum back to negative. At the same time, we continue to observe that Cumulative Volume remains weak. CV made a statistical high back in February, failed on the upside into the new highs made in March by the major indexes, and failed a third time into recent strength. All three CV highs, each lower, now comprise a defined downtrend. And what is now a big problem is the proximity of CV via the S&P Emini futures contract to statistical lows made in March 2009 and July 2010. Renewed selling would almost certainly cause CV to hit new Major Cycle lows in the Emini while also terminating the CV uptrend line in the cash S&P. That action could ring the death knell on the Major Cycle which remains precariously positive.

S & P 500 Index with Cumulative Volume

Also on the indicator front we continue to note the lack of enthusiasm of both our Call/Put Dollar Value Flow Line (CPFL) and the Most Actives Advance/Decline Line (MAAD). Both indicators that are computed via different sets of data created statistical highs in late February and early March. Neither has revisited those highs since then to suggest that Smart Money AND options players continue to remain skeptical of the upside prospects for this market. Nothing but new highs by CPFL AND MAAD with volume corroboration on the upside by CV would cause us to abandon our suggestion the market continues to look vulnerable.

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