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.

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.

Click charts to enlarge

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.