Indexes could make new major cycle highs -- or not

In sum, if the market fades now without making new highs, our H&S Top outlook could bear fruit. We would then need to see prices break below the March/June support lows and the potential Neckline of the pattern on increasing volume. Such action would almost certainly re-assert Intermediate Cycle negativity that would affect the long-term trend. Or new highs follow. But if volume remains weak, despite price gains, and our key indicators fail to confirm, such action would hint at an upside "draw play." Underscoring both of these options is the internal status of the market. These key indicators we follow have been deteriorating since February. In a nutshell, as price action unfolds in the sessions to follow, strength will bring the trading lines at the May highs into sharper focus. Or weakness below the lower lines will cause the March and June lows to take on more importance. Either way, we will soon know.

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.

McCurtain Most Actives Advance/Decline Line (MAAD)

While the major market indexes are threatening on the upside once again to the extent they could make new highs while reaching the best levels since March 2009, MAAD on both the Daily and Weekly cycles is not bullish. While MAAD improved slightly last week, this negative reflection of Smart Money suggests MAAD is nowhere near making a new high to confirm index price strength. In fact, only marginally more market selling would force the indicator to its lowest levels since peaking in early March. Similar action developed into the 2000 and 2007 market highs,

While the lead time into the 2007 highs was four months and very similar in duration, the 2000 price highs were preceded by a peak in MAAD by nearly nine months, a lead that might appear unacceptable because it missed the last 14% of the major uptrend. But considering the fact the indictor had been in an uninterrupted advance since early 1995 and coincided with a gain of nearly 300% in the S&P from indicator low to indicator high, to worry about the last 14% could be a trivial point. Also, there is the glaring fact that MAAD from the 1982 lows through the 1999 highs remained in a steady uptrend and offered up only four minor exceptions to index price action (August 1992, December 1997, August 2004, and July 2006), which were NOT confirmed by index prices with coincident weakness. As a consequence, MAAD confirmed, even led on occasion, a gain of nearly 1300% in the S&P after August 1982 and the bottom of the most powerful bull rally in stock market history.

Most importantly, it’s necessary to remember that deterioration in the indicator in and of itself is no reason to sell. Weakness in MAAD is simply an indication that Smart Money is skeptical about the market’s upside prospects. In such an environment smart traders use MAAD as a warning and tighten up trailing stop levels. In short, the market is the final arbiter of long positions, not MAAD or any other indicator.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL rallied slightly last week, but the bellwether is, like its MAAD counterpart, nowhere near making new highs with index prices. That last time such a significant negative divergence between CPFL and the broad market developed was in the months prior to the October 2007 market highs.

While we can only continue to suggest that deterioration in CPFL has been developing for reasons which may become clearer at a later date, we must continue to point out that a divergence between CPFL and the major indexes does not occur by sheer happenstance. In the recent environment options players have become increasingly reluctant to take on net bullish positions since the end of February because they have apparently remained skeptical of the market’s upside prospects. That skepticism can only be erased by new highs in the indicator. Lacking such action, we must presume the market will ultimately move in favor of the bias of CPFL, as has been the case historically.

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Conclusion

Last week’s strength in the major indexes moved the S&P, Dow, NASDAQ, and the Value Line index to, once again, within range of making new highs. It remains to be seen if new highs will follow. But whether such action occurs, or not, is not the point except to the extent an investor recommits, or remains long in the larger cycle trends. What is relevant is whether or not our key indicators underscore market strength and how index prices respond. Such action would then determine investor profits or losses.

Without internal indicator support, the prospects for a continuation of the short-term rally, let alone the major uptrend in effect since March 2009, are not good. Gains of 4% to 5% could cause index prices to reach new highs and the upper boundaries of potential Broadening Top price patterns, but such strength could prove to be an upside feint and might not be unsustainable.

Or prices simply fade at current levels, solidify Head and Shoulders Distribution Tops in the major indexes and, as index prices sink, volume increases and key supports are penetrated. Then the bullish case would be badly damaged and the Major Cycle trend would come sharply into focus.

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.