Market approaching abyss on major trendlines, support

Even the venerable Dow Jones Transportation Average that rallied to a new high and its best level since March 2009 on July 7 with confirming volume has become schizophrenic. When strength in the Dow 20 was not validated by the Dow 30, so tossing out the window a possible Dow Theory Confirmation on the upside, the Transports sold sharply lower over the past few weeks and were last threatening minor supports. At the same time, Cumulative Volume in the Dow 20 has ALREADY broken minor support created back on June 13 to suggest that the 20 is in synch with the 30 internally. Clearly, when the tides change they do so quickly.

S&P 500 Emini Futures contract with Cumulative Volume

But what is the Big Foot tromping into this market is the ongoing deterioration of our key indicators. The Most Actives Advance/Decline Line (MAAD) sold down to a new short-term low last week. That new low follows a downside break in MAAD the first week of June below its Major Cycle uptrend line. Clearly Smart Money does not like this market. At the same time, Cumulative Volume (see S&P Cash and S&P Emini charts) is right at long-term uptrend lines in both the S&P Cash and Emini. Emini CV is particularly ominous since a break below the long-term trend line could also quickly be followed by a break to new lows to levels below the March 2009 indicator bottom. There’s also the Call/Put Dollar Value Flow Line (CPFL) which is poised to break lower below its Major Cycle uptrend and Long-term Momentum in the S&P which has been holding below its Momentum high of late March/early April 2010 for the past 16 months.

So while it’s possible for market bulls to continue to remain in denial for a bit longer and so long as major supports, defined uptrends, and 200-Day Moving Averages have yet to be penetrated on the downside decisively, there is no denying indicator deterioration. And as we’ve noted repeatedly over the past several months after index prices peaked in mid-February, struggled to new highs in May, and then faded after the July highs, these indicators have been deteriorating because the advance appears to have been running out of steam while being fueled by weaker and weaker hands.

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.

But, and we underline BUT, until prices do follow through on the downside to confirm a major reversal, budget crisis notwithstanding, we must hold out the possibility that market activity over the past five-plus months could be a hesitation in the bull trend EVEN THOUGH our key indicators could continue to fail to confirm any renewal of strength. One option we held out as a possibility last week was a higher high to complete a Broadening Top formation. That is our hedge. But with the market heading lower to confirm indicator negativity, upside possibilities are becoming more remote by the day.

McCurtain Most Actives Advance/Decline Line (MAAD)

Smart Money as measured by our Daily Most Actives Advance/Decline Line (MAAD) continued to exit the stock market last week following steady deterioration since the early March indicator high. Weekly data also confirmed the selling and could make new lows with ease.

What should be the most disconcerting for the bulls via this action in MAAD is that Daily data has also declined below a defined long-term uptrend line stretching back to March 2009. Because the smaller cycle indicator is more sensitive than its weekly counterpart it remains more responsive to the nuances of the market.

But whichever of the two cycles is used, the fact is that investors with large stock market positions have been exiting this market, net, for the better part of the past five months. And while it’s true that index prices can continue higher despite deterioration in MAAD, we have never seen a situation where MAAD continued to weaken and the market did not eventually follow suit.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL declined every day last week, but the indicator has yet to make a new short-term low. Nonetheless, CPFL is poised to decline below a major uptrend line stretching back to March 2009 if new lows are created via more net options selling.

While it’s true that the net downside bias of CPFL since it peaked at the end of February has not been dramatic, the fact that the indicator confirmed no upside attempts in the major indexes since then is cause for concern. Even if the broad market makes another stab at the upside, we suspect such action would not be confirmed by CPFL, given the recent reticence of options buyers. As is the case with MAAD, we have never seen an instance where weakness in CPFL was not ultimately followed by selling in the major indexes.

Click charts to enlarge

Conclusion

A resumption of selling last week after two spirited, but failed, minor rallies increases our suspicion that price action in the major indexes since the February highs could prove to be significant. If, indeed, our key indicators have been correct in their assumption that rally attempts over the past several months have been fueled by weak hands while declines have been spurred by knowledgeable and sophisticated investors, we can expect that price and statistical support levels will be seriously challenged in the weeks just ahead. That, indeed, our suggestion of a developing Head and Should Distribution Top with confirming Volume action could prove to be not only classic -- and historic.

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.