Stock indexes hit minor lows, but resistance looms

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1178.81

-20.57

-1.7%

Dow Jones Industrials

11269.02

-175.59

-1.5%

NASDAQ Composite

2507.98

-24.43

-.9%

Value Line Arithmetic Index

2570.62

-52.37

-1.9%

Minor Cycle
(Short-term trend lasting days to a few weeks)

Intermediate Cycle
(Medium trend lasting weeks to several months)

Major Cycle
(Long-term trend lasting several months to years)

Negative

Negative

Neutral / Negative

While the stock market appears to be frenetic and seemingly uncontrolled as reflected in the anxieties of many watching the action, especially during periods like the recent one, the market is, in fact, poetry in motion. There is a symmetry that unfolds session after session and cycle after cycle.

And while there have been historical suggestions that a particular trend was a "new paradigm" or that "it’s different this time," there is no such thing as a truly unique stock market except insofar as price action makes a scribble here or a wiggle there to give a move its own finger print. The truth is every significant stock market high looks a lot like every other major peak which preceded it. Same for the lows. There are differences, but the similarities are more notable.

Market Overview – What We Know:

  • Major indexes stabilize in vicinity of downside targets calculated from Head and Shoulders Tops and major support coincident with January through July 2010 consolidation.
  • Since last Tuesday’s low for the move Tuesday and two days of peak volume in the S&P 500 and S&P Eminis, trading volume has been nearly cut in half.
  • CPFL declined to new Minor Cycle low last Friday (see chart) while continuing to underscore fact options players remain wary of this market. Last week Put $Volume to Call $Volume was negative by 2.25 to 1.
  • Options Dollar Value stats have been net negative for 13 of past 14 sessions.
  • MAAD dropped to a new short-term low last Wednesday (see chart) with only slight recovery since then to highlight fact Smart Money remains skeptical of the stock market.
  • Weekly MAAD data was last plotted right at long-term uptrend line stretching back to March 2009.
  • Ratio of NYSE Up Volume to NYSE Down Volume has begun to diminish. At the lows on Tuesday the UDRatio was 2.4 to 1. On Friday the UDRatio was 1.4 to 1.
  • Cumulative Volume remains weak on a net basis with CV last below major support in the Cash S&P (see chart) and well below major support in the S&P Emini (see chart).
  • Minor Cycle is deeply "Oversold" with moderately OS readings showing on the Intermediate trend and moderately "Overbought" levels still evident on the Major Cycle.

Market Overview – What We Think:

  • We suspect that last that Tuesday’s intraday index lows (1101.54—S&P 500) were the bottom of the Minor Cycle decline that began after the July 7 index highs (1356.48—S&P 500) at the peak of the Head and Shoulders Top formation.
  • Short-term recovery is likely, but within the context of a still negative Intermediate Cycle and a seriously threatened Major Cycle trend.
  • The ability of index prices to hold above the Jan/July 2010 consolidation lows (982.50—S&P) will prove to be critical, but since Cumulative Volume has already broken below those levels there is latent vulnerability in this market.
  • The odds remain good that any short-term rally will not move above Head and Shoulders Neckline resistance (1255-S&P 500) at levels coincident with a 60% retracement from last week’s lows.
  • Given the extent of recent price damage and price/volume damage, we suspect price action, from a bullish perspective, will be disappointing for some time to come.

Take a look at the four historical charts below that show four major tops. The price action of each covers about a year and does not include the most recent market highs. The caption under the graphs reveals when they were created. Note that there is a general similarity to all. Not only is every top followed by an initial decline and then a failed rally, but there is a certain symmetry to each that is replicated in the others.

Major highs in Dow Jones Industrial Average

Major market tops in the Dow Jones Industrial Average (A --1937, B – 1966,
C – 1946, and D – 2007) all had similar symmetry as evidenced by a final high that was followed by a failed rally. Chart: TradeStation Securities

While it is not our intention to suggest that mere chart pattern evaluation is THE key to picking major tops and bottoms in the stock market, the fact that such patterns coexist with indicator analysis, is reason to believe that such patterning will continue to occur far into the future since chart patterns tend to reflect the actions of the trading collective.

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