Stock indexes hit minor lows, but resistance looms

What we are suggesting is that the stock market’s recent price and indicator action is no exception to implied historic rules. A significant top was created by prices. Prescient indicators confirmed internal deterioration in the market. And ultimately the market moved in the direction of the indicators. That action is classic. It is also not unique.

S & P 500 Index with Cumulative Volume

Our suggestions over the past several months that the stock market continued to look vulnerable were due not to extreme psychic powers, but were spurred by our observations of our key indicators including CPFL, MAAD, CV, Momentum, and other timing tools which continued to suggest that all was not well in Indexville. The recent dramatic and sharp decline simply underscored indicator evidence and the coincident suppositions.

But now that we have had a decline, from top to the recent low in the S&P 500 of nearly 2370 points and nearly 20% with a coincident loss in the Dow Jones Industrial Average of nearly 2270 points and almost 18%, we look to the indicators once again for some clues as to what could follow.

S & P 500 Emini Futures contract with Cumulative Volume

First, deteriorating volume as reflected in Cumulative Volume on strength into the end of last week suggests that price gains may continue to be more short-covering, bargain-hunting than the makings of a true reversal. Simply recovering all of the recent losses with a simple erasure would be too easy and highly unlikely.

Second, that which was "Support" before the decline can now act as "Resistance." As a consequence, Head and Shoulders "Neckline" overhead" (1255—S&P) will probably act to dampen any light volume price activity on the upside.

Third, while deeply "Oversold" short-term statistics will coalesce to spur a rally relatively soon, we suspect that larger Intermediate and Major Cycle negativity will continue to exert downward pressure on the smaller cycle.

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.

Fourth, a weak showing by MAAD, CPFL, and CV would not bode well for the market when the short-term rally enters its end game. At that juncture we have no reason to believe those indicators would be doing anything more than simply eliminating near-term oversold conditions.

Fifth, from a purely psychological point of view, and considering the remarkable deterioration in Cumulative Volume in both cash and Emini futures in the S&P 500 and the other major indexes, we do not think the odds will favor the bulls any time soon. Large downside selling pressures are not easily erased.

And last, while index prices have stabilized and improved slightly after hitting H&S downside targets near the January/July 2010 consolidation zones, the ease with which Cumulative Volume sank through coincident supports suggests any market strength could prove to be more illusory than real.

McCurtain Most Actives Advance/Decline Line (MAAD)

Using Daily data, MAAD sank to a new short-term low last Wednesday with some marginal improvement following that low. On the larger Weekly Cycle, MAAD declined to its long-term uptrend line stretching back to March 2009 (See chart). Simply put, either MAAD begins to improve a bit from current levels or a downside penetration of that long-term line would ring the death knell on the 2 ½-year-old bull market even more loudly than has already been the case.

Even if market strength develops and a portion of recent losses are recovered, we suspect that MAAD will remain anemic on the upside because Smart Money will probably be unimpressed with this stock market. In fact, there is also the possibility, despite "Oversold" levels in Daily and Weekly MAAD Ratios that the indicator will remain feeble in preparation for another round of index selling that would almost certainly cause the indicator to make new lows below its long-term support line.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Based on Daily statistics, CPFL remained net negative all of last week and actually reached a new Short-term low last Friday, despite marginal improvement in the major indexes that made lows last Tuesday. Clearly, options players remain skeptical of market strength.

Underscoring their concerns, the decline in CPFL has also caused the indicator to decline marginally below its Major Cycle uptrend that stretches back to the early 2009 lows.

While we must admit that the overall decline of CPFL relative to the market’s losses has been less severe than in MAAD of CV, it is the direction of the indicator that is relevant, not the extent of its weakness.

Click charts to enlarge

Conclusion

Stock market selling abated last week following the establishment of what could prove to be a short-term low last Tuesday. Ultimately, however, that low will be contextual to the extent that what follows it will do so within the larger Intermediate and Major Cycles. Currently the Intermediate trend is negative and remains under threat while the larger major trend has been substantially weakened.

Because the short-term cycle is deeply oversold, some rebounding will inevitably develop. But after a reflex rally occurs and neutral to moderately overbought Minor Cycle stats are in evidence, indicator status will then provide likely clues as to the probable next direction of the market.

Given significant deterioration in Cumulative Volume which was spurred lower by huge net selling, the proximity of MAAD on the long-term to its March 2009 plot lows, and the closeness of long-term Momentum to negativity, we think market bulls may find the going very frustrating in the weeks ahead.

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. 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. Robert can be reached at traderbob@nyc.rr.com.