Market weakness may have completed needed test

Market Snapshot for session ending 8-18-11:

Market Overview – What We Know:

• In face of defined Price Channel statistical resistance (1211.17 – S&P 500), major indexes reverse to downside and head lower toward defined lower edge of Price Channel support (1153.84 – S&P 500).
• In one session S&P erases nearly 67% of gain since last week’s intraday low at 1101.54.
• Thursday’s trading volume in the S&P 500 nearly doubled relative to Wednesday’s activity, but trading stats were still nearly 30% below the August 8 volume peak.
• Volume on the NYSE was negative by nearly 34 to 1 with activity on the NASDAQ negative by 45 to 1.
• CPFL sank to another short-term low Thursday with daily data remaining net negative for the past 11 sessions. Put Dollar Value stats were greater than Call Dollar Value numbers by 5.4 to 1.
• MAAD Daily data also moved lower, but the cumulative indicator nonetheless remains above its August 10 plot low with the MAAD Daily Ratio holding near neutral..
• Major resistance remains in place at Neckline of recently defined Head and Shoulders Top formations (1255.00-S&P 500).

Market Overview – What We Think:

• Sharp reversal in major indexes to downside Thursday is not only a reflection of the power of statistical resistance (1211.17—S&P 500) at upper edge of 10-day Price Channel, but also of deteriorating upside volume over the past several days.
• While we cannot preclude further selling within the context of a Minor Cycle trend which remains negative, we would not be surprised to see prices stabilize not far from current levels prior to a near-term rebound and perhaps within the context of that a-b-c corrective phase we mentioned earlier.
• Thursdays’ weakness could be the “b” leg of the a-b-c move that may be developing within the context of a still negative Intermediate Cycle negative.
• So long as CPFL and MAAD remain weak, we suspect any market strength should be viewed with suspicion.
• Even if prices break above 10-day Price Channels, the odds are good recent Head and Shoulders “Neckline” resistance (1255—S&P 500) will act to contain any strength.
• Until we see new evidence, we suspect any strength that develops on the near-term will prove to be no more than a reflex rally within the context of a larger Intermediate Cycle negative.
• The fact Cumulative Volume in the S&P Emini is now below its March 2009 plot low is bad sign for the broad market on the longer term.

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We are also updating the daily chart of both the Call/Put Dollar Value Flow Line (CPFL) and Most Actives Advance/Decline Line (MAAD) indicators every day and providing the most recent raw data so you can begin to plot the indicators on your own (see below). The weekly equity index indicator summary provides longer-term commentary based on these indicators.

The definitions of the indicators along with links to the original stories provide helpful background. Also, Robert describes these indicators in a recent I-Trade show presentation available online.

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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.