Volatility reigns in earthquakes, hurricanes, stock market

Market Overview – What We Know:

• Major indexes have been in net lateral consolidation for past two weeks and finished last Friday about where they were week ending August 12.
• Short-term term lows have likely been put in place, but within context of Intermediate Cycle negative and challenged Major Cycle uptrend.
• Cumulative Volume has tended to mimic index pricing, but net performance of CV since last February has been negative while implying distribution via lower highs and lower lows, despite on balance price strength into May highs. S&P 500, NASDAQ, and Dow 30 CV were last at levels below July 2010 indicator support and at lowest levels since March/April 2009.
• Daily CPFL declined to yet another new short-term low Friday with indicator registering negative readings for past 17 sessions (Barron’s data reflected small CPFL gain last week, but magazine does not include options volume below a certain volume threshold. Thus the slight variance from daily Tradestation data that were net negative on week).
• MAAD continues to mimic market action, but indicator bias has been on-balance negative since February while reflecting little upside enthusiasm off of recent lows.
• Minor Cycle Momentum has risen to “Neutral” while Momentum on Intermediate Cycle is still negative and moderately “Oversold.” Major Cycle Momentum remains positive and moderately “Overbought.”

Market Overview – What We Think:

• Short-term trend could allow for some further gains and perhaps even strength back toward “Neckline” (1255—S&P 500) of defined Head and Shoulders Top created prior to recent breakdown in index prices. We do not think any strength will overcome “Neckline” resistance.
• We also suspect any buying that develops will do so within context of still negative Intermediate Cycle and still challenged long-term uptrend.
• Suspicions could be underscored by deteriorating volume on upside with increasing volume on market weakness.
• So long as market sentiment as measured by such indicators as CPFL remains poor, we think any strength that evolves could prove to be no more than weak bargain hunting/short-covering.
• Considering the overall damage suffered by stock market into and during recent market decline, we think bulls will continue to find it frustratingly difficult to make a case anytime soon.

First, while deeply "oversold" conditions on the Minor Cycle have been correcting to some extent over the past few weeks, price action is "classic" in that it has simply traced out what appears to be consolidation pattern within the context of a larger Intermediate Cycle negative. The presumption, of course, is that once near-term oversold readings are replaced by "Neutral" to "Overbought" readings, the market could be poised for more weakness. So, if the market remains vulnerable on the larger cycles is there reason to be bullish?

Second, while we could still see the S&P 500 rally higher, perhaps even back to its "Neckline" (1255) of the Head and Shoulders pattern resolved on the downside via recent sharp selling, we suspect volume could continue to deteriorate on the "Ups" while increasing on the "Downs." Cumulative Volume data have underscored that phenomenon while suggesting increased selling into market weakness is not a good thing for market optimists. So, once again, we ask, is there reason to be bullish?

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Third, while the market has been in a hesitant mode for the better part of the past three weeks and since the August 9 index price lows, our Call/Put Dollar Value Flow Line (CPFL) has steadfastly refused to underscore any positive flavor. In fact, CPFL has been making new lows for the past seventeen sessions. Clearly options players remain pessimistic about the stock market. And while the Most Actives Advance/Decline Line (MAAD) has mimicked index pricing to the extent the indicator has moved up from its lows, the net deterioration in MAAD since the indicator made its plot highs last February, the best since March 2009, has only underscored the apparent lack of faith Smart Money has had in this market. Using weekly data, MAAD also fractured its long-term uptrend the week ending August 19 while CPFL also remains below its Major Cycle uptrend stretching back to March 2009. So, here we go again, is there reason to be bullish?

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

But since the stock market can be a venue for contradictions and since contrary opinion is often one good way to play the game, we wonder if assuming the role of the Devil’s Advocate might be a good strategy. Is it just possible that because there are apparently so few reasons to be bullish, the market could offer some upside surprises? Maybe. But since market profits are rarely derived by playing "She loves me, she loves me not…," for now we suspect that adhering to traditional norms, as reflected in market price patterning and volume and internal indicators, is the best course to follow. None have shown little upside "lift" of late. Those failures are indications the market and its internal components remain vulnerable.

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.

In sum, we could play the "Contrary Card" and suggest that because the market "looks" weak, that’s all the more reason to suspect a bull move could be developing and that recent weakness will prove to be merely a pullback in the longer-term positive. But we want to see how this near-term "bottom" works out over the next several sessions. If prices rally and upside volume improves along with CPFL and MAAD activity, that would be one thing. But if buying is staged on low or failing upside volume and there is also indicator deterioration, that would be another. For the moment we think it’s a bit premature to suggest a resumption of net market negativity. But on the longer-term the bearish bet may be the most profitable strategy lacking indicator improvement.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD simply mirrored market action last week. In fact, like the major indexes, the indicator was last about where it was a few weeks ago. The Daily MAAD Ratio has recovered from deeply "Oversold" conditions to levels slightly better than Neutral.

The overriding mark of MAAD, however, is that the indicator has been in a net downtrend since last February and the indicator has fractured the lower edge of its Major Cycle uptrend stretching back to March 2009. Weakness on the longer-term continues to hint Smart Money remains skeptical of the market’s upside prospects and remains willing to sell into weakness. Until that latter tendency reverses, we suspect MAAD will continue to reflect internal market deterioration and the inability of market prices to ward off a bearish influence.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL as reflected by net put purchases on a Dollar Value basis has remained negative for the past 17 sessions through last Friday. Clearly, options players remain skeptical of the stock market’s upside potential as they have purchased put options on a net Dollar Value basis into market strength AND into market weakness.

As we have mentioned in the past, we have never seen an instance where the stock market defied a net negative CPFL bias. Not until CPFL begins to assume a more positive tone is it likely that equity prices will begin to improve on balance.

Click charts to enlarge

Conclusion

The stock market, as measured by Index prices, rose marginally last week. But strength left bids about where they were two weeks ago. While we could allow for some further short-term improvement following price stability after the August 9 short-term lows, we continue to think the major indexes will be unable to overcome major resistance at "Neckline" levels (1255-S&P 500) of Head and Shoulders Top formations violated on the downside several weeks ago. Even if such levels are approached or hit, we suspect such action will be accompanied by deteriorating upside volume.

On the longer-term, we also suspect any short-term strength that develops will do so within the context of still a negative Intermediate trend and a Major Cycle that has been seriously damaged over the past several months.

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.