Bear market retracement appears in the works

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1173.97

-2.83

-.24%

Dow Jones Industrials

11240.26

-44.24

-.39%

NASDAQ Composite

2480.33

+.48

+.01%

Value Line Arithmetic Index

2535.81

-12.35

-.48%

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

Intermediate Cycle
(Medium trend lasting weeks to several months)
Neutral / Negative

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

Bear market rallies have a lot in common with the proverbial "last dance." There’s a lot of hope and anxiety in attendance. In a bear market there’s also not much upside volume present. While it remains to be proven that we have entered a new bear market, Rules Number One and Two seem to be nicely in effect and lyrics from an old Elvis Presley song "Fools Rush in where wise men never go" keep trying to make themselves heard in the background. New bear or not, however, markets can only make themselves felt one session at a time.

While index prices reached new short-term lows on August 9, peak volume in the S&P 500 was hit on August 8. But volume levels at that extreme were nearly 250% higher than last week’s highest volume. Put another way S&P volume has deteriorated nearly 60% since the August 8 activity highs. Granted that some of last week’s deterioration was due to folks heading out early for the holiday, volume has nonetheless been low for nearly a month. And it takes volume to sustain a rally.

Volume, or lack of it, is especially noticeable in Cumulative Volume (CV). Notice how index prices rallied off of the August 22 pullback lows and then bettered their August 17 resistance highs with relative ease. But CV confirmed none of the price strength and continues to remain below the mid-August indicator plot highs. This means that it will be much easier for CV to make new lows (below the early August levels) if selling pressures resume.

Market Overview – What We Know:

  • Positive move by S&P 500 last Wednesday to 1228.02 and intraday high at 1230.71 completed what could turn out to be "C" leg of A-B-C reflex rally from early August lows. But, given fact Minor Cycle remains positive, we could still allow for S&P price strength to major resistance and Head and Shoulders Neckline (1255).
  • Such action would require downside confirmation below trailing lower edge of Daily Price Channel (see Table) to suggest new minor Cycle negative.
  • Minor Cycle positive is still developing within context of negative Intermediate trend.
  • Cumulative Volume has yet to confirm index price strength with S&P 500 Cumulative and S&P Emini Cumulative Volume holding below mid-August plot highs despite fact that index pricing bettered same levels. Failure suggests strength was fueled by weak players.
  • Daily CPFL declined to another new short-term low last Friday with indicator recording negative readings for past 22 sessions.
  • MAAD has mirrored market action since August lows with indicator continuing to remain in downtrend established last February.
  • Short-term Momentum has returned to moderately "Overbought" levels after having eliminated all of recent "Oversold" conditions. Such action is consistent with countertrend rally in bear move.

Market Overview – What We Think:

  • We continue to think any strength that develops will be doing so within context of negative Intermediate Cycle and Major Cycle trend that is in serious jeopardy.
  • We do not think any strength that develops will overcome "Neckline" resistance in S&P 500 at 1255.
  • Failure in upside volume since early August short-term lows could be an indication that savvy investors have not been fooled by countertrend strength. If so, and if rally soon reverses to a new short-term negative, we would look for an increase in downside. volume.
  • Ongoing deterioration in CPFL to new Short and Intermediate Cycle lows is an indication that options players also remain unimpressed with recent reflex rally and that they have probably been adding to put positions.
  • Considering statistical damage incurred by stock market into and during recent market decline, we suspect bullish case will be increasingly difficult to justify.
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