Bear market retracement appears in the works

Since CV remains weak in both the S&P 500 index and the S&P Emini contract with the latter below its March 2009 lows by a wide margin, the odds are good that if it turns out recent strength has merely been a reflex rally in a bear move, CV will make new lows in both the Cash S&P and the S&P Emini.

In addition, our Call/Put Dollar Value Flow Line (CPFL) has confirmed NONE of the strength in the retracement short-term rally. NONE. In fact Daily CPFL data have remained net negative for the past 22 sessions while continuing to underscore the notion that options players haven’t believed in any of the strength of the recent rally. Last Friday Put Dollar Volume exceeded Call data by nearly 2.4 to 1. Last week Put Dollar Volume exceeded Call Dollar Volume by 5.2 to 1. Such negativity on the heels of a downside break in CPFL below its long-term uptrend stretching back to March 2009 is decidedly not a bullish sign.

Daily S&P 500 Index with Cumulative Volume

Weekly S&P 500 Index with Cumulative Volume

Then we have our Most Actives Advance/Decline Line (MAAD). MAAD which has also fractured its major uptrend line also stretching back to March 2009. But what is most worrisome about MAAD is the fact this bellwether "liked" little of the long-term move since March 2009. In fact, Smart Money has been skeptical to the extent MAAD was unable to recover even 50% of its losses following the October 2007 to March 2009 bear market. Put another way, if renewed selling develops MAAD could easily make new long-term lows while highlighting the fact Smart Money continues to exit this market.

And then, while Intermediate Cycle Momentum remains moderately "Oversold," short-term Momentum has recovered from deeply "Oversold" levels created in early August to record moderately "Overbought" conditions. There is also the fact that Major Cycle Momentum remains moderately "Overbought" and would almost certainly slip into negative territory if renewed selling develops. Such negativity on that larger cycle would reverse the trend that has remained positive for over two years.

Daily S&P 500 Emini Futures contract with Cumulative Volume

Weekly S&P 500 Emini with Cumulative Volume

And last, the short-term trend remains positive currently despite weakness at the end of last week. While it’s possible strength to 1230.71 in the S&P on August 31 fulfilled the upside requirements of the "C" leg of an A-B-C rally, we would need to see prices decline below 1156 to 1178 (see Daily Stop Loss Tables) as this week progresses and Price Channel Stop levels rise. If such action does not develop, its possible current weakness could prove to be merely the "B" leg of a larger A-B-C retracement which would then measure out toward 1255 in the S&P and "Neckline" resistance of the Head and Shoulders Top formation broken on the downside the first week of August. Such return action can be classic once a H&S Top has been formed and resolved on the downside.

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 continue to view recent strength as nothing more than a countertrend rally in a larger cycle decline which has probably not run its fully negative course. While it remains to be seen whether or not a resumption of selling will confirm a new bear market with coincident weakness in Cumulative Volume, MAAD, and CPFL to new major lows, we nonetheless persist in our belief that the major cycle advance begun in March 2009 has been seriously challenged via recent selling and ongoing indicator weakness. There is also the fact that the market is entering that time of the year, fall, when some unpleasant downtrends have developed.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD has mirrored index price action since the early August lows, but it also wouldn’t take much net selling to push the indicator to new short and intermediate-term lows. Such action would set up the indicator to seriously challenge the major cycle support lows put in place in March 2009.

As for any bullish upside potential, MAAD has been in a net negative mode since last February and was last at levels not seen since February 2010 when the S&P 500 was near 1100. That net weakness not only reflects the internal deterioration of the market for the past several months, it also points to the fact that Smart Money continues to remain very skeptical of this market’s upside prospects.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL has remained net negative for the past 22 sessions. As a consequence of that unfavorable bias, not only has the indicator fractured its long-term uptrend stretching back to March 2009, but CPFL has confirmed none of the rebounding action since the August 9 index price short-term lows.

While options players have a reputation for being somewhat fickle, it’s also true that we have never seen an instance where CPFL continued to decline and the broad market disregarded that negative tone. We could see some further near-term rebounding, but we think that the negative flavor of CPFL is a suggestion the best the S&P could do would to be to return to major resistance near 1255.

Click charts to enlarge

Conclusion

The stock market has been in a consolidation mode for the better part of the past month. Further strength via rebounding action could develop in the sessions just ahead, but the short-term positive window of opportunity will progressively narrow from here on. In short, the time will come within the next few weeks when this reflex rally will be over. We would then look for a resumption of selling on the larger Intermediate Cycle and possible indicator weakness to new lows in CV, CPFL, and MAAD. It is that resumption of selling which could determine whether or not recent market weakness was merely a pullback in the Major Cycle bull trend begun in March 2009, or a reversal of the Major Cycle to negative.

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.