Market poised for more selling pressure, with caveats

There has also been indicator deterioration over the past month even though prices have shown stability relative to the August lows. Our Call/Put Dollar Value Flow Line (CPFL) has recorded net negative readings for the past 26 sessions. What that bias reveals is that not only did the indicator confirm NONE of the countertrend move in the market, but that options players continue to believe this market remains vulnerable and they remain unwilling to assume a bullish stance.

Then there is our Most Actives Advance/Decline line (MAAD) which remains net negative. While the Daily indicator was last plotted just above its August 10 short-term low and could make a new low with ease, the Weekly series sank to a new low last week and was last at levels not seen since July 2010 when the S&P was quoted near 1000. Clearly the Smart Money crowd has remained unimpressed with this market over the past month.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Another indicator we have referred to infrequently is the traditional NYSE Advance/Decline Line that has concerned some market students to the extent it did not predict via divergence the recent decline in the market. In fact, the NYSE A/D Line peaked on July 7 and over two months after the broad market hit highs on May 2. Some have been apparently surprised by that failure. But the truth is, the traditional A/D Line is notoriously ineffective. Prior to the market peak in January 2000 the NYSE A/D made a statistical high on April 3, 1998, nearly two years and 31% before the ultimate market highs. In the ensuing major decline it made a low on October 18, 2000, two years and 27% before the final lows of October 2002. The indicator was a bit better into the fall 2007 Highs when it led the market by a few months. It was about coincident with the March 2009 lows and then failed into the recent highs.

While it remains to be seen if the May 2011 highs were the peak of the bull trend that began in March 2009, it’s a good bet that relying on the NYSE Advance/Decline line prescience is not the best way to arrive at a conclusion as to the market’s probable future direction since the indicator is inherently flawed for reasons we will have to elaborate on at another time. Just one exception can be catastrophic and this indicator has failed miserably three out of its last five times at bat and prior to some of the most volatile moves in stock market history.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures with Cumulative Volume

Last there is Momentum. Short-term Momentum is currently moderately "Overbought" with intermediate-term Momentum moderately "Oversold." Major Cycle Momentum is "Overbought."

In conclusion, after a month of rebounding, the broad market, as measured by the S&P 500, is about where it was in early August. Downside volume picked up as selling increased and upside volume pulled back as prices rose. Such action is bear trend specific. CPFL remains net negative and MAAD is on the verge of making new lows on both the daily and weekly cycles along with Cumulative Volume. And the traditional Advance/Decline is useless to the extent it is simply undependable

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.

Nonetheless, we suspect two possible scenarios could develop in the sessions just ahead. First, prices simply accelerate on the downside, take out the short-term uptrend line stretching back to early August and then decline below the August lows to re-assert the Intermediate Cycle negative even though that trend looks "Oversold." Or, second, if it turns out the selling since August 31 proves to be the "B" leg of an A-B-C pullback, prices would need to stabilize near current levels and then rally quickly over several sessions back toward Head and Shoulders Neckline resistance in the S&P near 1255 toward 1270. Of the two scenarios we prefer Number One following a little rebounding action into the first of this week that would not better the August 31 high at 1230.71.

McCurtain Most Actives Advance/Decline Line (MAAD)

Weekly MAAD sank to a new low for the move last week while the Daily series continues to hold just above a low made back on August 10. Both cycles continue to amplify the fact that Smart Money does not like this market and remains skeptical of its upside prospects. Daily MAAD has been net negative since early March with the Weekly Cycle lower following its final high on April 29.

The Weekly MAAD Ratio remains in "Oversold" territory while the Daily Ratio was last heading lower from "Overbought" levels after correcting downside extremes following the early August lows.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL tacked on another four negative sessions (holiday excluded) last week to extend the indicator’s downside move while hinting that options players have continued to adopt net negative market positions by purchasing more Puts on a Dollar Value basis than Calls.

CPFL was last below its longer-term uptrend line stretching back to March 2009 that was fractured on the downside over a month ago. Admittedly, however, CPFL has been less negative than index prices to the extent the indicator was last plotted at levels not seen since January 2011 when the S&P was nearly 100 points higher. Nonetheless, it is the direction of the indicator that is more important than the amount of decline it has sustained.

Click charts to enlarge

Conclusion

The stock market on a net basis has been treading water for the past month. Obviously that tone will change and probably sooner than later. But until we see defined weakness below a defined short-term uptrend line stretching back to the early August lows and the breaking of downside supports at that August low (1101.54--S&P) we cannot rule out the possibility the market could make one last stab at the upside toward Neckline resistance back toward a defined Head and Shoulders Top (1255--S&P). In fact, such action would be consistent with price action following a downside break from such a formation.

If such strength does not develop, however, a resumption of selling would simply re-assert Intermediate to Major Cycle negativity and, in the case of the major trend, probably turn long-term Momentum negative to almost certainly verify a cyclical bear move that would effectively end the bull market begun after the March 2009 lows.

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.