Market poised for more selling pressure, with caveats

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1154.23

-19.74

-1.68%

Dow Jones Industrials

10992.13

-248.13

-2.20%

NASDAQ Composite

2467.99

-12.34

-.49%

Value Line Arithmetic Index

2493.58

-42.23

-1.66%

Minor Cycle
(Short-term trend lasting days to a few weeks)
Neutral / Negative

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

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

A month ago the major indexes put in place a short-term low after nearly two weeks of sharp selling that included a downside break from a classic Head and Shoulders Top down through a defined "Neckline." Selling volume was large and forced Cumulative Volume in the S&P 500 Index back to levels not seen since March/April 2010 while CV in the S&P Emini sank to and below its March 2009 nadir.

But after a month of pronounced volatility, the major indexes as measured by the S&P 500 are about where they were in early August. At the same time, deeply "Oversold" conditions have been erased and have been replaced by moderately "Overbought" to "Overbought" readings on the Minor Cycle. Intermediate conditions are toward "Oversold."

Simply put, and given the downside damage suffered by the market prior to the lack of net gains since early August, price action has the appearance of a reflex rally within the context of a larger negative cycle. In fact, chart action in the S&P 500 on the short-term trend looks like a classic bear "flag" with downside implications. In fact, with prices back at the lower edge of a defined and up sloping trendline connecting three points of contact back to the August low (1101.54), a downside break would suggest a resumption of larger cycle selling. Underscoring that potential is the fact that while index prices rallied to a short-term high (1230.71--S&P) on August 31, Cumulative Volume did not. That failure is an indication that (1) weak hands fueled the move to 1230.71 and (2) it wouldn’t take much selling to push CV to a new short to intermediate-term low if selling resumes.

Market Overview – What We Know:

  • Broad market as measured by S&P 500 has made virtually no upside progress over past month and since early August lows (1101.54--S&P) on a closing basis.
  • Cumulative Volume has underscored market’s inability to make upward progress by failing to confirm price strength into August 31 reflex high at 1230.71--S&P.
  • Price action continues to have earmarks of bear trend rally with suggestion that time is running out on rebounding action.
  • Market continues to trace out what could be classic bear “flag” on short-term cycle within context of still negative Intermediate Cycle.
  • Resolution of pattern would come with downside break below trendline to August lows and lower edge of 10-Day Price Channel with selling to new lows needed to re-assert larger cycle negative.
  • For 26th day in a row, Daily CPFL declined to new short-term low Friday with Put Dollar Volume exceeding Call Dollar Volume by 3.11. Weekly ratio was negative by 4.29 to 1.
  • Weekly MAAD dipped to new intermediate low last week with Daily MAAD poised to confirm on downside with only modestly more market weakness.

Market Overview – What We Think:

  • We continue to think time is running out on Minor Cycle rebound rally that began after early August lows. But there must be definitive downside break of rising trendline stretching back to August 9.
  • Failure of Cumulative Volume in S&P 500 and S&P Emini to better mid-August indicator resistance is an indication weaker hands have been fueling buying for past month.
  • Price action and volume since August lows is consistent with bear move retracement.
  • It’s still possible rebound could carry S&P back to “Neckline” resistance (1255-1270) of recently violated Head and Shoulders Top, but increasing downside volume on market weakness has been yet another indication market internals remain poor and a sign there is little chance major resistance at Neckline level in S&P 500 will be overcome.
  • Ongoing failure of CPFL to show any enthusiasm for market on upside despite recent price gains is bearish.
  • In event another wave of selling develops, it is likely Momentum on long-term trend will turn negative to confirm a reversal of bull trend in effect since March 2009.
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