Stock market gains suggest bear market rally

Back at the market last week, and our analyses, the major indexes gained ground along with our key indicators and market sentiment improved. Not only did the S&P 500 Index post a 5.35% gain, but the bellwether rallied above statistical resistance at the upper edge of its 10-day Price Channel (1204-1205) to suggest that weakness since the August 31 intraday peak (1230.71), and the best level since the early August low (1101.54), could prove to be the “B” leg of and A-B-C correction and preliminary to further price gains back toward major resistance at 1255-1270.

Daily S&P 500 Index with Cumulative Volume

Weekly S&P 500 Index with Cumulative Volume

Even if last week’s strength is followed by more short-term gains, we do not think its time for “Hats and Horns.” Short-term price action continues to look as if it is a bear market retracement within the context of larger cycle negativity. In fact, if the S&P and the other major indexes are able to improve over the next couple of weeks to give the possible A-B-C pattern some symmetry to the extent the “A” leg mimics the "C” leg in terms of time and distance, strength would put the market back into a time frame often associated with major weakness –The Fall period. In other words, we could see some additional near-term strength as a potentially bearish longer-term scenario remains intact.

Daily S&P 500 Emini Futures contract with Cumulative Volume

Weekly S&P 500 Emini Index with Cumulative Volume

But the bulls won a round last week. Short-term Momentum and our two proprietary Trading Oscillators were last decidedly positive. After 28 days of net negative numbers with Put Dollar Value exceeding the call side, CPFL turned upward on both the Daily and Weekly cycles. MAAD was net higher on the week and on the short-term. And Cumulative Volume improved in both the S&P 500 and the S&P Emini to the extent that both issues could do better on the near term.

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, for the moment we will wait for the Minor Cycle to play itself out. If the S&P 500 betters its August 31 intraday high at 1230.71, we think the odds favor a move toward 1255 and Head and Shoulders “Neckline” resistance recently broken on the downside. Maybe 1270 at the outside. But even if that higher number is hit, we do not think that prices will be able to better that resistance (1255-1370.58) which stretches back to last February. That’s what we think. It remains to be seen what the market will do, but if it fails again somewhere between here and major resistance, we suspect it’s all but certain more concerted weakness will turn Major Cycle Momentum negative and such movement would signal an end to the bull trend begun in March 2009.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD perked higher last week, but indicator improvement nonetheless remains within the context of longer-term negativity. The Daily MAAD Ratio was last near neutral with the Weekly MAAD Ratio still “Oversold.” The status of that latter indicator ratio could allow for further price gains in the major indexes, but we think that any strength which follows will cause the Weekly MAAD Ratio to quickly return to neutral levels than have historically coincided with downside points of reversal in a bear trend.

There is also the lingering longer-term problem of poor MAAD performance not only from March 2009 to the recent highs, but of the relationship of MAAD to those 2009 lows. In a nutshell, it would take little net selling to cause MAAD to sink below the March 2009 indicator low. Such action would have profound longer-term negative implications for the broad stock market.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

After 28 days of net market negativity, CPFL turned positive last Tuesday to not only signal a near-term change in the attitudes of options players, but to also underscore recent price gains in the major indexes. But since the indicator has turned higher into what could prove to be the latter stages of a reflex rally in a bear trend, we do not think CPFL will be able to overcome its statistical high put in place last February.

Click charts to enlarge

Conclusion

Equity prices gained last week as the short-term rally initiated after the early August lows was re-asserted. While strength above statistical resistance (10-day Price Channel at 1204-05--S&P 500) was a positive development, strength above 1230.71--S&P 500 is required to suggest a possible move toward major resistance at 1255-1270.

Even if such strength occurs, however, we continue to think net positive price action over the past several weeks will prove to be, in retrospect, nothing but a reflex rally in a bear trend. In other words, at this point we do not view weakness since the May market high (1370.58--S&P 500) as merely a corrective phase in an ongoing bull market.

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, private investor and financial markets consultant based in New York City. He is a member of the Market Technicians Association and can be reached at traderbob@nyc.rr.com.

If you would like to read more about how the CPFL is constructed, read a Futures article on the concept. This link will take you to the MAAD article.