Indexes, key indicators sink; intermediate cycle oversold

And while CPFL on neither the daily nor the weekly Minor and Intermediate Cycles has exhibited the same deterioration as MAAD, CPFL is roughly in synch with the S&P on the downside on a percentage basis and continues to suggest via options player’s lack of buying enthusiasm that market sentiment is still not all that hot. Also, considering the acceleration in downside volume over the past two weeks, which indicates players exiting the market on weakness that is not a good sign, there is the lingering suggestion the broad market could remain under downside pressure.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

But lest we completely succumb to conventional wisdom or what might seem to be obvious, it’s important to note that the next larger Intermediate Cycle, although negative, is currently “Oversold.” It became “Oversold” into the early August lows when the S&P hit 1101.54 and then perked up a bit into the short-term rally which appears to have ended via last Thursday’s selling spree. What is significant about current stats on that larger cycle is that Intermediate Cycle Momentum has NOT made new lows in ANY of the key issues, many of which including the Dow 30, Dow 20, and the Value Line Index all hit new price lows last week.

While history suggests that a downside Momentum failure in a defined trend is always a possibility, even though prices continue to deteriorate, the fact Momentum has NOT made new lows is nonetheless a point of interest. What Intermediate Cycle Momentum could be saying is that while the “rate” of decline may be diminishing, such action might not necessarily preclude further market losses.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

As a consequence, we are left with a possible re-assertion of negativity on the Intermediate Cycle via a reversal of the short-term trend back to negative after several weeks of countertrend strength. Several key indexes have underscored that resumption by sinking to new lows with others poised to follow suit. At the same time, our key indicators have declined to new lows with a key barometer of “investor intent,” MAAD, which is on the brink of making a new Major Cycle low. There is also the fact that Major Cycle Momentum will not be able to withstand much more market weakness without reversing its long-term positive signal, generated after the March 2009 lows, to negative. That action would certainly amplify a reversal of the bull trend to bear trend.

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.

So, in conclusion, to keep trend negativity going the market must continue to weaken EVEN THOUGH short-term Momentum might not confirm that action. At the same time we must see continuing deterioration in MAAD, CPFL, and Cumulative Volume to the extent activity on up days diminishes while negative days bring out more sellers. And while we cannot preclude the possibility the market might be in a "testing" phase in that it is looking for an Intermediate Cycle bottom that could precede a period of relatively indecisive market action in which intermediate-term "Oversold" conditions could be worked off, our gut feeling tells us this market has probably initiated a new bear trend that will not end any time soon.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD on both the Daily and Weekly Cycles moved down to new lows for the move last week. Weakness on the lesser trend suggests that the reflex rally begun after the early August lows is probably over and that more selling could follow. Yet again, there is an indication "Smart Money" sees few reasons to be long this market.

With the MAAD Daily Ratio back toward neutral, and even though the larger MAAD Weekly Ratio is "Oversold," we suspect more near-term weakness could develop to not only extend net losses on the larger intermediate trend, but such selling would simply develop within the context of a larger cycle that would get a more "Oversold." Such action is characteristic of bear trends just as "Overbought" can be a symptom of bull trends.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Following 28 days of net negativity when CPFL on the Minor Cycle was positive for three sessions September 14, 15, and 16, the indicator was back into negative territory all of last week. Underscoring that bias, the indicator hit a new low for the move last Friday. Like their MAAD counterparts, options players have re-asserted their net negative market outlook by purchasing more puts on a dollar value basis than calls.

While it’s true CPFL has not deteriorated to the same extent as some of our other indicators, what is important to remember is that it is the overall direction of CPDL is key to its influence. If there is a countertrend move at some point on the larger Intermediate trend, we would not be surprised to see CPFL fail on the upside. That action would be just as bearish as a down move, albeit a shallow one, as has been the case since last February.

Click charts to enlarge

Conclusion

Net selling last week in the stock market probably re-asserted longer-term weakness and could result in more new lows in the weeks just ahead. Our only concern from a seller’s point-of-view is that the Intermediate Cycle remains "Oversold." History suggests, however, that "Oversold" in a bear move can persist, just as "Overbought" can be the norm in a primary uptrend.

Overhanging all of this, however, will be the upcoming status of Major Cycle Momentum which peaked in the spring of 2010 and which has not revisited those levels since then. Given the fact that long-term Momentum can reach a plot high about one-half way through a long-term uptrend and the fact that it is on the verge of a negative number now, we can only say once again that the bullish camp has a large point to prove from here on.

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.