Indexes, key indicators sink; intermediate cycle oversold

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1136.43

-79.58

-6.54%

Dow Jones Industrials

10771.48

-737.61

-6.40%

NASDAQ Composite

2483.23

-139.08

-5.30%

Value Line Arithmetic Index

2413.90

-217.40

-8.26%

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

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

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

Red ink proliferated in the stock market last week. With index losses ranging from -5.3% in the NASDAQ Composite to an extreme of -8.26% in the Value Line with negatives in-between for the Dow Jones Industrials (-6.4%) and the S&P 500 (-6.5%), there wasn’t much doubt about the market’s direction. Adding to the dreary mix, the Dow Jones Transportation index hit a new low with the Dow 30 to re-assert a long-term Dow Theory Sell signal. Cumulative Volume confirmed weakness in both Dow Averages by making new lows.

And while the S&P 500 did not hit a new price low, S&P CV did. Our Call/Put Dollar Value Flow Line (CPFL) and our Most Actives Advance/Decline Line (MAAD) also sank to new lows for the move. Short-term Momentum hit a new low and our two proprietary Trading Oscillators remain negative on both the Minor and Intermediate Cycles. Only the Major Cycle continues to hang in there by a thread.

Market Overview – What We Know:

  • Heavy selling at the end of last week terminated defined short-term uptrend lines stretching back to the early August price lows.
  • Weakness forced the Dow Jones Industrial and Transportation Averages to new closing lows for the move to underscore a Dow Theory Sell signal created on August 2.
  • Cumulative Volume in both the Dow 30 and 20 confirmed price action to new lows.
  • New lows were also reached by the Value Line Index, MAAD, CPFL, and Cumulative
    volume in the S&P 500.
  • S&P needs to sink below 1101.54 to create a new low (last at 1136.43).
  • Friday’s volume in S&P 500 shrank by nearly 30% on weak up day in market. Weekly S&P Volume rose by nearly 9%.
  • MAAD could make a new low below its March 2009 level with only another 35 net negative “units” (up issues minus down issues).
  • Intermediate Cycle remains “Oversold” and Intermediate Cycle Momentum failed to make new lows in ANY of the key issues, despite selling to new lows in many.
  • Major Cycle Momentum in S&P 500 remains marginally positive and could sink into negative territory with only somewhat more weakness.

Market Overview – What We Think:

  • Odds are good last Thursday’s selling in major indexes terminated short-term reflex rally begun after early August lows (1101.54--S&P 500).
  • Confirmation of weakness to new lows for move by Cumulative Volume in S&P 500, Dow 30, and Dow 20 with S&P Emini close to a downside negative confirmation has underscored market’s internal weakness.
  • Fact MAAD sank to new low Thursday is further evidence “Smart Money” has found little reason to be long this market since MAAD peaked back on March 3.
  • Negativity in CPFL has pushed options indicator to new low while underscoring notion options players also see little reason to be long this market.
  • With short and intermediate-term trends trending negatively, odds favor a reversal of Major Cycle Momentum to negative to signal reversal of long-term positive of move initiated March 2009.
  • With Intermediate Cycle in “Oversold” territory, however, we cannot rule out possibility that any failure of market to sustain downward bias could result in Intermediate Cycle low that could be followed by some “choppy” price action with net upward bias over a period of several weeks.
  • It’s unlikely such movement would allow bids to overcome major resistance (1255-1370-58--S&P 500) formed by Head and Shoulders Tops broken on the downside several weeks ago.

After just under five months and two failed rallies, one of which culminated in the formation of the Right Shoulder of a defined Head and Shoulders top back in July, the S&P has lost nearly 17% (Cash and Emini), the Dow 30 just over 16%, the NASDAQ Composite 14%, and the Value Line Index a whopping 23%. At the same time, it would only take marginally more selling to push MAAD on the weekly cycle to a new all-time low and below the March 2009 indicator bottom. Given the fact that Daily MAAD data dipped to new a short-term low that was confirmed by the weekly series last week, it’s obvious that the “Smart Money” crowd continues to view the stock market with suspicion.

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