Stock market range bound with hint of ‘Gunsmoke'

Not only is our Most Actives Advance/Decline Line (MAAD) on the cusp of making a new low for the moving via daily data, but the weekly series using weekly data hit a new low last week. At the same time, our Call/Put Dollar Value Flow Line (CPFL) has been trending lower on a cumulative basis since August 4 with the exception of three positive readings on September 14, 15, and 16. CPFL has been moving steadily lower since peaking back on February 25 and hit another new low last week.

In addition, Cumulative Volume in the S&P 500 and the S&P Emini could make new lows with ease to underscore the market’s negative bias. CV in the cash S&P is now at its lowest level since late March 2009. If S&P Emini CV breaks below its August 8 plot low, such action would put CV for the widely traded futures contract at its lowest level ever. CV in the Dow Jones Industrial Average is also back to March 2009 levels with CV for the NASDAQ Composite back at April 2009 readings.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

As always with the market, however, there are caveats.

First, the next larger Intermediate Cycle is “Oversold.” Momentum and our two proprietary Trading Oscillators on the short-term trend remain negative, but are positioned at levels which could precede a rebound on that larger cycle. The caveat there is that “Oversold” conditions in an established bear trend can persist.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

Which leads us to our next warning. Currently it looks as if the market is setting up for another decline which could result in new lows. Such action could very well be confirmed by MAAD, CPFL, and CV. But if new lows do not follow in prices or our indicators, it could turn out that recent selling back toward, but not below, the early August lows (1101.54—S&P 500) was merely a “test” of those early August levels. In that event, deeply “Oversold” Intermediate Cycle conditions would gain greater credence and the odds would increase that a larger cycle rebound could develop. What would then become relevant would be just how far an intermediate term rally might carry.

If a more bullish scenario develops we continue to think major resistance positioned at the “Neckline” of the Head and Shoulders Top (1255—S&P 500) should contain any upside thrusts. At worst for aggressive sellers, the May highs would act as the last bastion of resistance (1370.58—S&P).

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.

Of the two scenarios, a resumption of selling to new lows or a “test” of recent lows prior to an Intermediate-term rebound, we are leaning more in favor of the former rather than the latter. Why? First, the negativity of our key indicators over the past several months will not be erased easily. Second, many players continue to think selling since the May highs could prove to be merely a pullback in the bull advance begun in March 2009. We suspect they may be wrong. Third, only a little more selling will move Major Cycle Momentum in the S&P and the Dow 30 to negative to reverse the positive signal generated by those two bellwethers in early 2009. Such a signal is not easily changed even though there could be some bullish countertrend action following such a negative longer-term Momentum reversal. Fourth, the venerable Dow Theory remains under the influence of a sell signal. And last, we are into that time of the year, the fourth quarter, from which some of the worst bear moves in stock market history have developed – think 1929 (major bear), 1987 (intermediate pullback), and 2007 (major bear).

So, while some upside surprises could develop, we suspect the bullish camp will continue to have a difficult time. Recalling our western motif, when black-hated Wilson played by Jack Palance faced off against “Shane” played by Alan Ladd in the 1953 western classic, and Wilson said, “Prove it,” this market is similarly headed for a decision point.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD made a new low on the weekly cycle last week with only a bit more net selling on the daily trend required to cause the smaller and more sensitive daily cycle to make a new low. The primary caveat is that both the Daily and the Weekly MAAD Ratios remain in “oversold” territory. The only caveat to that caveat is that “Oversold” conditions can remain “Oversold” in larger cycle negative trends.

Underscoring short and intermediate-term considerations is the fact the MAAD has demonstrated net deterioration for the past several months to highlight the fact that Smart Money has been exiting the market. While Weekly MAAD created a peak in late April, Daily MAAD topped out and began heading lower in early March. That variance alone was enough warning to suggest all was not well in Wall Street. The same warning persists.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL moved to new lows on both the daily and weekly cycles last week. Both the Daily and Weekly CPFL Ratios were net negative by nearly 5 to 1 comparing Put Dollar Volume to Call Dollar Volume. That negative bias suggests that options players continue to view the stock market with skepticism. In fact, there have only been three net positive call vs. put dollar value sessions since August 4 when calls on a dollar value basis exceeded puts on September 14, 15, and 16.

So long as options players continue to view the stock market negatively, not only can there be an underlying unfavorable hedging bias, but market sentiment as reflected by this indicator will provide no impetus to an upward boost in equity market prices. In other words, so long as CPFL trends lower, all positive market actions should be viewed with suspicion.

Click charts to enlarge

Conclusion

While there was strength into last Tuesday’s intraday market highs, net action thereafter left all of the major indexes heading lower over the remainder of the week with only the Dow 30 ultimately able to eke out a small 1.3% gain. At the same time, not only did the Value Line index close at a new weekly low, but so did our sentiment-reflecting CPFL options indicator and Weekly MAAD. It would take little additional net selling to push Daily MAAD and Cumulative Volume to new lows. The only factors mitigating in favor of the bullish camp are the fact that the market on both the short and intermediate trends is “Oversold.” Unfortunately for the bulls, “Oversold” conditions can persist.

With index prices stuck between the August lows and the August highs, it’s clear that a decided break in one direction or another is required to eliminate the current stalemate. Of the two choices we prefer the new lows possibility.

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.