Stock market will soon decide if it is half full or half empty

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1155.46

+24.04

+2.12%

Dow Jones Industrials

11103.10

+189.72

+1.73%

NASDAQ Composite

2479.35

+63.95

+2.64%

Value Line Arithmetic Index

2443.57

+58.52

+2.45%

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

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

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

One of the most difficult times in the stock market is when cycles begin to change their focus. Usually that morphing occurs as one cycle falters and evolves within the context of the next larger cycle which is also evolving. Sometimes the process is concerted. The current market environment is one of those times.

After nearly five months of on balance selling pressure, the Intermediate Cycle has worked itself into an historically "Oversold" condition coincident with weakness to new lows (1074.77--S&P 500) made on October 4. Those support points may now be acting as a "floor" beyond which the smaller Minor Cycle may be unable to push prices downward since near-term selling has lost its downside Momentum. At the same time, Intermediate Cycle buying has been picking up as longer-term investors may be stepping back into the market.

Put another way, while market selling below the early August lows (1101.54--S&P 500) resulted in new lows for the major indexes on October 4, that action was not confirmed by short-term Momentum in that the lowest statistical low remains back at the early August price bottom. The recent failure in short-term Momentum was proof the market’s rate of descent into the October 4 low was deteriorating relative to the power of the first move into the early August lows. And bear in mind this slippage in the power of short-term Momentum was developing as the Intermediate Cycle worked progressively lower into "Oversold" territory, an area that has tended to be historically coincident with cyclical "opportunity." Simply put, we have never seen the Intermediate Cycle at these levels on the "Overbought/Oversold" spectrum without seeing the market rebound sooner than later.

Market Overview – What We Know:

  • Market as measured by S&P 500 has staged five failed rallies since early August lows and was last positioned about midway between late August high (1230.71) and new lows for move made on October 4 (1074.77) with its sixth upside attempt looming.
  • Index prices have moved within striking distance of upper edge of 10-Day Price Channel (1167.62—S&P 500) and defined downtrend line (1178) stretching back to May high (1370.58—S&P 500).
  • Most Actives Advance/Decline Line (MAAD) demonstrated marginal improvement last week, but indicator remains in defined longer-term downtrend.
  • MAAD Weekly Ratio remains at deeply “Oversold” levels.
  • Short-term Momentum remains negative, but marginally so, and was last just below neutral.
  • Intermediate Cycle remains at historically “Oversold” levels.
  • Major Cycle Momentum was last negative in all of major indexes.
  • Daily MAAD remains toward levels not seen since late July 2009 when S&P 500 was toward 990.
  • CPFL moved to new low for move last Friday with Daily Ratio negative by 2 to 1 on a Dollar Value basis. Weekly stats, however, were positive by 1.2 to 1.

Market Overview – What We Think:

  • It’s possible October 4 price lows (1074.77) of decline initiated after early May index highs will prove to be lowest levels on Intermediate Cycle.
  • In fact, broad market pricing has much same price look of action into lows of March 2009 price bottom in that modestly lower lows followed an initial low (November 2008) with Momentum failing to make new lows on the second downward thrust (March 2009).
  • While it’s possible the market could be poised for an Intermediate Cycle rally, we wonder if there could ultimately be a lack of upside follow-through that would prevent the major indexes from making new highs above May’s best bids.
  • Lacking an upside resolution with coincident movement above Price Channel resistance, defined downtrend lines, and then price resistance at late August highs (1230.71—S&P 500), we will view recent gains as merely countertrend in nature and unsustainable, as has been case since early August.
  • Yet another new low in CPFL last week underscores notion that options players remain skeptical of this market and see no reason to be net long, as yet.
  • Long-term weakness in MAAD, despite marginal improvement last week confirms net selling bias of “Smart Money” crowd.
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