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

Market Snapshot:

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.

Another possibility would see the market rallying back into the midst of significant resistance stretching back to the May highs, but it would not be able to overcome those levels. Nor would our indicators. In fact, with major resistance beginning toward 1255 in the S&P 500 and stretching to the May highs, we wonder if buyers would even be able to overcome first resistance at the late August highs (1230.71—S&P 500), let alone the May highs that remain nearly 20% above current S&P 500 bids. Keeping in mind that yesterday’s support lows become tomorrow’s resistance highs, the burden of proof continues to remain solidly on the shoulders of the bullish crowd.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

There are also some indicators values that bear noting. As we mentioned earlier, Intermediate Cycle "Oversold" conditions are currently evident. But there is also another market truth worth bearing in mind to the extent that "Oversold" conditions can persist. Prices continue lower and readings get more "Oversold." So we could be left with a conundrum in that "Oversold" levels may not be all they appear to be.

The best way out of this dilemma is to closely monitor the status of index pricing relative to objectively calculated 10-Day and 10-Week Price Channels highs that represent Minor and Intermediate Cycle upside break points. We also pay attention to defined and subjectively drawn downtrend lines and to upside resistance levels as created by price. In the case of the S&P 500, applying all three tools, to suggest an Intermediate Cycle reversal to positive, the S&P 500 would need to break above is 10-Day Price Channel high (1167.62 on Monday), it’s downtrend line at 1178, and then first resistance at the high of August 31 (1230.71). If this trifecta comes to pass the odds would improve that an Intermediate Cycle advance has begun.

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.

Also, with Major Cycle Momentum now negative, effectively reversing the positive Momentum numbers that have persisted since mid-2009, we would likely continue to suggest that any developing strength on the Intermediate Cycle is doing so within the context of longer-term negativity. If, however, those marginally negative Momentum numbers on the Major Cycle move back into positive territory, we would probably have to abandon the "countertrend within the bear" stance and move to a "resumption of the bull trend" outlook.

And there is the possibility the market will stall yet again in the midst of the August resistance and that sellers will force prices lower and even possibly to new lows (below 1074.77—S&P 500). That development would underscore bearish weakness and lead to more "Oversold" conditions. Underscoring all of this and lacking definition on the upside, the current Intermediate Cycle remains intact.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD demonstrated marginal improvement on both the Daily and Weekly cycles last week. Given the deeply "Oversold" condition of MAAD on the larger Intermediate Cycle, that ratio bias could provide the upside impetus for prices on the larger cycle.

While we must allow for some upside potential even though "Oversold" conditions can persist if prices make new lows in a move, it is the extent of MAAD deterioration since the indicator peaked back in early March on the daily cycle that is still relevant, implied price "opportunity" notwithstanding. Put another way, index prices could rally on the Intermediate Cycle in the weeks just ahead, but would they be able to overcome major resistance back at the May highs and would MAAD confirm that strength?

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Options players continued to exhibit skepticism of the upside prospects for the stock market last week by forcing CPFL to new lows and its worst levels since late February. That disregard of price improvement came in the face of index price gains upward from the October 4 lows, levels which some think could be the lowest levels for the intermediate-term decline begun in May.

But as we’ve mentioned before, we have never seen an instance where the market was able to disregard the negative consequences of CPFL action on the long term. The only choice in such an instance would be for CPFL to reverse course and head higher with the market. That’s possible, but if it does not happen, the odds of the market continuing higher without CPFL confirmation would not paint an optimistic longer-term outlook for prices.

Click charts to enlarge

Conclusion

There are some signs the stock market may have seen the worst of the Intermediate Cycle downtrend begun after the early May index price highs. While it’s possible an Intermediate Cycle low has been put in place via the October 4 index lows, to suggest an intermediate-term reversal we would need to see prices rally above defined 10-Day statistical resistance at the upper edge of a Price Channel (1167.62--through Monday), a downtrend line stretching back to the May highs, and then price resistance at 1230.71--S&P 500. Or we would be inclined to believe recent strength has been nothing but another failed rally within the context of a still unfavorable Intermediate Cycle.

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.