Following May to October stock decline -- blue sky or Sisyphus?

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1238.25

+13.67

+1.11%

Dow Jones Industrials

11808.79

+164.24

+1.41%

NASDAQ Composite

2637.46

-30.30

-1.13%

Value Line Arithmetic Index

2642.11

+11.92

+.45%

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

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

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

The stock market never gives all players what they want. Price action over the past several months is an example of that truism. Longs, as measured by the S&P 500, who entered the market anytime after February are still waiting to break even and remain under water. Shorts that entered the market anytime after the first week in August are waiting to break even and remain under water.

What remains to be seen now is which side will come out ahead in the weeks to come. Will the bulls be vindicated by further gains? Or will Sisyphus prevail? One colleague we speak with regularly believes without a doubt that the stock market is headed for new highs. Or will an upside failure ultimately bail out nervous shorts? Another colleague we know believes that any strength will prove to be merely a bear market rally.

We are a fence sitter right now. We know that the “bluer” the stock chip, the better the issue has performed recently and since the August lows. Both the S&P and the Dow Jones Industrial Average have done better than the NASDAQ Composite or the Value Line Index which has placed a poor fourth. Could strength recently be just a blue chip rally?

Market Overview – What We Know:

  • S&P 500 and Dow Jones Industrial Average rally to short-term highs Friday and on week as NASDAQ Composite and Value Line Index lag.
  • Cumulative Volume in S&P 500 and S&P Emini on daily and weekly cycles has yet to break above resistance highs made in August, despite strength in pricing above August resistance.
  • S&P 500, Dow 30, and NASDAQ have rallied above upper edge of defined 10-Week Price Channels to underscore positive tone on Intermediate Cycle. Only the Value Index has failed in that respect and remains nearly 34 points below this week’s Price Channel point at 2675.64.
  • Short-term cycle remains “Overbought” in Momentum, our two proprietary Trading Oscillators, and Daily MAAD Ratio. Intermediate Cycle indicators remain moderately “Oversold” to “Neutral.”
  • CPFL was positive Friday by 3.10 to 1 and on week by 2.78 to 1. Indicator remains in downtrend stretching back to early March and has failed to confirm any of recent strength in broad market.
  • MAAD was positive again Friday and has moved within range of defined downtrend line stretching back to March 3. Break above downtrend line would still leave indicator well below March highs and level required to make new high.
  • Major Cycle Momentum was last fractionally positive in Dow 30 and NASDAQ while holding fractionally negative in S&P 500 and Value Line Index.

We also know that Minor Cycle stats that were deeply “Oversold” into the October 4 short-term lows are now very “Overbought” even though “Overbought” readings in a new uptrend can remain that way for extended periods of time. Underscoring upside potential is the fact that the next larger and more powerful Intermediate Cycle remains moderately “Oversold,” but not deeply “Oversold” as was the case two weeks ago. That nuanced change in the intermediate trend means that the next stop on the intermediate ratio scale is “Neutral” and neutral readings in a bear trend can equate with “Overbought” in a bull. Think May 2001 and May 2008, both hesitations with neutral readings occurring in primary bear markets.

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