Intermediate cycle gains traction as resistance gets chewed up

Market Snapshot for session ending 10-27-11:

 

Last

Day Change

%Change

S&P 500 Index

1284.59

+42.59

+3.43%

Dow Jones Industrials

12208.55

+339.51

+2.86%

NASDAQ Composite

2738.63

+87.96

3.32%

Value Line Arithmetic Index

2809.37

+123.15

+4.58%

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

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

Major Cycle
(Long-term trend lasting several months to years)
Positive

Market Overview – What We Know:

  • Sharp gains in S&P 500 Thursday pushed bellwether to within 6.6% of May high at 1370.58.
  • Short-term cycle remains positive in all major indexes, but also “Overbought.”
  • Bottom of 10-day Price Channel and downside exit point at “failsafe” level (1200.35—S&P) holds through Friday’s trading (1200.35 on Friday). So long as index prices remain above Price Channels, short-term trend is positive.
  • S&P volume rose nearly 30% as compared to Wednesday’s levels with confirming action from Cumulative Volume (CV) in both S&P 500 and S&P Emini futures contract. But on relative basis CV has only recovered about 50% of its losses since May high while S&P prices have come back nearly 75%. CV volume recovery in S&P Emini is at about 30%.
  • Prices in S&P 500, Dow Jones Industrials, NASDAQ Composite index, and Value Line Index remain firmly above upper edge of 10-week Price Channels, so confirming positive trend in broad market.
  • MAAD rallied higher Thursday to new Minor Cycle high and back above defined downtrend line stretching back to March plot high.
  • CPFL was positive again Thursday by 2.39 to 1 but has yet to break above any short-term resistance levels.

Market Overview – What We Think:

  • Continuing strength in market on short-term is proof yet again that “Overbought” reading in strong rally can stay “Overbought.” So the best strategy is to enjoy the ride while it lasts because at some point a corrective phase will develop. First, 10-Day Price Channels will be fractured on the downside. Then Momentum and our Trading Oscillators will turn negative.
  • If short-term weakness is merely corrective action within context of larger Intermediate Cycle, currently “Overbought” conditions will be quickly erased and “Neutral” readings on downside might be good enough to put in place a short-term low prior to more strength.
  • Big question now, however, is whether or not market will have power enough to overcome major resistance stretching to May highs. Options players, as measured by CPFL, apparently think not since indicator remains lackluster on upside.
  • MAAD has been performing well and remains in synch with market, but like Cumulative Volume (CV) has only recovered about 50% of its losses from March high whereas S&P has retraced nearly 75% of its losses. Divergence could prove to be bearish once short-term high is put in place.
  • While Minor cycle remains positive, albeit “Overbought,” Intermediate Cycle remains in zone of opportunity near “Neutral,” but less so than at October low. Major trend remains near “Neutral.” We could allow for S&P strength to upper edge of 10-Month Price Channels and statistical resistance (1325-1340—S&P 500), but think gains beyond that level could be difficult.
  • “Overbought” short-term statistics are evident and will soon take hold.

Click charts to enlarge

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