Market facing 'a bridge too far' or new long-term highs?

While our Most Actives Advance/Decline Line (MAAD) has improved on the upside with the market and remains in positive synch, MAAD has not recovered from its October lows to the same extent has pricing in the S&P 500. While the index has recovered nearly 75% of its price losses since the May highs, MAAD on the daily cycle has only come back about 50% while MAAD on the Weekly Cycle has been even more anemic with a recovery of only about 30%.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Then there is our Call/Put Dollar Value Flow Line (CPFL) which made a new short- to intermediate-term low on October 17, but on a relative basis remains back at levels when the S&P was nearly 100 points lower. In fact, CPFL has yet to break above plot resistance made in late September, despite index price gains above similar levels. Clearly, options players remain unconvinced of recent market strength.

In addition to MAAD and CPFL, our Cumulative Volume (CV) numbers remain unconvincing. While CV in both the S&P 500 cash index and in the S&P Emini futures contract have moved higher with pricing, neither series has performed as well as has the S&P. The cash S&P CV indicator has come back just under 50% while the Emini CV has recovered by only about 30%. This indicator also continues to suggest that market internals remain weaker than price.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

We are left with two market possibilities with nuances. In the first instance the market would make a new high and our key indicators would confirm that strength by becoming more enthusiastic and also making new highs. Or, the market makes new highs and the indicators do not confirm that action. That possibility could provide a classic market "hook" similar, in fact, to the recent May highs.

With the second possibility, the market fails to make new highs and confirms lingering internal market weakness. That outcome would be less surprising, given the fact that indicator deterioration, or at least the failure of the indicators to confirm on the upside, usually precedes market weakness. In this instance, a resumption of market weakness and a reassertion of the bear trend begun last May would then follow.

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.

There is no denying that currently the Minor and Intermediate Cycles are positive. Pricing on both cycles is decidedly above trailing 10-Day and 10-Week Price Channels (see table). More buying could improve investor positions on both trends. But it is the Major Cycle that is the issue. Will that long-term trend ultimately be re-asserted via new highs or will buyers be unable to push prices to new highs? Given the proximity of pricing to the May peaks, it’s a toss.

Major Index Price Objectives at top of 10-Month Price Channels

So the best way to play this market currently is to define downside risk points and for this we like the lower edges of 10-Day and 10-Week price channels while realizing that soon the short-term trend is going to peak out and consolidate. Whether that consolidation occurs below or above the May highs will be important since it will ultimately affect the staying power of the larger Intermediate Cycle. But the status of our key indicators when that pullback begins will prove to be more important. They will more truly reflect the real status of the market than pricing even though investors must ultimately act on pricing to preserve gains and protect against losses.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD has improved with the broad market since its October 3 low on the Daily Cycle, but the indicator has not recovered as much of its losses since its May highs as have the major indexes. That failure simply underscores the notion that while Smart Money has played the rally over the past month, it has done so with less enthusiasm that seems to be evident in index pricing. That divergence is especially noticeable in the Weekly MAAD series which has only recovered about one third of its losses from the May highs.

If the broad market as measured by the S&P rallies to new highs without confirmation from MAAD we would view that failure as a sign, as in May 2011, that the Smart Money crowd has yet again failed to view the stock market as a healthy venue on the long term trend, despite the recent sharp rally.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Options players have been on vacation for months. Quite simply, they have remained unconvinced of market strength since the October lows. Not only has CPFL failed on the upside since the indicator made a belated short-term low on October 17, but it has yet to even break above first resistance plotted
in mid-September. Yes, this negative divergence could be erased with an influx of Call Dollar Value relative to puts, but negativity is not easily erased.

Into the 2000 market highs CPFL was progressively less able to confirm strength in the S&P until finally from June until September 2000 and just prior to the first sharp decline, CPFL moved decidedly lower. This could be another one of those instances.

Click charts to enlarge

Conclusion

The stock market was higher for the third week in a row last week, but while our key indicators have remained in synch on the upside in terms of market direction, they have not confirmed the market’s longer-term prospects in terms of the amount of improvement in each indicator. While the S&P 500 has recovered nearly 75% of its price losses since May (1370.58), MAAD, CPFL, CV, and Momentum have not underscored those gains with similar percentage moves.

There have been other instances in market history where our indicators have held back as the market has moved higher, but ultimately price strength has proved to be a "Bridge Too Far" and elongated lines of supply have worked against market prices.

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.