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

Market Snapshot:



Week Chg

Week %Chg

S&P 500 Index




Dow Jones Industrials




NASDAQ Composite




Value Line Arithmetic Index




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

Intermediate Cycle
(Medium trend lasting weeks to several months)

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

Now things get interesting.

Last week we outlined two opposing views from two colleagues – one believes the stock market will rally to new highs within the next year. The other thinks recent market strength will prove to be nothing but a bear market rally in the wake of the May 2011 highs. The bets are on!

There is no denying the fact the broad market as measured by the S&P 500 has rallied nearly 19.5% since the October 4 lows (1074.77). In that same time frame the Dow Jones Industrial Average has rallied 17.5%, the NASDAQ 19%, and the Value Line index just over 25%. What is also true is that the four major indexes currently remain below their May highs (S&P by 6.2%, Dow by 5%, NASDAQ by 5.2%, and the Value Line by 11.3%).

Market Overview – What We Know:

  • Near-term positioning of index prices will determine whether or not stock market will rally to new highs (above May 2011) or whether major resistance stretching up to May highs will prevail (1370.58—S&P 500)
  • Status of key indicators remains mixed to extent none have been as strong as indexes since October lows.
  • In addition, Minor Cycle remains in “Overbought” territory while larger Intermediate Cycle has moved rapidly upward from “Oversold” to “Neutral” to moderately “Overbought” levels. Major Cycle remains near “Neutral.”
  • Pricing in all indexes remains positive on Minor and Intermediate Cycles to extent bids continue to hold well above lower edges of 10-Day and 10-Week Price Channels. 10-Month Price Channel highs that can act as significant resistance remain above bids in all indexes.
  • Cumulative Volume in S&P 500 and S&P Emini has yet to underscore market strength and continues to highlight lack of relative upside enthusiasm, despite pricing. CV in S&P has recovered about 50% of losses since May with Emini coming back about 30% while S&P pricing has regained nearly 75% of losses.
  • MAAD has remained in synch with market during recent short-term rally, but this indicator has also not performed as well on relative basis as have prices. Daily and Weekly MAAD Ratios remain moderately “Overbought.”
  • CPFL has been moving marginally higher since its October 17 low, but the indicator remains noticeably below its May highs.

Market Overview – What We Think:

  • While stock market has moved within striking range of May 2011 highs (1370.58—S&P 500), it remains to be seen if any further strength will prove to be failed return-action rally within context of developing bear or a re-assertion of bull trend begun in March 2009.
  • New index price highs with a coincident failure of our key indicators to make new highs would be long-term bearish. Nothing but new price and indicator highs would cause us to give a “two thumbs up” to market’s Major Cycle bullish prospects.
  • If a short-term high in the midst of major resistance develops in the sessions just ahead, we would view that as a potential failure of the bull advance to the extent that resistance finally stymied the rally.
  • Given the history of our indicators and the current status of price action, we would not be surprised to see the market fail to make new highs as the Intermediate Cycle became “Overbought” once again and preparatory to a resumption of selling begun last May.
  • We could allow for S&P strength to upper edge of 10-Month Price Channels and statistical resistance (1325-1340—S&P 500—see table), but think gains beyond that level could be difficult, given current configuration of our key indicators.
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