Short-term cycle looking ‘toppy’ in face of resistance

Market Snapshot for session ending 10-31-11:

 

Last

Day Change

%Change

S&P 500 Index

1253.30

-31.79

-2.47%

Dow Jones Industrials

11955.01

-276.10

-2.26%

NASDAQ Composite

2684.41

-52.73

-1.93%

Value Line Arithmetic Index

2728.96

-74.97

-2.67%

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:

  • Short-term “Overbought” conditions began to “bite” Monday as Momentum and our other key indicators took hold on downside.
  • Break below 10-Day Price Channels (see table below) would suggest an end to Minor Cycle advance begun after October 4 short-term lows (1074.77—S&P 500).
  • But so long as index prices remain above Price Channels, short-term trend will remain positive.
  • S&P volume was down Monday by a mere 2.4%
  • Cumulative Volume (CV) in both S&P 500 and S&P Emini futures contract remains, on relative basis, weaker than index pricing that has been rising for the past month. S&P 500 CV has only recovered about 50% of indicator losses since May high while S&P index has recouped nearly 75% of price losses in same time frame. CV 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 on Intermediate Cycle.
  • MAAD was net negative Monday with no issues up and 20 down. MAAD Daily Ratio has corrected some of recent “Overbought” conditions and was last heading toward “Neutral.”
  • CPFL was marginally negative Monday, and indicator remains above October 17 short-term low by about 2.3%
Index Daily stops Weekly Monthly
10/31 11/1 11/2 11/3 11/4 11/4 11/30

S&P 500
Index

SELL
1208.42

SELL
1212.80

SELL
1215.42

SELL
1221.75

SELL
1233.11

SELL
1135.43

BUY
1325.13

Dow Jones
Industrials

SELL
11495.88

SELL
11537.74

SELL
11576.00

SELL
11641.52

SELL
11751.18

SELL
11549.90

BUY
12357.72

NASDAQ
Composite

SELL
2603.64

SELL
2610.14

SELL
2608.74

SELL
2624.78

SELL
2644.13

SELL
2415.40

BUY
2795.45

Value Line
Index

SELL
2570.63

SELL
2585.21

SELL
2594.56

SELL
2619.89

SELL
2655.73

BUY
2431.21

BUY
3027.66

Market Overview – What We Think:

  • Fact that broad market continues to stall in face of major resistance (1255-1370.58—S&P) underscores our warning that despite power of recent rally, weak internals and resistance could ultimately cause rally to fail.
  • Best strategy is to enjoy the ride while it lasts because at some point a shorter-term corrective phase will develop. First, 10-Day Price Channels (see table above) 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 at best.
  • 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.

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