S&P forfeits 34% of rally in two sessions -- correction?

Market Snapshot for session ending 11-1-11:

 

Last

Day Change

%Change

S&P 500 Index

1218.28

-35.02

-2.79%

Dow Jones Industrials

11657.96

-297.04

-2.48%

NASDAQ Composite

2606.96

-77.44

-2.89%

Value Line Arithmetic Index

2636.72

-92.24

-3.38%

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

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:

  • Broad market as measured by S&P 500 has lost nearly 34% of gains since October 4 low (1074.77) in just two sessions.
  • Prices in major indexes ultimately found some support at lower edge of 10-Day Price Channels. NASDAQ Composite broke its Price Channel low by fractions on closing basis.
  • Trading Volume in S&P 500 rose nearly 25% Tuesday on weakness.
  • Cumulative Volume (CV) in both S&P 500 and S&P Emini futures moved sharply lower Tuesday.
  • From October 4 low to October 27 high S&P 500 CV recovered only 50% of indicator losses since May high while S&P index recouped nearly 75% of price losses prior to selling on Monday and Tuesday. CV recovery in S&P Emini was 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.
  • MAAD was net negative again Tuesday with 1 issue higher and 19 lower. MAAD Daily Ratio has corrected some of recent “Overbought” conditions and was last slightly below “Neutral” levels toward moderately “Oversold.”
  • CPFL was negative Tuesday by 2.84 to 1 and continues to remain weak relative to index pricing.
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 fail in face of major resistance (1255-1370.58—S&P) underscores our warning that despite power of recent price rally, weak internals and resistance could have lingering negative effect as exemplified by losses Monday and Tuesday.
  • Weakness Monday and Tuesday could prove to be beginning of short-term corrective phase that will eliminate “Overbought” conditions on Minor Cycle. 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, near-term “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 on larger Intermediate Cycle.
  • 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, like Cumulative Volume (CV), only recovered about 50% of its losses from May high whereas S&P has retraced nearly 75% of its losses. Divergence could prove to have negative effect of index prices once short-term high is put in place.
  • Short-term trend remains toward “Overbought,” despite losses over past two days. 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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