Whether stock bulls or bears prevail, minor trend looks tired

The reason we bring up these comparisons now is that the stock market has exhibited the tendencies of both “airplanes” and scuba divers” over the past several months. Following the May highs (1370.58—S&P 500), downside pressure was definitely in play until early August. Heavy volume caused a remarkable negative break in our Cumulative Volume (CV) series as reflected in the S&P 500 and the S&P Emini futures contract. Longs were hit hard and scuba divers profited.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Following the August lows and a modest reflex rally, prices sold down to new lows the first week of October. The S&P 500 exceeded its August low at 1101.54 by declining to a new low at 1074.77. But that second low turned out to be a draw play. Some would call it a “delayed ending” or a “hook” in that those new lows were not confirmed by short-term Momentum AND the market on the Minor Cycle was deeply “Oversold.” In other words, the scuba diver was exhausted and water pressure, buyers, prevailed to reverse the trend to the upside.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Emini Futures contract with Cumulative Volume

Then came a sharp recovery with the market “airplane” accelerating upward to recover nearly 65% of the losses suffered by the major indexes since the May highs. But as the rally progressed, short-term “Oversold” conditions were quickly erased and prices began to stall in the face of major resistance (1255-1370.58—S&P 500). Imagine the airplane confronting a lack of oxygen at altitude.

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.

Currently, with the scuba diver recovering on the beach on both the Minor and Intermediate Cycles, it remains to be seen if the airplane will be able to take another run at the upside. The Minor Cycle is beginning to suggest that betting on substantially more strength could be a bad bet. Even though the near-term trend looks toppy and could be subject to a good pullback over the next couple of weeks, the larger Intermediate Cycle continues to offer upside potential. But that trend remains near Neutral” to moderately “Overbought” as compared to deeply “Oversold” in early October. There is some risk there too.

Index Price Objectives / Resistance at top of 10-Month Price Channels

In sum, we suspect that short-term buying power could be near an exhaustion point. With index prices still stuck between those May highs and the October lows, it becomes a question of how far a short-term correction might carry and to what extent that pullback would affect the larger Intermediate and Major Cycle trends. If the pullback proves to be shallow, it could be a bullish reset prior to more price improvement that could result in a serious challenge to those May highs, or could even result in new highs.

On the other hand, given the poor performance of Cumulative Volume and of our key indicators on a relative basis over the past several weeks, there is still risk in this market on the longer term. Put another way, in the sessions just ahead, it remains to be seen whether or not the astute investor will have to put on his snorkel in the face of a "normal" pullback or whether he may need a really strong parachute for a full bailout.

McCurtain Most Actives Advance/Decline Line (MAAD)

While the S&P 500 has recovered about two thirds of its losses since the May highs, MAAD has only retraced about 50% of its losses on the Daily Cycle and only 30% on the larger Weekly Cycle. At the same time, the indicator continues to toy with a defined downtrend line stretching back to the indicator’s March 3 high.

While concerted buying could cause MAAD to resume its uptrend initiated after the early March index price lows, we wonder if it would be able to overcome the March plot highs even if index prices make new highs. Given the lingering anemic performance of Weekly MAAD stats which are a reflection of the indicator’s long-term prospects, it would seem that Smart Money continues to view strength since the October lows with skepticism.

The only thing mitigating in favor of a more bullish MAAD is the fact both Daily and Weekly MAAD Ratios are currently near "Neutral." The Daily series began an internal correction of "Overbought" readings on October 18. Such action in an uptrend can be bullish for market prices.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL deteriorated last week. While that action was in synch with the broad market, the indicator also deteriorated as the market rallied from the early October lows. Clearly, options players remain in a quandary as to the direction they think the stock market is headed in that neither call buyers nor put buyers on a Dollar Value basis has been able to gain an upper hand. That tone has been underscored by negative CPFL action since late February.

While it’s true the indicator is now holding at a level equal to where it was plotted last January and a level equivalent to current pricing in the S&P 500, it is the unfavorable tone of CPFL that is the issue since we have never observed an instance where the market continued to diverge from a negative CPFL without unfavorable consequences eventually affecting prices.

Click charts to enlarge

Conclusion

The short-term upend in the stock market begun after the early October lows looks increasingly vulnerable. A downside break below 10-Day Price Channels with negative confirmation from short-term Momentum, our proprietary Trading Oscillators, MAAD, CPFL, and CV would suggest a period of corrective action.

Such selling would then determine the staying power of the larger Intermediate Cycle which is currently positive, but still vulnerable to the extent that trend must result in new highs (above 1370.58—S&P 500) in the not too distant future. Or the past several weeks of strength could prove to be nothing but a reflex rally in a bear trend initiated after the May highs.

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.