Whether stock bulls or bears prevail, minor trend looks tired

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1253.23

-31.86

-2.47%

Dow Jones Industrials

11983.24

-247.87

-2.02%

NASDAQ Composite

2686.15

-51.00

-1.86%

Value Line Arithmetic Index

2740.42

-63.52

-2.26%

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

As we were searching for a theme for this week’s Market Summary, it occurred to us the stock market on a very elementary level is a lot like airplanes and scuba divers. Guided in flight by pilots, planes can rise, but they can also fall of their own weight. A conventional fixed-wing aircraft will reach the limits of its upward trajectory and can go no further.

Likewise, markets can succumb to gravity which can be a lack of buyers. It takes volume to drive prices higher. As in aerodynamics, the stock market has its upside limitations. When buyers begin to disappear in the face of more sellers, the market will fall.

Market Overview – What We Know:

  • Minor Cycle trend remains positive, but “Overbought.”
  • Intermediate Cycle trend remains positive, but near “Neutral” to moderately “Overbought”.
  • Major Cycle remains near “Neutral.”
  • Trading Volume in S&P 500 was down about 3% last week.
  • S&P 500 remains above lower edge defined 10-Day Price (see Table below) and point which, if penetrated on downside, would suggest end to short-term advance begun after October low (1074.77)
  • Cumulative Volume in both S&P 500 and S&P Emini futures contracts remains anemic relative to S&P pricing. Whereas S&P recovered about 65% of price losses since May high, CV in S&P 500 and S&P Emini only recovered about 50%.
  • Daily Most Actives Advance/Decline Line (MAAD) continues to flirt with downtrend line stretching back to indicator high plot put in place March 3. After peaking on October 18, Daily MAAD Ratio has been internally correcting “Overbought” conditions and was last holding toward “Neutral.” Weekly MAAD Ratio was also toward “Neutral.”
  • Call/Put Dollar Value Flow Line (CPFL) continues to exhibit remarkable weakness relative to index pricing. Indicator has demonstrated virtually no upside strength since October lows and could sink to a new longer-term low with relative ease.

Imagine scuba divers as sellers in a bearish move. Each time they propel themselves lower into the water’s depths, it gets a bit more difficult to make downside headway. At some point, they can dive no deeper due to water pressure. That water pressure equates with buyers looking for opportunity in an “Oversold” market. At some point an exhausted diver will become overcome by water pressure and he must rise. So it is with the stock market. At the end of a bear trend buyers overcome sellers.

Market Overview – What We Think:

  • Odds are increasing that short-term rally begun after early October lows (1074.77—S&P 500) is about over. Price action last Thursday and Friday looked more like “return action” after creation of a short-term top (1292.66—S&P 500 on October 27).
  • Index prices continued to “walk” upward along lower edge of 10-Day Price Channel in S&P 500 (see Table) last week, but Channel support could be broken with ease on downside to confirm end to Minor Cycle uptrend.
  • If we are correct Minor Cycle advance is nearly over and S&P proves unable to better October 27 intraday high (1292.66) and corrective action develops, what is at stake is viability of next larger Intermediate Cycle which has erased much of “Oversold” opportunity over past several weeks with readings now holding from “Neutral” to moderately “Overbought.”
  • Given poor showing of Cumulative Volume (CV) since October lows, it remains to be seen how much damage a short-term pullback might cause larger cycles to suffer.
  • In addition, as long as major resistance (1370.58—S&P 500) holds, there is an underlying suggestion all strength back to those highs is merely “return action” within context of Major Cycle which remains iffy.
  • Options players, as measured by CPFL, continue to underscore notion that strength since October lows is merely reflex rally under bear cloud.
  • Similarly, MAAD has only recovered about 50% of its losses from May high whereas S&P retraced nearly 65% of its losses into October 27 highs. Divergence could prove to have lingering negative effect on index prices once short-term high is put in place.
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