Market recovers from losses, but resistance remains

Market Overview – What We Think:

• While the recovery of last Wednesday’s losses on Thursday and Friday could presage further market strength, lacking movement above October 27 intraday high (1292.66), gains in S&P would have to be regarded as a reflex bounce.
• If S&P is able to better 1292.66, net hesitation in market over past two weeks that led to elimination of “Overbought” conditions with “Neutral” readings now prevailing could be a suggestion market is on verge of another up leg within context of Intermediate Cycle positive.
• Overhanging all upside possibilities, however, is zone of major resistance stretching from 1255-1370-58 in S&P 500. To re-assert Major Cycle advance and to end suggestion strength since October low has been merely a “return action” rally, new index highs must follow.
• Failure of CPFL to demonstrate little upside follow could continue to act as drag on market enthusiasm.
• But new short-term high in MAAD Friday is an indication of subtle shift in Smart Money crowd’s attitude toward market.

We have been assuming since the October lows that the lack of indicator enthusiasm as reflected in Cumulative Volume (CV) for the S&P 500 index and the S&P Emini futures contract was a reflection of weak market internals. There is also that substantial band of resistance stretching from 1255-1370.58 in the S&P 500. That zone encompasses the lower edge of the Head and Shoulders Top formation and the “Neckline” fractured on the downside in early August. Undoubtedly there are longs clustered in that price spectrum waiting to get even if bids come back to their levels.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

There is also the fact that with the Major Cycle holding positive, albeit marginally, a resumption of buying would occur within the context of that tentative long-term positive and the lingering Intermediate Cycle positive. Put another way, recent Minor Cycle hesitation may have been merely a point of adjustment within the positive context of those larger cycles.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

But the bulls must still prove their point. Even though the Minor Cycle has come back nicely from the October lows, more strength must follow. And even though the Intermediate and Major Cycles could provide the favorable backdrop for additional upside activity, the elephant in the room, the resistance up to 1370.58—S&P, must be overcome. Can that resistance be absorbed? Yes, it’s possible. But, in fact, nothing but new highs will re-assert the long-term bull initiated after the March 2009 lows.

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.

Short of certainty that major resistance has been eliminated with a "look back" in a few months, there is also the classic nature of price action since May and since the construction and resolution of that Head and Shoulders Top we have referred to often. While it’s true the pattern’s objectives have been met, we continue to wonder if this market is merely staging a return-action rally within the context of a longer-term top put in place last May. Intermediate Cycle statistics remain positive, but they have moved rapidly higher over the past several weeks from deeply "Oversold" conditions to moderately "Overbought." Its true prices on the Intermediate Cycle could mimic recent short-term action by moving laterally for a time to eliminate "Overbought" readings, but there is still the major resistance problem.

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

In sum, an investor playing the larger Intermediate trend should remain optimistic providing prices do not sink below the lower edge of defined 10-Week Price Channel lows (see table). If an investor has been looking for a short-term pullback, then strength above the October 27 intraday high (1292.66) would indicate a resumption of the larger Intermediate Cycle positive within the context of a major trend which remains tentatively positive.

No matter how the short-term trend resolves itself, however, until that peak at the May 2011 high (1370-58—S&P 500) is overcome, all price movement short of that level must be viewed as "return action" within the context of a longer-term top. Simply put, either the market makes new highs to re-affirm the major trend, or it does not.

McCurtain Most Actives Advance/Decline Line (MAAD)

The Daily MAAD Ratio reached an "Overbought" extreme of October 18. Since then the indicator has moved steadily back to "Neutral" territory and was last holding toward that level. Historically, "Neutral" readings in an otherwise positive larger cycle, intermediate in this case, can precede a resumption of the larger trend. In other words, that corrective action in MAAD on the Minor Cycle may have been enough of a statistical pullback necessary for a resumption of the dominant Intermediate Cycle.

There is also the fact that following sharp selling last Wednesday, MAAD did not demonstrate the same negativity as the broad market and then recovered very quickly on Thursday with strong follow through on Friday. The indicator then rallied to a new short-term high on Friday.

In a nutshell, MAAD has begun to exhibit a slightly more positive tone than the broad market to suggest that Smart Money may have begun to view index pricing in a somewhat more favorable light. But like the broad market, MAAD still has good distance to travel before the indicator would be positioned to overcome the highs it made March 3 nearly two months before the broad market peaked.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Unlike MAAD which has begun to assume a more positive tone relative to the broad market, CPFL, which measures the activities of options players, has demonstrated little net improvement since the August/October lows. Options buyers, in a word, have remained skeptical of stock market strength and have continued to hedge their bets on a net Dollar Volume basis by purchasing nearly as many puts as calls.

While it’s possible the options crowd could be carried along by a new round of stock market euphoria, history suggests that so long as this indicator remains mired in skepticism, the longer-term prospects of the broad market should also be viewed with caution.

Click charts to enlarge

Conclusion

The sharp recovery in the major indexes last Thursday and Friday on the heels of Wednesday’s losses could prove to be "short-covering" rally, or it might be the resumption of the larger Intermediate Cycle positive following a little over two weeks of lateral corrective action on the Minor Cycle. While we had anticipated a lengthier short-term pullback, there is no denying that buyers have pushed prices to within range of the October 27 intraday high (1292.66), the point which must be exceeded to re-assert the larger Intermediate Cycle positive. That coupled with the fact that our Most Actives Advance/Decline Line (MAAD) hit a new short-term high last Friday is a hint more market improvement is possible.

But it remains to be seen if strength since the October lows will prove to be a resumption of the Major Cycle advance begun in March 2009, or not. Until Major resistance at 1370.58 is exceeded, the coin is still flipping.

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.