Redemption or regret facing long investors in weeks ahead

While upside remains as a given, for months Cumulative Volume (CV) has put on a poor showing. As of Friday’s close, while the S&P 500 had retraced nearly 50% of its losses since the May high (1370.58), CV in the bellwether had only retraced about 30% of its losses. At the same time, CV in the S&P Emini futures contract had only retraced about 25% of its losses since May while holding not far from new long-term lows made in early October. Put another way, another round of concerted selling could push CV in the S&P Emini to new lows with ease.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

It is those new lows and the market’s possible proclivities in that direction that are the issue. Major Cycle Momentum is currently positive but is holding so by a mere toehold. Only several weeks ago and into the early October lows Momentum on the biggest trend was fractionally negative. Then there is our Most Actives Advance/Decline Line (MAAD) which has been moving in synch with the market since the October lows, but is nowhere near bettering its May highs. Similarly, MAAD remains treacherously close to its March 2009 lows. Not only has the indicator failed to show longer-term enthusiasm over the past two years (even though it did rally with the market), but now like Cumulative Volume, it wouldn’t take much market weakness to push MAAD to a new long-term low. There is also our sentiment-based Call/Put Dollar Value Flow Line (CPFL) which has confirmed NONE of the market’s strength since the October lows. None. A few days of near-term selling could push CPFL below the October lows with ease. Clearly, options players do not feel optimistic about this market.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

Keeping these pros and cons in mind, we are left with a few market scenarios….

First, on the bullish side, and given the fact that the Intermediate and Major Cycle trends continue to hold positive, recent short-term weakness could prove to be merely a lull within the context of a larger cyclical advance. S&P 500 prices might stabilize at or near first support toward 1200 and the consolidation since the October 27 intraday high (1292.66) could prove to be a "normal;" A-B-C pullback precedent to a resumption of the new intermediate uptrend begun after the October lows (1074.77—S&P 500). Buying back above the October high could lead to further absorption of major resistance with the market possibly powering upward and then above the May 2011 high (1370-58—S&P 500). A measured move from the current consolidation relative to the October low would put the S&P not only at a new high but toward 1465. Working in conjunction with index pricing, all of our key indicators would also power higher to confirm market strength.

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.

Second, the above scenario develops, but there is a marked dearth of indicator confirmation. CV, MAAD, and CPFL are noticeably absent on the underscoring front. At the same time, while Momentum on the larger cycle gets more positive, it does not make new highs with prices. The combination of higher prices without indicator confirmation could set the market up for another large decline.

Third, neither of the first two scenarios develops. Prices stall in the midst of major resistance as our key indicators remain reluctant on the upside while ready to make new lows with ease. Prices break to the downside. The Intermediate Cycle turns negative as Major Cycle Momentum moves into the negative column. The return action rally begun after the October lows ends and larger cycle negativity reasserts itself.

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

In sum, long-term indecision relative to the May 2011 highs will be resolved in the weeks just ahead and as a result of that clarification the decisions made by long-term investors will either be redeemed, or not. But one thing is certain -– the longer it takes this market to decide, the more difficult it will be for the bullish camp to benefit from market movement since a lack of upside resolution is usually the result of persistent selling pressures. All it will take to stymie the bullish case is for the market to continue offering a few more sellers than buyers and new highs will not follow.

McCurtain Most Actives Advance/Decline Line (MAAD)

After perking to a new short-term high November 11, Daily MAAD moved lower last week. While the indicator was a bit more positive than index pricing, MAAD nonetheless had a somewhat negative tone on the Minor Cycle.

Offsetting weakness, however, was the fact that the MAAD Daily Ratio has moved back to neutral levels and could sink into "Oversold" territory with only a bit more market weakness although "Neutral" in an otherwise positive Intermediate Cycle uptrend can be good enough for a near-term low.

Short-term tendencies aside, MAAD continues to look anemic on the long-term cycle. Not only are weekly stats not far above the October indicator lows, but Weekly MAAD data is holding just above the March 2009 Intermediate and Major Cycle lows. Those relationships highlight the fact that not only has Smart Money tended to shy away from this market on the long-term, but that tendency has not changed recently and despite index strength.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL hit a new short-term low back on October 17 at a point when the S&P 500 was nearly one-half of the distance and 12% into its short-term advance. Since then CPFL perked a little higher into the last one-half of the short-term price rally, but then faded back toward its October lows.

It doesn’t take much analysis to discover that options players haven’t thought much of the market’s recent upside gains. Not only have they apparently been buying nearly as many puts on a dollar value basis as calls over the past month, but their skepticism could result in new lows for CPFL with only a little more selling. There is also the fact that CPFL is nowhere near making new highs relative to the highest plot of February 25, 2011.

While we cannot rule out the possibility the broad market could attempt new highs, we must point out again that we have never seen an instance where the broad market maintained a bullish bias without positive encouragement from CPFL.

Click charts to enlarge

Conclusion

Price action in the S&P 500 over the past few weeks could ultimately prove to be a mere hesitation within the context of larger cycle positivity. If the S&P 500 doesn’t give up much more ground on the downside, and considering the fact that most near-term indicators are "Neutral" to moderately "Oversold," we could see a resumption of buying at any time.

But it is the big picture which remains the issue. Yes, there could be another short-term advance. The October 27 intraday high at 1292.66—S&P 500 could be overcome and those traders astute enough to capture that movement could profit. But for the longer-term investor who has gained little over the past year, nothing but new highs will redeem his long position. This side of that possibility there could be nothing but regret.

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.