As stock market fiddles negatively, bullish cause burns

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1158.67

-56.98

-4.68%

Dow Jones Industrials

11231.78

-564.38

-4.78%

NASDAQ Composite

2441.58

-130.92

-5.08%

Value Line Arithmetic Index

2463.54

-168.24

-6.39%

Minor Cycle
(Short-term trend lasting days to a few weeks)
Negative

Intermediate Cycle
(Medium trend lasting weeks to several months)
Positive / Neutral

Major Cycle
(Long-term trend lasting several months to years)
Positive / Neutral

Over a period of about six months, the stock market, as measured by the major indexes, traced out what appears to be a classic Head and Shoulders Top with a defined Left Shoulder, a Head, a Right Shoulder, and a Neckline. Trading volume diminished throughout the pattern’s formation. Prices broke to the downside and sunk through the bottom of the Neckline. Downside measured move objectives were reached and the market put in place a low which was subsequently tested. A rally ensued, but after prices retraced earlier losses back to the Neckline, bids sank again. The latest decline leaves index prices, as measured by the S&P 500, 7.8% above the measured move low at a point equal to index pricing thirteen months earlier. At the same time, the S&P was last just over 15% below the Head of the price pattern.

Admittedly, the “pullback” from the short-term rally into Neckline resistance has retraced what could be a “normal” 40% to 60% correction of the up move off of the lows. And prices have also achieved deeply “Oversold” levels on the Minor Cycle at levels equal to short-term lows created over the past several years. And prices have achieved those “Oversold” levels in the vicinity of the lower edge of defined Intermediate Cycle Price Channels (1154.28—S&P 500). Put another way, the stock market could be ripe for a rebound on the near-term.

Market Overview – What We Know:

  • S&P 500 has corrected just over 60% of the advance begun after the October 4 intraday low (1074.77). Such action can be “normal” in an otherwise positive advance where next larger Intermediate Cycle remains positive.
  • To suggest trouble for S&P 500, index would have to decline below lower edge of 10-Week Price Channel (1154.28 -- through December 2). Such weakness would then suggest possible “test” of that October 4 low.
  • Short-term trend is as “Oversold” as at any time over past several years. “Oversold” conditions can persist, however.
  • To reassert Intermediate Cycle uptrend begun after October low (1074.77—S&P 500), S&P would have to better October 27 intraday high at 1292.66.
  • Weekly Most Actives Advance/Decline Line (MAAD) declined to new intermediate-term low last week and was last within 25 issues of breaking low put in place week ending March 13, 2009. Daily MAAD Ratio has moved back into “Oversold” territory.
  • MAAD on Major Cycle has continued to underperform broad market, a suggestion Smart Money remains skeptical of longer-term stock market prospects.
  • Call/Put Dollar Value Flow Line (CPFL) remains remarkably weaker than market and could sink to new lows with little additional effort.

But keeping in mind the bull / bear battle, which has one side believing new market highs will follow while the other thinks a new bear market is underway, the bears are winning and it remains possible that price action over the past several months could prove to be distribution selling into a major cycle top that followed a 2 ½-year rally from the March 2009 lows. Underscoring that notion, and despite the possibility for another market pop to the upside, it is obvious after a year of trying the bullish camp has simply not had the power to overcome bearish resistance even though they have tried repeatedly to accomplish that task.

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