Market using up time, momentum in face of major resistance

In some of our other key indicators such as the Most Actives Advance/Decline Line (MAAD), and aside from lingering long-term negative divergences we have continued to note, there is evidence of the market getting overheated once again. The MAAD Daily Ratio is currently as “Overbought” as at any Minor Cycle top over the past five years. The larger Weekly MAAD Ratio at 1.24 is about two-thirds of the way through a normal “Overbought”/”Oversold” range presuming 2.00 as an historically overdone level for the past 25 years.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

With indicator and price information in hand we can reach some conclusions. Given the fact that short-term price action, as measured by the S&P 500 index, has shown reluctance on the sell side, at least to the extent weakness has tended to generate more buying, we cannot rule out the possibility more strength could follow. Such strength comes with an ongoing caveat, however. Considering the fact that buying for months has been weak relative to the longer term trends (think CV), we suspect that if buyers are able to push prices higher into resistance at a time of the year when volume tends to be diminished anyway, it’s possible that higher prices could be more the result of a lack of sellers than of solid and serious long-term buyers.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

“So what?” you say. “Higher prices are higher prices.” What we’re driving at there is that if this market is somehow able to muster enough strength to not only push prices upward on a still positive Intermediate Cycle, but to also somehow challenge the May 2011 high at 1370.58—S&P 500, then an upside measured move in the S&P 500 to 1376.55 could become a reality. In other words, a weak volume end of year rally could push the market to new highs in the major indexes in preparation for a “return to work” in January by folks less convinced of the market’s longer-term staying power.

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.

There is also a distinct possibility that NONE of our key indicators would confirm any strength to new highs. CPFL, MAAD, CV, and Momentum on all cycles have been showing marked reluctance for months, so there’s no reason to believe they will change dramatically to confirm a weak rally to new highs. Even if it develops which at this point is a very big “if.”

Ultimately, the ability of the market to confront, absorb, and overcome resistance up to 1370.58—S&P 500 in the weeks just ahead will be the issue. If buyers fail then such action simply amplifies our longer-term bearish concerns. If the bulls succeed we suspect it’s a very good bet such strength could prove to be an end game “hook” rather than the beginning of something grand and sustainable.

McCurtain Most Actives Advance/Decline Line (MAAD)

While MAAD on the Minor Cycle via daily data has tracked index pricing over the past several days, the MAAD Daily Ratio has moved back to levels historically associated with “Overbought” and vulnerable for the past several years. The MAAD Weekly Ratio was last toward moderately “Overbought” levels.

Underscoring all short-term MAAD action is the fact that following its Intermediate Cycle peak several months ago, MAAD has been noticeably weak. Not only did the indicator sink to a new Intermediate Cycle low the week ending November 25, and despite the fact that index pricing held above lows made back in October, MAAD came within 25 negative issues of declining below the March 2009 major cycle low.

While MAAD participated in the uptrend since the March 2009 lows in terms of its directional bias, a quick survey of the indicator’s longer-term chart leaves no doubt as to the negative longer-term bias. Smart Money has, quite simply, not been participating in this market to the same extent it bought in previous cycles.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

For virtually all of the short term index price consolidation over the past six sessions, CPFL has posted net losses on a Dollar Value basis. The indicator was also net negative last week by 1.04 to 1. In addition, CPFL was last just a blink above new Intermediate Cycle lows made back on October 17, let alone miles below the major highs the indicator made back on February 25.

In a nutshell, options players, despite an S&P 500 rally of nearly 17% from the October price lows (1074.77), have remained remarkably unenthusiastic about the upside prospects for the stock market. If history is any guide to future market action, at least as measured by CPFL, the staying power of the market in the face of negative CPFL readings is not a good sign for the bullish case.

Click charts to enlarge

Conclusion

Lateral movement in the major indexes over the past several days could be a suggestion that latent buying could be precedent to further near-term gains even though the Minor Cycle has moved back into “Overbought” territory and even though those same indexes continue to face a wide band of major resistance stretching up to the May highs (1370.58—S&P). The key work here, however, is upside “attempt.”

There is also the fact that as the market moves into lighter volume holiday and end of year trading, the absence of serious selling could support a weak volume rally. Even a rally that could seriously challenge the May highs and best levels since March 2009. The “C” leg of a possible a-b-c rally begun after the October lows measures to 1376.55—S&P 500 and would be good enough for a new high. We suspect, however, that such strength would not be confirmed by any of our key indicators and that price movement to new highs could prove to be a classic draw play.

This side of bullish action, an upside failure into developing “Overbought” conditions on the Intermediate Cycle would simply play into our negative longer-term scenario. Put another way, we must allow for upside possibilities given current market bias, but a failure would be no great surprise.

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.