After five months, stock market nearing ‘do or die’ point

Market Overview – What We Think:

• While we cannot rule out possibility further short-term rebounding could develop so long as larger Intermediate Cycle remains positive, last week’s selling and ongoing inability of bullish camp to push prices higher and through major resistance (1255-1370.58—S&P 500) amplifies negative market bias that has persisted for past several months and since August breakdown. .
• To prove bullish point S&P 500 would have to rise above first resistance at 1267.06 and December 7 intraday high and then October 27 intraday high at 1292.66 or failure and subsequent downside break below 1180—S&P 500 would suggest all price action since October lows has been countertrend bounce within context of larger cycle negative.
• Inability of broad market, as measured by S&P 500 index, to overcome major resistance stretching up to 1370.58—S&P means time is wasting for bullish cause. If failure persists, we suspect that sooner rather than later “ascending wedge” chart formations that have been developing will resolve on downside.
• While there are folks who believe price action since May will prove to be merely a pullback in primary bull market, we think time is running out for that strategy.

Cumulative Volume (CV) is another problem area. Again, while CV in both the S&P 500 and the S&P Emini futures contract has been directional to the extent CV has mimicked price action over the past few months, what remains is a marked divergence between S&P 500 prices and CV on the long-term trend. CV in S&P cash and futures both peaked back in February coincident with that high in CPFL. In the wake of those highs, CV in the S&P 500 not only sank below CV supports put in place during the consolidation of July/August 2010, but selling in August pushed CV down to levels not seen since early April 2009 and just a bit above the March 2009 lows.

Over on the futures side, CV in the S&P Emini not only eclipsed the March 2009 low via selling in early August, but Emini CV declined to its lowest level ever! Since that downside volume disaster CV in neither issue has done all that well. In fact, on the charts a very nice little “ascending wedge” has been developing in CV just as it has been in S&P pricing and the other major indexes.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

On the charts, our trailing 10-Day and 10-Week Price Channels are worth noting. Via selling early last week the lower edge of the 10-Day channel was threatened and then fractured via selling in the S&P 500. That weakness underscored the November 25/December 7 short-term rebound that was the second failure on the upside relative to the October 27 intraday high at 1292.66. More important, however, the now tentative and larger Intermediate Cycle trend, which remains marginally positive, has put renewed focus on the lower edge of the trailing 10-Week Price Channel that will be good through this coming week to 1188.87. If that last “failsafe” level is terminated on increasing volume, new lows in CPFL and weakness in MAAD, we suspect the countertrend bounce begun after the October lows would be over and that more selling would almost certainly flip currently “Neutral” long-term Momentum back into negative territory to underscore a longer-term bear.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

But there is a “this side of there” scenario. If the market turns out to be somewhat more resilient than we suspect and if it turns out that buyers get another shot at the upside, there are three key levels to monitor. The first is that December 7 short-term high at 1267.06 that is coincident with the near-term downtrend line stretching back to the second key point at the October 27 high (1292.66). Strength above the first level and then the second would re-assert the now fragile Intermediate Cycle. Yet another failure at the second level would simply highlight the inability of the bulls to overcome selling pressures.

But there is a third level. If the first and second levels are somehow surpassed, then S&P bids must overcome 1370.58 at the May high in the S&P 500 to suggest a resumption of the primary bull trend begun in March 2009, a very long two years and eight months ago.

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.

What are the odds bulls can eliminate selling pressures to cause index prices to rebound enough to make new highs? As students of the market know, there is never a scarcity of surprise when it comes to the stock market. But considering the status of our key indicators, current market pricing, and the doubtful abilities of the bullish camp, we are reminded of that World War II movie, “A Bridge Too Far,” when there came a time when the assault simply ran out of steam.

McCurtain Most Actives Advance/Decline Line (MAAD)

While price action in S&P 500 remains about 3% above a rising uptrend line connecting the October 4 (1074.77) and November 25 (1158.66) short-term low and the two points of contact for a developing “ascending wedge” chart formation, a notoriously bearish formation, Daily MAAD is easily within range of its uptrend line connecting the same two dates. In fact, one solid down day with MAAD maxing out at a minus 20 issues would likely fracture that line to suggest the advance since the price October low is over.

But there is the larger issue with Weekly MAAD data that we have pointed out for months. Not only did MAAD falter on the upside after the March 2009 lows, even though the indicator did move higher with prices, MAAD diverged on both the Daily and Weekly cycle prior to the May highs. More importantly, that major high in MAAD in the early spring occurred not far below a very long-term trend line stretching back to the 2000 plot high that connects with the October 2007 high. In other words, there is now a defined trend line more than a decade old suggesting that smart investors have become progressively less enthusiastic about the stock market.

Then there is the relationship of MAAD to the March 2009 lows. That is what is scary. Not only did the March 2009 low in MAAD sink BELOW the March 2003 indicator support level, but selling since August has moved MAAD back within range of that same March 2009 low.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

If CPFL was an entrepreneurial startup, it would now be nearly bankrupt, or at least circling the drain. After 10 months the indicator has shown no inclination to demonstrate any upside enthusiasm. In addition, last week the indicator sank to its lowest levels since the downtrend in the indicator was begun last February 25. And that’s despite a 13% rally in the S&P 500 as measured by last Friday’s Close.

So what’s the matter with the options crowd? Quite frankly they do not believe that strength in the stock market since the October lows will prove to be anything more than a bear market retracement. And we suspect that even if the market is able to create yet another upside attempt, perhaps a measured move from last week’s lows up toward last May’s highs, CPFL would probably confirm little, if any, of that strength relative to the February highs in CPFL.

Given the fact that CPFL weakness signaled the downturn in the market averages at the major cycle highs in 2000 and again in 2007, we so no reason to believe out of step this time around.

Click charts to enlarge

Conclusion

The Intermediate Cycle in the stock market is in trouble. Last week’s selling not only flipped a tentative Minor Cycle trend back into negative territory, but further weakness would not only fracture a rising uptrend line connecting the October and November index lows, it would push bids lower through trailing 10-Week Price Channels (1188.87—S&P 500) and a point which must hold if there is to be any chance the bullish camp might pull a challenged trend out of the fire.

Underscoring all price possibilities and indicator reluctance is the fact that nothing but strength back above the May highs (1370.58—S&P 500) will re-assert the Major Cycle advance begun after the March 2009 price lows. Considering the ongoing failure of CPFL, MAAD, CV, and Major Cycle Momentum, which is now seriously challenged, we wonder if bulls need a holiday miracle to prove their point. Unfortunately, new highs by themselves will not get the job done. There must also be indicator corroboration on the upside and we suspect that will simply not happen.

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.