Stock market rallies, but Santa forgot the volume

Market Overview – What We Think:

• As we’ve suggested before, higher prices do not a bearish case make. That’s unless bull is ingesting hemlock, or in the current case when volume underpinnings of rally are weak.
• Last week’s strength in major indexes gave a boost to bullish cause on Intermediate Cycle, but S&P 500 still has 100 points of major resistance to overcome before new highs could follow.
• We suspect short- to intermediate-term rally will fade somewhere this side of 1370.58 and that bearish case will prevail.
• Ongoing development and maturation of potential ascending wedge chart pattern since inception after October lows is suggestion all strength since October lows could ultimately prove to be reflex rally in wake of bear market top made last May.
• While near-term looks a bit more optimistic as does larger Intermediate Cycle, fact is that wide range of sellers will be eager to break even all way to 1370.58—S&P 500.
• Amplifying our concerns over price, none of our key indicators including CPFL, MAAD, CV, or Momentum looks eager to confirm index pricing. Lack of indicator faith makes us all more skeptical of strength toward or even above the May highs, levels that must be overcome to re-assert Major Cycle advance.

Also, a quick look at a chart of any of the major indexes highlights the chart formation that has been developing over the past few months, a pattern we suspect is a classic “rising wedge” that has proven to be historically bearish. Such a pattern usually consists of three parts –an “A” leg advance, a “B” leg pull back, and then a final “C” leg rally. If we are correct that the move since early October is merely a reactive rally in an otherwise negative longer-term down move, then we could see the S&P higher on that “C” leg rally now underway to anywhere from 1310.77 to 1375.55. If the former target is the final ascending wedge top that action would not be good enough for a new market high and would simply underscore yet another upside failure as has been the case since the August breakdown in pricing. But if the more optimistic target is hit, that level would be good enough for a new high and would better the May peak in the S&P 500 at 1370.58. Maybe.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Of the two scenarios which one are we leaning in favor of? Probably somewhere in between the two targets in the 1325-1350 range that would be good enough to scare the shorts while at the same time giving the bulls a dose of new optimism – and hope. That upside target also coincides with the upper edge of our 10-Month Price Channel at 1137.19, the statistical stall point on the Major Cycle for a return move. In the background we continue to see such indicators as our Call/Put Dollar Value Advance/Decline Line (CPFL), our Most Actives Advance/Decline Line (MAAD), Cumulative Volume (CV), and Major Cycle Momentum, looking only so-so.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

In fact, this market reminds us a lot of the top in 2000. Following the sharp downside break in March that was followed by an initial low in April, there was a tedious and failed rally that lasted until September. During that latter period, MAAD and CPFL continued to deteriorate along with CV and Momentum. Index prices then headed lower and hit new lows in October with selling proceeding apace for the better part of the next two years and until the October 2002 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.

In sum, the Intermediate Cycle had some life breathed back into it last week and could even continue to do better in the sessions just ahead. But like our football team that came onto the field missing a large portion of its first string players, we wonder at the quality of the rally that has been underway for nearly three months. And considering the fact that the S&P 500 must rally more than 100 points upward through major resistance to make new highs (above 1370.58), we wonder how much staying power this rally will have once the first team comes back to work after the holiday. This rally is beginning to look a lot like the 4th quarter with only a few minutes and long yardage to go for Bull Tech.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD has remained synchronous with the broad market as measured by the S&P 500 index since the October lows, but it is the larger Weekly MAAD that is a problem. Not only did the indicator take a severe hit during the decline that lead to the October lows, but the larger cycle indicator also declined to a new short-term low in November even though index pricing held above that near-term reaction level. The weekly series would undoubtedly do better if the broad market continues to do better in the weeks just ahead, but there is that lingering notion that Smart Money continues to view the uptrend since March 2009 lows with less enthusiasm than during other cycles.

It is that long-term market avoidance by Smart Money that is the issue with MAAD, considering the fact the indicator remains not far above its March 2009 plot lows to suggest that only modestly more selling in equities could force Weekly MAAD to a new long-term low and to levels not seen since August 1989.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL did better last week in that four of the week’s five trading sessions were accompanied by positive Call Dollar Values. On the week, Call Dollar Values exceeded Put Dollar Values by nearly 4 to 1.

But would higher prices in index pricing, even new highs in the S&P 500 above 1370.58, result in new highs for CPFL? For now, we don’t think so. In fact CPFL has confirmed none of the rally in the broad market since the October lows to suggest that options players continue to view market strength with suspicion. To reverse that negative tone, CPFL would have to rally and would need to better its March 2011 plot highs.

Click charts to enlarge

Conclusion

Short-term gains in the broad stock market over the past several days have stimulated the larger Intermediate Cycle that was under threat on the downside. The only problem with the rally is that normal volume is diminished in the face of the year-end holiday In fact, last Friday’s volume in the S&P 500 was only one half of “normal.”

While there is no denying the profitability of higher prices, ultimately bids must be measured against the quality of the underpinnings of the rally that is driving prices higher. After a few weeks of lighter than normal holiday trading, we wonder what will happen when all players are back at work after New Year’s. At that point the pedal hits the metal and the realities of the current low volume rally could become painfully clear.

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.