Market loses holiday cheer, fades on low volume

We are left with two upside price targets. The one at 1376.55 would result in a new S&P high and would better the May 2011 peak at 1370.58. Such action would suggest a re-assertion of the Major Cycle uptrend begun in March 2009. The secondary measurement to 1310.77 would not create a new high in the S&P.

Market Overview – What We Think:

• We could see some further market recovery on the short to intermediate term trend over the next few weeks.
• Upside profit targets for S&P 500 at 1310.77 and 1376.55 come into view via measured moves from October lows.
• We suspect eventual peak in S&P on Intermediate Cycle will fall somewhere between two targets and shy of new highs above 1370.58 at May peak and level that must be bettered to re-assert Major Cycle advance begun in March 2009.
• Possible stopping point for rally in effect since October lows could be before 1336.70 and upper edge of 10-Month Price Channel in effect for all of January.
• Odds are good that even if market is somehow able to reach new highs, none of our key indicators will confirm such strength to suggest staying power of rally could be highly suspect and could turn out to be a classic ‘draw play” for unwary buyers.
• Volume, possible deciding factor in bullish equation, has been anemic of late while S&P must still tack on more than 110 points to make a new high.

But there is a huge qualifier hanging over this market. For the S&P to rally enough to make a new high it would have to come out from behind a year of relative doldrums and would have to move upward through more than 112 points of major resistance, a task it has been unable to perform to date. At the same time with none of our key indicators anywhere near making new highs, where would the underpinnings for such strength come from? Smart Money as reflected in our Most Actives Advance/Decline Line (MAAD) liked little of the rally from March 2009 to the May 2011 highs. It declined eagerly after the May peak and actually sank to a new short term low on the weekly cycle a few weeks ago.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

In addition, our Call/Put Dollar Value Flow Line (CPFL) has confirmed NONE of the rally from the October lows and actually hit a new short to intermediate-term low December 19. Cumulative Volume (CV) has mimicked price action since October, but on a relative basis CV remains weak on the long term trend after suffering severe damage during the August decline. In fact, CV in the S&P 500 is back to levels not seen since April 2009 while CV in the S&P Emini is only modestly recovered after sinking to new all-time lows last summer. And then there is long-term Momentum which has been flirting with slightly negative to slightly positive for months.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

We are left with a market permeated with contradictions. If new highs follow sometime in the first quarter, will they hold given the strong likelihood that none of our indicators would confirm such action? As a consequence, we suspect the Intermediate Cycle will top out somewhere this side of making new highs as measured by the S&P 500. A reasonable stopping point would be somewhere toward the upper edge of the 10-Month Price Channel that will be good until 1336.70 through January. Price Channel statistical resistance (or support) tends to coincide nicely with real price stopping points. The rally could fade somewhere between our secondary target at 1310.77 and a new high at 1376.55. The market would then have completed its ascending wedge price pattern and would be free to resume the larger cycle decline we think began at the May highs.

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.

Is it possible our prognosis is overly pessimistic? Sure. Is it possible new highs could follow? Also affirmative. But is it likely? Ah…. But it’s Wall Street, folks and as we’ve learned over the past decade, anything is possible. Buckle up. It could be an interesting year and a bumpy ride.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD on the daily cycle continues to perk along with index pricing in terms of market direction, but its relative performance compared to the S&P 500 has not done as well as the S&P viewed relative to the October highs. In other words, MAAD would have to improve more than the S&P to equal the S&P.

That failure is a reflection of the overall performance of the S&P 500 on the Intermediate Cycle that turned higher after the October lows, and of the longer-term trend that continues to suggest Smart Money has not been involved in the market over the past couple of years to the same extent it participated in previous cycles.

While we hold out the possibility the broad market as measured by the S&P could make a stab at new highs in the weeks just ahead, we also think it’s a very good bet MAAD would not confirm such price strength by making new highs also. Such a failure in MAAD if new highs developed would be worrisome.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Options players appeared to be shifting toward the call side of the ledger a bit more last week, but considering noticeably light holiday volume, any strength in this indicator, considering its history since last May, should be suspect. Not only did CPFL sink to a new low on October 19, but the indicator has confirmed absolutely none of the market’s net gains since the October lows.

On an equivalent basis, CPFL is holding about where it was a year ago when the S&P was quoted at similar levels, but it is the bias of CPFL that remains the key issue. So long as options buying investors fail to second higher index prices by going net long on a Call Dollar Value basis, there is every reason to believe market sentiment, as measured by this indicator, is not what it should be. There is also the fact that since 1983 when our data for this series began, there has never been an instance when the market defied negative CPFL readings indefinitely.

Click charts to enlarge

Conclusion

After a year of stock market activity that left the major indexes little changed, we could nonetheless see some short to intermediate-term price strength over the next few weeks. Bids in the S&P 500 could exceed the October high at 1292.66. Prices could also work higher into major resistance that stretches back to the May 2011 highs at 1370.58—S&P 500. But we do not think prices will be able to better the May highs first because our key indicators do not warrant such optimism, and second because we think the market is much closer to an end game on the Intermediate Cycle than many believe.

An ideal bearish scenario that could develop on the near-term would be for the S&P to rally into resistance toward the upper edge of its 10-Month Price Channel at 1336.70, put in a short to intermediate-term top to complete the move since the October lows, and then begin moving decisively downward to re-assert a new bear market that was probably begun in May 2011.

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.