Market defies indicator deterioration, but for how long?

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1277.81

+20.21

+1.60%

Dow Jones Industrials

12359.92

+142.36

+1.11%

NASDAQ Composite

2674.22

+69.07

+2.65%

Value Line Arithmetic Index

2737.41

+41.81

+1.55%

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

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

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

A low volume rally that continues to stall in the face of massive resistance can be just as revealing as a low volume decline that fails to sink in the face of support. After more than a year of failing to overcome what was previously support, we continue to marvel at the staying power of this market and if it will ever be able to overcome what is now major resistance..

When Cumulative Volume (CV) is inserted into the equation, while the S&P 500 is now quoted near 1280, CV remains not far from 1150, a level the S&P reached back in September 2010. While we understand that rallies can persist on low volume for awhile, history suggests that sooner or later those rallies give way to the realities of the market when there are no buyers left to sustain strength.

From a purely practical point-of-view, we see this market continuing to defy gravity. To be more bullish on the market we would need to see Cumulative Volume at much higher levels to suggest that there has been some accumulation developing. But we do not. In addition, not only did the short-term trend spend four out of five sessions last week fuddling about after one strong rally the first day of the year, but the Minor Cycle is now noticeably “Overbought.” At the same time the larger Intermediate Cycle that has been underway since the October lows is approaching similarly “Overbought” levels.

Market Overview – What We Know:

  • Market action on low volume remained anemic four out of five sessions last week in wake of a good rally on first day of trading year.
  • Trading volume in S&P 500 increased nearly 20% vs. Wednesday’s action.
  • Trading volume for first week of year was 41% below similar levels in 2011 and 2010, 36% below 2009 volume, and more than 50% below 2008 first week activity.
  • Short-term trend continues to look weak in face of major resistance, but so long as short and intermediate term cycles remain positive, further gains cannot be precluded.
  • S&P must better May 2011 high at 1370.58 to re-assert Major Cycle uptrend.
  • MAAD was negative Friday by 7 to 13, but MAAD on Minor Cycle has been keeping up with S&P pricing, although not with net S&P gains relative to last May’s intermediate highs.
  • Weekly MAAD remains weak relative to late October short-term highs and on long-term cycle.
  • CPFL continues to flirt with positivity, but has confirmed none of strength since October lows while holding only slightly above new lows for move made December 19.
  • Cumulative Volume remains weak on Minor and Intermediate Cycle relative to S&P.

On the indicator front, our Most Actives Advance/Decline line (MAAD) has remained in synch with the broad market, but whereas the S&P 500 retraced about two thirds of its losses since the May 2011 highs (1370.58—S&P 500) relative to the October lows (1074.77—S&P 500), MAAD has only come back about 50%. The Smart Money indicator is suggesting one of two things must happen. Either the market moves in favor of MAAD or MAAD moves dramatically higher to mimic market action. Unfortunately, history does not support MAAD moving in favor of the market, a dilemma that leaves the market and bulls in a precarious position.

Market Overview – What We Think:

  • We continue to look with extreme skepticism on this Intermediate Cycle rally that has persisted since the October lows (1074.77—S&P 500). But so long as the intermediate trend remains positive, we must accede to its “positive” flavor.
  • We suspect, however, that when the short-term advance begun after the December 19 lows (1202.37—S&P 500) ends, that termination could also mark the end of the intermediate advance and the completion of the ascending wedge chart formation that has been developing since October.
  • While we continue to believe new highs (above 1370.58—S&P) will not develop, we cannot rule out such a possibility so long as the Intermediate Cycle remains positive.
  • If such strength does occur we do not think any of our key indicators will confirm strength, a development that could weigh heavily on market pricing.
  • All of major indexes (S&P 500, Dow 30, NASDAQ, and Value Line) have one thing in common in that all have stalled at “Necklines” of Head and Shoulders top initiated early last year. Pattern was followed by losses last August and indexes have never fully recovered. What was then support broken on downside is now resistance on upside.
  • Ongoing failure in face of major resistance in market that keeps inching toward “Overbought” territory is not sign of trend health.
  • Odds remain good S&P 500 could stall anywhere this side of upper edge of 10-month Price Channel at 1336.70.
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