Market defies indicator deterioration, but for how long?

On the options front, our Call/Put Dollar Value Flow Line (CPFL) continues to flirt with a little bit positive and a little bit negative while holding only inches above the new lows the indicator made December 19 and the lowest levels since the indicator peaked nearly a year ago on February 25, 2011. Options players, like their Smart Money MAAD counterparts, continue to view this market with a healthy dose of skepticism. The last time we saw CPFL fail so dramatically counter to the market was prior to the October 2007 highs when the indicator peaked four months before the final highs. Earlier in 2000, CPFL reached a high with the market in late March, but then noticeably deteriorated into the fall of 2000 as the indexes staged an abortive upside attempt that came within points of eclipsing the March highs. In fact, CPFL was trading at new lows as the market staged that last rally.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

We mentioned CV earlier, but also must note that this important indicator took a major hit during the August decline. Not only did CV in the S&P 500 erase nearly all of its gains since the March 2009 lows, but the indicator has simply not kept up with S&P pricing since October. S&P Emini CV is a chart disaster. Not only did CV in that issue sink to an historical low in early August, and following a massive conformation failure into the May 2011 highs, but if the Emini CV breaks below the August lows, such weakness would put the indicator at yet another new long-term low.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

The market continues to face a dilemma. On one hand prices, as measured by the S&P 500, have rallied nicely since the October lows. While the S&P and the Dow 30 have gained just under 19% with the NASDAQ up 16%, the Value Line index has added just over 22%. But the NASDAQ and VAY have been anemic of late. But where are the underpinnings for this rally? MAAD with 50 years of historical data hasn’t liked the rally since March 2009, let alone the small retracement since October even though it participated in both moves reluctantly. CPFL with 30 years of history accrued since index options began trading in early 1983 has confirmed virtually none of the strength since the October lows. And Cumulative Volume continues to highlight the fact that something historic occurred via selling last August.

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’s to be done? First, nothing but new highs will re-assert the Major Cycle uptrend begun in March 2009 (above 1370.58—S&P 500). Second and this side of there, nothing but strength above the October 27 intraday and short-term high at 1292.66—S&P 500 will re-assert the Intermediate Cycle uptrend begun after the October lows. And amplifying those two requirements, nothing but renewed strength to new highs in MAAD, CPFL, and CV will provide the statistical underpinnings to this market we believe are critical to a resumption of long-term buying, EVEN IF new highs somehow develop. Can the indicators step up to confirm market action? Anything’s possible. Is it likely before the Intermediate Cycle peaks and heads south? No.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD came within range of its late October early November plot highs last week, but like the S&P 500 failed. Most actives Daily Ratio was last toward moderately “Overbought” territory while larger Weekly MAAD Ratio remains near neutral, a tone that could underscore potential for higher price on short to intermediate trend.

It is the action of MAAD on the Major Cycle that remains the key issue, however. MAAD has liked little about the stock market since the March 2009 lows even though it was synchronous with the S&P up from those lows. But whereas the S&P recovered nearly three quarters of its losses since the October 2007 highs, MAAD only came back about half that much and, following the August downdraft, was last plotted not far from all-time lows.

For this indicator to re-assert the Major Cycle uptrend, weekly MAAD would have to better its late October highs and then the May 2011 peak. Such action is possible, but we believe it is not likely. An ongoing failure by MAAD simply points out the weak internal dynamics of a market that has been unable to break out of a defined trading range for more than a year.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL has been giving a little and taking a little for the better part of the past four months, but on a net basis, the indicator has gone virtually nowhere. It confirmed none of the rally off of the October lows and was last plotted just a stone’s throw from new lows made on December 19. Overhanging all of that is the fact the indicator has remained in a defined downtrend since reaching a high on February 25, 2011.

For CPFL to begin moving upward in earnest, options players would have to come to the party on the buy side and we would have to see noticeable net Call dollar Value statistics eclipsing Dollar Value put buying. Given the progressively precarious status of the broad market in that it has made little net headway relative to major resistance since October, we suspect CPFL will remain uncooperative.

Click charts to enlarge

Conclusion

After yet another week of low volume activity, the major indexes posted small gains last week. Strength was suspicious relative to trading activity that noticeably trailed volume statistics from 2008 through 2011 at the end of the first week by from 36% to 51%. Clearly the uptrend in effect since the October price lows does not have the strategic backing of similar rallies in previous uptrends.

That lack, plus a host of indicators which have refused to “like” the rally make us wonder if the chart formation that has been developing since October will indeed prove to be an “ascending wedge” pattern with downside implications. The low volume characteristics and the inability of pricing make us suspect the rally underway for the better part of the past five months could be reaching a termination point.

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.