Market defies indicator deterioration, but for how long?

Market Snapshot:

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.

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.