Will market resistance prove 'steel lid' or 'tissue paper'?

In fact, chart action looks a lot like market activity that followed the first serious downside break in the prices after the October 2007 highs. Bids were lower until late January 2008, rallied a bit and then made a somewhat lower low in late March. A return action rally developed and lasted until late May and then it was all over after nearly four months. Extant Intermediate Cycle “Overbought” conditions were followed by renewed market weakness and the bear was in full roar until March 2009.

Market Overview – What We Think:

• So long as short and intermediate-term trends remain positive, we must allow for further price gains. Considering fact developing “ascending wedge” price pattern is approaching possible end stage, continuation of rally that began after October lows is questionable.
• Improvement in MAAD on the smallest daily cycle is encouraging from a bullish point-of-view, but the indicator must still overcome resistance at its May 2011 high while larger and more important weekly MAAD remains lackluster and offers little hope it will even come close to making new highs. Divergence between two suggests to us that more volatile daily series may have gotten ahead of itself since MAAD Daily Ratio is “Overbought.”
• Lack of confirming action in Cumulative Volume (CV) makes us continue to wonder if rally underway since October lows could soon play out and terminate somewhere this side of 1336.70—S&P 500 at upper edge of 10-month Price Channel, level now acting as long-term statistical resistance.
• Hanging over all price action is major resistance high at May peak (1370-58—S&P 500) and level we do not think this market will be able to overcome anytime soon.

In chart action that has developed since the August/October lows there are similarities. August was the first low followed by a slightly lower low in October. This rally has lasted five months versus four in 2008, but the pattern looks the same. Market stats on both the Minor and Intermediate Cycles are overheated. Prices continue to struggle on the upside on mediocre volume. Options players, as measured by our Call/Put Dollar Value Flow Line (CPFL) remain nonplussed about this market and have confirmed virtually none of the rally since October. CPFL could make new lows with ease.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

At the same time, while the Most Actives Advance/Decline Line (MAAD) has shown strength on the near-term cycle and rallied to a new short-term high last Thursday, the indicator is “Overbought” on the short-term trend as measured by the MAAD Daily Ratio and remains way “out of the money” on the larger Intermediate-term Cycle. The larger trend has also only recovered about one third of its losses since the May 2011 and rests not far from its March 2009 Major Cycle lows. While the weekly MAAD Ratio is not yet extremely “Overbought,” it could reach into that zone by default over the next few weeks through cancellation of previously oversold numbers.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

Then there is the chart pattern we have mentioned recently that is playing out in the form of a possible “ascending wedge.” That pattern is notoriously bearish and might prove to be no exception to the historical norm this time either. The ascending wedge is usually a “return action” move accompanied by weaker than normal volume and struggling price movement on the upside.

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.

As a consequence, we are left with a market dilemma that has left prices, as measured by the S&P 500, about where they were one year ago. When Cumulative Volume is entered into the equation, CV is now plotted more than 100 points below where the S&P is currently bid. Is that divergence an indication of internal market strength? We don’t believe it is. But so long as the short-term trend remains positive, since it will be the first to turn negative, we must defer to the lingering “positive” trend. When the Minor Cycle inevitably turns negative, the extent to which such negativity develops will then determine the staying power of the more important Intermediate Cycle and then the Major trend. We think that resolution will come somewhere this side of 1336.70—S&P 500 and the level we do not think the bellwether index will be able to exceed before more serious selling develops.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD did relatively well last week and actually moved to a new short-term high on Thursday. The indicator is “Overbought” on the Minor Cycle, however. Weekly MAAD remains less enthusiastic. The latter, in fact, has only recovered about one third of its decline since May 2011 while Daily MAAD has regained about two thirds of its losses.

While Daily MAAD is better positioned to make new highs than Weekly MAAD, we would view new highs by the former without confirming action by the latter as an anomaly. Until Weekly MAAD also makes new highs with the broad market, there would be the suggestion that Smart Money remains reluctant and continues to view market strength with suspicion. There is also the possibility Daily MAAD will stall out this side of making new highs as the broad market also fails.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was positive four of the five trading sessions last week, but on a net basis has demonstrated little overall enthusiasm lately relative to the new lows made back on December 19 even though the S&P 500 has been able to better its late October price highs (1292.66) and Minor resistance. In fact, CPFL could sink to new lows with relative ease to simply underscore the notion that options players continue to think the stock market is too risky for net long positions.

In fact, continuing CPFL lackluster performance underscores the notion that options buyers have been purchasing almost as many put options as they have been buying calls on a Dollar Value basis. Given CPFL’s history, to observe this kind of options action as market “return action” develops does not leave us with a sanguine feeling. If we area wrong about this market and the bullish camp wins the day and new highs follow, we would also need to see CPFL make new highs with that market. The odds of that happening anytime soon? Some between slim and not so hot.

Click charts to enlarge

Conclusion

The stock market rally that began after the October lows (1074.77—S&P 500) has begun to look “mature” on the both the Minor and Intermediate Cycles since both trends are currently “Overbought,” or nearly so. In fact, the larger Intermediate Cycle is now as overheated as at any Intermediate Cycle high over the past five years.

While such extreme conditions can persist for a time, given the ongoing failure of most of our key indicators to favorably confirm price action recently, especially Cumulative Volume, CPFL, and intermediate-term MAAD as a bearish chart pattern continues to unfold, we can only wonder how much longer this stock market trend will be able to persist.

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

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.