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

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1289.09

+11.28

+.88%

Dow Jones Industrials

12422.10

+62.18

+.50%

NASDAQ Composite

2710.67

+36.45

+1.36%

Value Line Arithmetic Index

2796.72

+59.31

+2.16%

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

The stock market, as measured by the major indexes, posted small gains last week. While the S&P 500 and the Dow 30 came in under 1%, the NADAQ and the Value Line Index did somewhat better, the latter adding 2.16%. But whereas the S&P and the Dow have bettered their late October resistance highs (1292.66—S&P 500), the NASDAQ and VAY have not.

Despite net strength in the market since the August/October lows with gains in the S&P of 19.9%, in the Dow 30 of 19.3%, in the NASDAQ of 17.9%, and strength in VAY of 25.1%, major resistance continues to loom over pricing. In fact, as we were thinking of themes for this week’s Market Summary, the idea came to mind that resistance will prove to be either a one ton manhole cover, or tissue paper. The former would keep a lid of strength while the latter would be a conduit to more gains and new highs above the May 2011 peaks (1370.58—S&P 500). Of the two options, we continue to think the result will be that resistance will prove to be a steel lid and that this issue will be resolved early in the first quarter of 2012, maybe even within the next few weeks.

It is the background “noise” of this market that remains a concern. First, short- and intermediate-term Momentum are “Overbought.” Momentum on the Minor Cycle is now as overheated as at the May and July 2011 highs and as it was prior to the recent October highs. Momentum and our Overbought/Oversold readings on the Intermediate Cycle are now as overdone as at the October 2007, April 2010, and May 2011 intermediate-term highs. Can those extremes persist? Yes they can, for awhile, but when viewed in conjunction with some of our other indicators like Cumulative Volume (CV), the internal strength of this market comes more clearly into focus.

Market Overview – What We Know:

  • Major indexes gained again last week, but trading volume remains subpar while Cumulative Volume in S&P 500 and S&P Emini remained noticeably weaker than S&P pricing.
  • Short-term cycle is now “Overbought” with Intermediate Cycle not far behind. Intermediate Cycle is now as overheated as at October 2007, April 2010, and May 2011 highs.
  • So long as S&P 500 holds above lower edge of 10-day Price Channel (1264.88, Monday), short-term trend will remain positive..
  • S&P 500 remains somewhat below our first upside measured move target at 1310.77.
  • Daily MAAD reached new short-term high last Thursday and has actually been doing better than broad market since December 19 Minor Cycle low, but that smaller cycle is now “Overbought.” MAAD on larger Intermediate Cycle has not done as well and remains, relatively, not far above major support of March 2009 indicator lows.
  • Until S&P 500 overcomes major resistance at May high (1370.58), all strength must be regarded as “return action” in larger cycle negative.
  • CPFL has been a bit more positive recently, but indicator remains anemic overall and has confirmed none of strength in broad market since October lows.

While both the S&P and the Dow were able to better their October 27 short-term highs to re-assert the Intermediate Cycle advance begun after the fall lows (1074.77—S&P 500), CV in neither the S&P 500 or the S&P Emini futures contract has confirmed that action (see accompanying CV charts). In fact, CV in the Emini is currently plotted at levels equivalent to pricing when the S&P was 100 points lower. Given the fact that it takes volume to drive a rally, is it really any surprise that after nearly a year index prices have still not bettered that large zone of resistance stretching up to May’s highs? Is that failure the lull which will precede strength to new all-time highs, or is it something else? We think it is something else.

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