Near 2011 highs, stock market bull at critical juncture

“Smart Money” as reflected in our Most Actives Advance/Decline Line (MAAD) has performed well via short-term Daily MAAD and was last just 14% below its 2011 high reached back on March 3, 2011, but the more important and longer-term Weekly MAAD was last plotted 47% below its 2011 high. It also remains to be seen, even though Daily MAAD is closer to making new highs, whether or not the shorter-term series will indeed make new highs. Even if it does make a new high on renewed market strength, coincident corroboration by Weekly MAAD leaves this Smart Money combo in limbo since both must confirm in the same direction to suggest, in this case, bullish market underpinnings.

Market Overview – What We Think:

• Biggest question now hovering over market is “how close to an endgame is the rally that began in early October and will new highs follow before rally is over?”
• We continue to think major resistance will prevail, but it wouldn’t be first time a sharp downside break was followed by steady movement to a new high. Think July 2007 (1555.10—S&P 500) that was followed by October 2007 high (1576.09) and then second worst bear market in stock market history.
• While our first upside target in S&P 500 at 1310.77 has been exceeded and short-term Momentum has confirmed none of rally since December 19, it is probably only matter of time before short-term “Overbought” condition begins to bite.
• Substandard Volume in S&P 500 and ongoing anemic performance of S&P Emini futures contract underscores fact futures crowd continues to hedge its bet as this Intermediate Cycle rally matures. Best volume days now are roughly equal to worst volume days a year ago.
• When 10-day Price Channel is inevitably broken (1277.29 -- Monday), extent to which selling then develops will determine staying power of larger Intermediate Cycle in effect since October lows.
• As we have said repeatedly, any upside failure that occurs before new highs are reached would accrue to benefit of bears on longer term.

On the sentiment front, our Call/Put Dollar Value Flow Line (CPFL) has also been perking up lately, but this series too has yet to better its late October highs, let alone getting anywhere near the plot highs the indicator made the last week of February 2011. The only way this action can be interpreted is that options players have become a little more bullish on the market over the past few weeks, but given the abject failure of CPFL to confirm almost none of the rally since the October lows, they are either abysmally late to the party or the music is about to stop.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

On the charts we’ve referred recently to what could be a classic “ascending wedge” chart pattern. In an ascending wedge, according to the charting gurus Edwards and Magee in their 1948 classic, Technical Analysis of Stock Trends, “there is no evident barrier of supply to be vaulted but rather a gradual petering out of investment interest…. Thus a Rising Wedge typifies a situation which is growing progressively weaker in the technical sense (page 156).” E&M then go on to point out that once the pattern is resolved on the downside, prices invariably quickly retrace all of their previous gains. If this pattern is historically consistent, all of the rally since the October lows would be erased and new lows could follow.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

We bring up this pattern because it is the internal dynamics of the market that seem to be confirming the “petering out” aspect of the possible wedge, especially volume in the form of CV – prices have moved higher, but CV has remained relatively weak. The market on the Minor and Intermediate Cycles is now “overbought, and Momentum has failed. All of this relative indicator anemia has occurred in the final leg of a possible a-b-c move that has traced out the wedge pattern. The “a” leg lasted from early October to the last week of October. There was a “b” leg correction that lasted from October 27 to November 25. And now the “c” leg advance. It is this part of the rally we suspect could be the end move.

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.

In sum, while we suspect the market is closer to an endgame in this rally that has persisted since early October and for the better part of the past four months, until first the lower edge of defined 10-Day Price Channels are fractured and then the lower edge of Intermediate Price Channels, this trend will remain intact. Will new highs evolve? That’s the interesting part. Upside measured move targets as calculated from the October low (1074.77) and via the a-b-c rally at the optimum could allow the S&P to reach 1376.55. That level would better the May 2011 high at 1370.58. But the reality could be that the new high was merely the end of a rally that was merely a reflex move following the first downside break in August. Or the market simply fails to make new highs and the weak underpinnings are justified. In either case we will soon know.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rallied to a new short-term high last Wednesday and was last just over 14% below its March 2011 major resistance high. MAAD Daily Ratio is “Overbought.” MAAD on the weekly cycle was last 47% below its March 2011 highs and was only moderately overheated on the weekly cycle.

While it’s possible Daily MAAD plots could reach new highs if the broad market also hits new highs, a failure by weekly MAAD to follow suit would be long-term bearish. In other words, BOTH Daily and Weekly MAAD must confirm on the upside.

There is also the possibility that the short-term trend could reach an end point before daily MAAD makes new highs. And given the fact that MAAD on the larger cycle remains much closer to the MAAD lows made in March 2009, an upside failure of both indicators in this environment could mean those 2009 MAAD lows could be in jeopardy sooner than later.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL perked higher last week, but has yet to better recent plot resistance put in place at the end of October. At the same time, the indicator has confirmed virtually none of the price advance in the broad market since the October lows, let alone getting anywhere near the long-term plot highs made in February 2011.

While it’s possible CPFL could play a game of catch-up in the sessions to follow, given the maturity of the rally begun in early October, we suspect any CPFL action from here on will be too late to offer any positive confirmation. In fact, its lagging action merely highlights our ongoing suspicions that price strength since early October could prove to be a classic “draw play” since we have never seen an instance where CPFL failed to confirm market action and the market didn’t ultimately pay a price for that negative CPFL divergence.

Click charts to enlarge

Conclusion

Prices moved upward again last week and the Dow 30 and the S&P 500 moved closer to making new highs, especially the Dow which was last just 155.52 points and 1.2% from equaling its May 2011 peak at 12876.00 The S&P needs another 4.0% to make a new high above 1370.58.

Question is, will either index, or the NASDAQ of the Value Line Index, be able to make new highs anytime soon? Some of our indicators like Daily MAAD have underscored price strength, but such movement is exceptional and has not been prescient lately to the extent it led pricing. Weekly MAAD has been unexceptional and Cumulative Volume unimpressive. The market is “Overbought” on the Minor and Intermediate Cycles and Momentum has confirmed none of the strength since mid-December.

So is this market on the verge of a price “breakout” to new highs and are our indicators simply spoiled sports acting spitefully? Time will tell, but for our money we suspect that even if new highs develop the odds are 60/40 they will be closer to a price end than a new beginning.

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.