Stock market pondering miss or lull on short-term overbought

While our Call/Put Dollar Value Flow Line (CPFL) has shown some marginal life over the past few weeks, CPFL has been unable to better its October 28 plot high and continues to remain between that level and its December 19 support low. When added to the fact the indicator has confirmed virtually none of the rally since the October lows, we can only ponder the lack of faith the options crowd has had in this rally that is now about to end its fourth month. If anything, it appears options buyers have been purchasing almost as many puts since early October as they have been buying calls on a dollar adjusted basis. And considering the proximity of CPFL plots to those December lows, it wouldn’t take much net negativity in the market to force CPFL to new lows, a development that would definitely not accrue to the benefit of a price uptrend.

Market Overview – What We Think:

  • We continue to think the end of the short-term rally that began in the major indexes after the short-term low in mid-December was reached (1202.37—S&P 500) is nearing an end point.
  • The big question is whether or not new highs will precede that ending.
  • Extent to which Minor Cycle weakens will also determine staying power of larger Intermediate Cycle and Major Trend.
  • If we are correct that all of rally since October lows has been a “return action rally” following the creation of a major high in May 2011 (1370.58—S&P 500), then a retracement of all gains since October could quickly follow.
  • To suggest Minor Cycle negative, however, S&P must first decline below lower edge of 10-Day Price Channel (1297.23—Monday). Lower edge of Intermediate Cycle Price Channel was last plotted at 1209.43.
  • If short-term advance persists, major resistance is overcome, and new highs follow, it wouldn’t be first time sharp downside break (May-October) was followed by movement to new high. Think July 2007 (1555.10--S&P 500), when brief correction developed, and then short-term rally to new high in October 2007 high (1576.09) occurred. Then followed second worst bear in stock market history.

Volume statistics have remained a mixed bag. Peak volume occurred back at the early August lows and there has been a marked downward bias in activity since then. Even trading in the New Year as compared to the first weeks of 2011 is noticeably less enthusiastic. As revealed by our Cumulative Volume (CV) statistics, market activity carried CV in the S&P 500 marginally above its late October plot highs, but CV in the S&P Emini remains noticeably weaker and has yet to confirm cash strength by also moving above the late October indicator highs. Clearly, the futures crowd has not been overly enthusiastic about this market.

Momentum has confirmed none of the rally since mid-December on the Minor Cycle and no strength since late December on the larger Intermediate Cycle. Momentum on the long-term trend remains near neutral and, as has been the case for the past several months, could flip back into negative territory with only a negative market “sneeze.”

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Upside measured move targets as calculated from the October lows have been met or nearly met both in terms of time and distance. The “ascending wedge” price pattern we have discussed lately looks mature and the possible “c” leg of the pattern in the S&P 500 is about equal to the “a” leg up of the advance. That’s optimum. Also, the S&P is still contained within the context of the upper edge of the 10-Month Price Channel high (1336.70 recalculated to 1319.38 for February) we suggested earlier as the possible containment point for any ‘return action rally” as calculated from the October lows. While the venerable Dow has risen above a similar price channel, the Dow is not “The Market” as is the S&P. The Dow 30 has also not made new highs.

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