Stock market pondering miss or lull on short-term overbought

Market Snapshot:

There is an old idiom that goes something like “a miss is as good as a mile,” meaning that a goal not reached by either a small amount or a large amount is still a failure. In the current stock market context with prices having been unable to better the May 2011 resistance highs (1370.58—S&P 500), that old saying has taken on even greater significance since “Overbought” short and intermediate-term statistics persist. Will the market, or won’t it?

Last week’s market action certainly underscored market uncertainty with the S&P 500 up just fractions, as the Dow Jones Industrials faded a little. The NASDAQ Composite and the Value Line Index were ahead, but both remain overheated on the shorter cycle and increasingly vulnerable on the larger intermediate trend.

The price dilemma relative to the May 2011 highs will be resolved. That’s a certainty. But as we’ve noted recently, even if new highs are reached, will that action suggest an optimistic and solid resumption of the bull trend initiated in March 2009, or will it mark the end game of a strong price rally with weak indicator affirmation since the October 2011 price lows? If the former, we would have to see new highs accompanied by all of our key indicators. If the latter it’s belated hats and horns for the bears.

Market Overview – What We Know:

• Major indexes were mixed last week with S&P up a touch and Dow 30 down fractionally. NASDAQ and Value Line Index were up marginally.
• Short and intermediate-term cycles remain positive and “Overbought.”
• Short-term Momentum in S&P 500 has failed to confirm any of strength in index since December 19 lows and could flip into negative territory with relative ease.
• Intermediate Cycle Momentum has confirmed none of advance since late December.
• Cumulative Volume (CV) in S&P 500 has moved higher with index lately, but has not recovered since May 2011 as has S&P 500. S&P Emini CV has yet to break above late October resistance and reflects lack of commitment by futures contract buyers.
• Key statistical resistance in S&P holds at upper edge of 10-Month Price Channel at 1319.38 (February level) and point that must contain strength.
• Daily MAAD reached short-term high last Wednesday and was 33 issues from equaling its March 2011 high. Weekly MAAD, however, has only recovered about 50% of its loss since May 2011 and was last 66 issues from equaling its 2011 highs.
• Daily CPFL was positive Friday by 1.33 to 1, but was negative on the week by .76 to 1. CPFL remains substantially below February 2011 indicator highs and has confirmed none of strength since October lows.

While Daily Most Actives Advance/Decline Line (MAAD) has experienced a statistical revival since the late November short-term lows and has even come within range of equaling its March 2011 plot highs, like the “miss and the mile” proverb, the daily series has yet to actually make a new high. There is also the fact that Weekly MAAD remains in a less advantageous position than the daily series. In fact, while Daily MAAD has recovered nearly all of its losses as calculated from the March 2011 highs, Weekly MAAD has only recovered about 50%. Without coincident corroboration from both data sets, we would view strength by Daily MAAD to a new high as suspect, since it is the weekly series that determines the flow of the more important long-term cycle.

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.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

So we’re still faced with the same scenario that has persisted for weeks -- to re-assert the Major Cycle uptrend initiated in March 2009. Nothing but new highs above the May 2011 price peaks (1370.58—S&P 500) will suggest a resumption of that trend. But, given the weak underpinnings of the rally since last summer’s sell-off and even though index prices have recovered the lion’s share of those losses, will new highs provide the necessary spark to not only sustain buying, but will our reluctant indicators finally get on board?

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.

We continue to think that the “rally” that has persisted since the October lows will prove to be no more than a reflex rally off of an “Oversold” Intermediate Cycle begun in early October. Whether or not the market makes new highs could prove to be less important than whether or not the underpinnings of that strength are confirmed. The stock market usually tends to confound most players at key turning points. To assume that economic forecasts of a normal market return of 5 to 6 percent over the next 12 months is a foregone conclusion, due to the fact the market has had a pretty good January, could prove to be an over statement. Near-term, the point at which the Minor Cycle peaks and then heads lower, after a new high or not, will determine the staying power of the increasingly “Overbought” Intermediate Cycle and then the Major Cycle.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rallied to a new short-term high last Wednesday, but then faded Thursday and Friday. The Daily series was last 33 issues from equaling its March 2011 highs while Weekly MAAD was 66 issues below its 2011 peak. Weekly MAAD looks weaker than Daily MAAD and is still noticeably vulnerable relative to its March 2009 lows that could be reached much more easily than the S&P 500 could hit its 2009 lows. Weekly MAAD weakness would not be a good omen for broad market.

Near-term question for MAAD is whether Daily MAAD will make a new high above March 2011 level and if Weekly MAAD will follow suit. If either fails on the upside, that action would suggest Smart Money crowd has run out of steam on this rally and that any further market strength should be viewed with suspicion.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL has demonstrated marginal strength over the past month, but has yet to better its late October highs, let alone come anywhere near the high the indicator made in February 2011. That failure continues to highlight the fact that options players, as measured by call buying over put buying on a Dollar Value basis, remain reluctant.

We have never seen an instance in the history of CPFL, which stretches back to early 1983, when the indicator remained negative, or nonplused, for an extended period time that the market did not ultimately move in the direction of the indicator. We see no reason to suspect this time will be any different. That’s unless CPFL begins to dramatically move in favor the market. But we suspect such action is highly unlikely given the indicator’s history.

Click charts to enlarge

Conclusion

Close, but not close enough. That’s been the story of the stock market recently relative to those highs put in place in May 2011. With the smallest Minor Cycle looking increasingly vulnerable, we can only wonder how much longer the short-term trend will persist before more concerted selling develops. The big thing relative to the Minor Cycle, however, is whether there will be enough power to cause the major indexes to better their May 2011 highs (1370.58—S&P 500).

Even if new highs follow, however, we wonder if there will be enough staying power to sustain a long-term advance, considering the fact the next larger Intermediate Cycle looks increasingly vulnerable.

So we wait to see where, and when, the short-term trend peaks and fades. Whether it’s accompanied by new highs, or not. The extent to which that pullback affects the larger Intermediate Cycle will then determine the staying power of the Major Cycle. In any case, we continue to think the bulls will have to increasingly prove their case. If new highs are made they could have an even bigger point to prove.

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.