Market reaches new highs but rally lacks substance

The volume failure is especially noticeable in the S&P Emini futures contract. While Cumulative Volume (CV) bettered its late October resistance about two weeks ago, CV in the Emini just barely perked above October’s resistance last Friday. Why is the futures crowd so behind the curve on the rally since the late November short-term reaction lows? The only answer we can come up with is that looking forward they do not think the rally that began in October will last and that new highs or not, they are unwilling to make major commitments in a market that remains indicator vulnerable.

It is always convenient when making an argument to present only that evidence which underscores a premise. Present information out of context to prove the point and, even though the conclusion may be bogus, the desire to be right outweighs the need to be objective. It’s like the old syllogism: “John is a boy and John likes girls. Therefore, John likes Mary.” Or, “The long-term trend in this market is still positive and the major indexes are making, or are about to make, new highs. Therefore, the primary bull move has been re-asserted.” Baloney.

We are doing our best not to get caught in that trap. We have a set of indicators we believe have worked well over time. Currently, with one minor exception, Daily MAAD, those indicators are suggesting that the rally that has been underway since the October lows lacks the underpinnings characteristic of rallies and long-term trends the broad market has experienced before. Are the indicators wrong? Could be, but we doubt it. With that one lone exception none of our key indicators have liked this rally. And with Minor and Intermediate Cycle “Overbought” statistics now evident, we continue to wonder if new highs could prove to be more of a classic “draw play” than a major opportunity in a primary bull market.

Market Overview – What We Know:

• Major indexes rallied again last week with NASDAQ Composite bettering May 2011 high. Dow Jones Industrials could easily make a new high, but S&P 500 needs another 1.8% to equal its May 2011 peak at 1370.58. Value Line index needs another 4.2%.
• Daily MAAD rallied to a new high above March 3, 2011 high Friday, but Weekly MAAD remains well below similar 2011 high. Weekly MAAD is “Overbought.”
• Short and Intermediate-term trends based on price remain positive, but “Overbought.”
• Selling in S&P 500 below lower edge of 10-Day Price Channel (1307.12—Monday) would suggest beginning of end of Minor Cycle advance underway since mid-December.
• Short-term Momentum in S&P 500 remains fractionally positive and has failed to confirm any of strength in index since December 19 lows. Indicator could easily fall into negative territory.
• Cumulative Volume (CV) in S&P 500 remains above late October resistance highs. S&P Emini CV fractionally bettered late October resistance high last Friday, but remains weak overall.
• Daily CPFL was positive Friday for ninth session in row by 4.75 to one, but remains below last October resistance and has confirmed none of strength since October lows.

Market Overview – What We Think:

• We continue to believe upside failure by majority of our key indicators is strong hint that rally since October lows is not a resumption of the primary bull trend begun in March 2009. More likely scenario is powerful countertrend rally.
• While it’s difficult to continue holding onto bearish prognosis in the face of higher prices, we can only suggest that indicator weakness in the face of high prices has always accrued to the benefit of indicators. This is not to say that profits haven’t been possible since October. On flip side of coin even longs can occasionally make money in a bear market.
• So, with the major indexes continuing to evoke “Overbought” readings on both the Minor and Intermediate Cycles, we can only defer to our indicators and their implied discipline while awaiting inevitable downside breaks in price below 10-Day Price Channels first (1307.12—S&P 500) and then 10-Week Channels second (1218.64—S&P 500). Point at which those breaks occur will determine staying power of longer-term trend.
• If we are correct that all of uptrend since October lows has been a “return action rally,” albeit a powerful one, following the creation of a major high in May 2011 (1370.58—S&P 500), a retracement of all gains since October could follow.
• Given proximity of pricing to last May’s highs and fact Minor Cycle has yet to turn negative, we cannot preclude additional upside attempts.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

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.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rallied to its best level since March 2011 last week. Weekly MAAD did not. The divergence of the two indicators, one to the other, is a possibility we held out. So long as Weekly MAAD, which is more in tune with the market’s long-term trend, refuses to make new highs above its 2011 levels, we must presume all is not well with this market, despite strength in the Daily MAAD series.

While Weekly MAAD is approaching a downtrend line that connects the 2007 and 2011 indicator highs, it has nevertheless so far failed to better that level as price and indicator data have created “Overbought” readings on both the Minor and Intermediate Cycles. The conflict between Daily and Weekly MAAD readings as compared to those 2011 highs will be resolved.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL perked a bit higher last week on both the Daily and Weekly cycles, but on a relative basis the indicator is nowhere near its 201l highs even as it struggles to get back above the late October resistance highs already broken by index pricing weeks ago.

That variance in this options indicator continues to underscore the fact that options players remain skeptical of this market and have been unwilling on a net basis to buy more call options than put options. Until they decide where their market bias lies, CPFL will continue to exhibit relative neutrality. And that lack of conviction in the face of higher market prices is not a bullish sign, long-term.

Click charts to enlarge

Conclusion

Stock market prices were higher last week. The NASDAQ Composite index and Daily MAAD were even able to better their May 2011 highs while the Dow Jones Industrials and the S&P 500 came within range of also making new highs. But this rally that has been underway since early October is mature. The short-term trend is decidedly “Overbought” with the next larger intermediate trend coming in a close second. Question is, how much longer will it last?

Given the overall lack of indicator confirmation of strength over the past four months, we can only suggest from an historical point-of-view, that the odds do not favor a continuation of this rally indefinitely. More importantly, the lack of indicator confirmation in the face of higher prices could mean recent strength could prove to be a major deception. What better way to “hook” buyers than to create new highs on subpar volume as many key indicators fail to confirm strength. If we are wrong to the extent the rally begun in early October proves to be more important than we think, we must see indicator corroboration.

MAAD Weekly 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 Daily 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.