Stock market flirts with highs but without conviction

Market Overview – What We Know:

• After another week of trading only the NASDAQ Composite index was able to hold above its May 2011 price highs. Late week selling forced Dow Jones Industrials and Daily MAAD back from similar new highs.
• Of the 14 major indexes and indicators we closely monitor, at end of last week only one, NASDAQ Composite, was at a new high and then by only .55% above its 2011 high.
• Trading volume faded about 7% last week.
• Short and Intermediate-term trends remain “Overbought.”
• Weakness below lower edge of 10-Day Price Channel (1318.59—Monday) would be needed to suggest beginning of end to Minor Cycle advance underway since December 19 short-term low (1202.37—S&P 500).
• Short-term Momentum in S&P 500 remains marginally positive, but it wouldn’t take much to turn indicator negative to reverse currently positive Minor Cycle trend.
• After bettering its March 2011 high last Wednesday, Daily MAAD faded at end of last week and fell back below 2011 high. Weekly MAAD continues to underperform.
• Cumulative Volume (CV) in S&P 500 remains above late October resistance highs, but Emini CV remains weak. Both remain substantially weaker than prices relative to May 2011 highs.
• Daily CPFL was negative Friday by .97 to 1, but Weekly CPFL was positive by 1.32 to 1. CPFL has yet to better its late October resistance high and has confirmed little of strength since October lows.

The reason we continue to remain skeptical of the market’s ability to continue remarkably higher is the noticeable lack of volume. While there’s no denying index pricing has done well since the early October lows, much of that positive movement could have occurred because of a lack of sellers. In fact, trading volume during January ran at about half of the same trading levels in January 2011. A quick look at the Cumulative Volume (CV) charts on both the Daily and Weekly cycles for the S&P 500 and the S&P 500 Emini futures contract (see attached charts) highlight the discrepancy between pricing and CV. In the case of the cash S&P, CV was last holding about 7% below that issue’s May 2011 peak. CV in the S&P Emini was nearly 11% negative relative to its May 2011 high. By contrast S&P 500 pricing was last only about 2% from bettering its May 2011 price peak at 1370.58.

Market Overview – What We Think:

• Plodding nature of market over past several sessions and weakness at end of last week makes us wonder how much longer short-term trend that has been positive since mid-December will be able to last.
• Ongoing upside failure of majority of our key indicators is strong indication rally since October lows could prove not to be resumption of the primary bull trend begun in October 2009. More likely scenario could be powerful countertrend rally that might “hook” many investors because of recent flirtations with May 2011 highs.
• While it’s difficult to continue holding onto bearish prognosis in face of higher prices, we can only continue to suggest market’s true internal “health” as measured and reflected by condition and outlook of our indicators. Higher prices can occur, but without indicator confirmation, strength is definitely suspect.
• Ongoing struggle relative to May 2011 highs gives us feeling there is certain inevitability about this market that may ultimately not accrue to benefit of bullish crowd.

That variance in pricing relative to Cumulative Volume is a cause for concern since deterioration, or at least a negative divergence, preceded the breakdown in prices prior to the peak in October 2007, the Intermediate Cycle pullback in April 2010, and the sharp selloff in the spring of 2011. With yet another divergence between S&P prices and Cumulative Volume developing, we could presume that once gain pricing has gotten ahead of itself and the market is setting up for another pullback of some importance. Since the market very often fools the greatest majority of investors at the least opportune times, for an Intermediate Cycle negative to develop in this environment after some new highs have been made could be prove to be an excellent “hook” for the least wary.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Aside from volume considerations, our Cumulative Advance/Decline Line (MAAD) series has been exhibiting some interesting readings of late. Daily MAAD bettered its March 2011 high last Wednesday by a couple of notches, but then sank a bit into the end of the week. Daily MAAD was last .72% below its 2011 peak. On the other hand, Weekly MAAD has been somewhat less enthusiastic and was last 2.66% below its 2011 high. Since the latter indicator tends to more accurately reflect long-term trends than Daily MAAD, the failure of Weekly MAAD to make a new high is more consistent with some of our other indicators that have also failed to better their May 2011 highs.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

One additional failure is our Call/Put Dollar Value Flow Line (CPFL). While CPFL has been demonstrating some marginal improvement lately, the weighted options barometer has yet to better its late October resistance high even though index prices surpassed similar resistance points weeks ago. Daily CPFL was also last nearly 21% below its late February 2011 high. The last instances we recorded such noticeable failures in CPFL were into the 2000, 2007, and May 2011 market highs. If this instance proves to be an exception, nothing less than strength above the February 2011 CPFL high would be sufficient to erase implied negativity.

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, the stock market, as measured by the major indexes, continues to struggle with the 2011 highs. Same goes for most of our primary indicators. Given the fact that a possible “ascending wedge” price pattern under construction since the October lows looks as it if could be in an endgame as Short and Intermediate Cycle “Overbought” readings are in evidence, especially on the CV charts, to believe this market could improve substantially from this point on without a correction could be a fateful denial of the laws of gravity.

McCurtain Most Actives Advance/Decline Line (MAAD)

After perking to a slightly higher high than its early 2011 plot peak, Daily MAAD faded at the end of last week and was last .72% below its 2011 high. At the same time, Weekly MAAD, which is more sensitive to the long-term trend of the market, was 2.66% below its 2011 high. While the negatives in both indicators relative to the 2011 peak are small, the confluence of trendlines and “Overbought” conditions on both the Minor and Intermediate Cycles make us look somewhat askance at the potential for further substantial price gains before a meaningful index price correction develops.

Since MAAD has continued to reflect a net negative long-term tone for the past few years, and especially since the March 2009 lows, how a correction plays out and how MAAD responds to it with those 2009 lows in mind could be a significant marker for the Major Cycle.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL improved again last week, but not only has the indicator still failed to better its late October resistance highs, CPFL is still nowhere near bettering its 2011 peak. While the marginally positive bias of CPFL over the past few weeks could be a good sign, in the face of generally “Overbought” market price readings, CPFL gains could prove to be a moot point since the indicator remains net negative on the longer-term.

There is also the fact that we have never seen an instance where CPFL continued to underperform the broad market where the market didn’t ultimately move in the direction of the indicator.

Click charts to enlarge

Conclusion

After another five sessions of trading, the major indexes posted a string of small losses last week. While that negativity was not enough to reverse the short-term uptrend that began after the December 19 lows (1202.37—S&P 500), it could prove to be the beginning of the end of that trend given short-term “Overbought” conditions. And considering the fact the larger Intermediate Cycle is also “Overbought,” the extent to which the Minor Cycle weakens could have an appreciable effect on that larger intermediate trend.

Over the past few months we have indicated that we did not believe strength which followed the October lows would prove to be anything more than a countertrend rally. While it’s difficult to adhere to such an opinion as index prices approached, teased, or even selectively surpassed the May 2011 highs, this market is, increasingly, beginning to look top heavy. While it remains to be seen to what extent a short-term pullback would affect the larger Intermediate Cycle, or even the more important major trend, it’s a good bet there will soon be definition to the question.

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.