Stock market tug-of-war continues at 2011 highs

We do not deny the profitability of the rally, nor have our indicators held negative throughout the advance. All were positive on the Minor and Intermediate Cycles and that favorability reflected itself in the cyclical table we report each day and each week above. The Minor Cycle has been positive for nearly two months. The Intermediate Cycle has been positive since late October. And the Major Cycle has confirmed market strength since mid-2009.

Market Overview – What We Think:

  • While odds appear to be increasing short-term rally underway since December 19 low (1202.37) is toward its end point, at least a short-term pullback must soon develop or our suggestions that market has been tracing out A-B-C rally via a bearish “ascending wedge” chart pattern since October lows could be invalidated.
  • So long as prices do not break below edge of 10-Day Price Channel (1338.59--Tuesday) market bias will remain deciding factor.
  • Ongoing failure of Cumulative Volume (CV) in S&P 500 and S&P Emini relative to underlying S&P 500 underscores our belief rally since October lows lacks internal “fortitude” necessary to sustain this rally on longer term.
  • To prove point, we would need to see a healthy decline on Minor Cycle that could threaten larger Intermediate Cycle that currently remains positive until 1243.18 at bottom of 10-Week Price Channel.
  • Ultimate status of Intermediate to Major Cycles will likely be determined once short-term advance ends and bias of indicators relative to pricing is re-assessed since higher prices require indicator confirmation or strength is suspect.

The issue is not the bias of the indicators relative to the October lows. The issue is whether those same indicators have the internal strength to confirm price action on the long-term trend as index pricing has moved to the 2011 highs and, in some cases, surpassed those levels. So far, with the lone exception of Daily MAAD, none of our key indicators has underscored market strength either by leading on the upside or by keeping in tune with market action. Historically, that variance is always a cause for concern. To revert to military jargon, the internal dynamics of the rally since October have been “under strength.”

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Traditionally, low volume rallies following a sharp downtrend like the one experienced by the market from the May 2011 highs until the October lows are not sustainable. What has perplexed many market practitioners over the several weeks is that prices continue to work higher while there has been little net improvement in the market’s internal dynamics.

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