Stock market tug-of-war continues at 2011 highs

Market Snapshot:

Definition – “Tug-o-war”:

1. A contest of strength in which two teams tug on opposite ends of a rope, each trying to pull the other across a dividing line.
2. A struggle for supremacy such as in a political tug of war between those in favor of the proposal and those against it.

Considering activity in the stock market over the past several months, we’d like to add a third item to “Tug-o-war” definitions -- 3. A struggle for supremacy between opposing bullish and bearish forces in the stock market.

While the battle the market has been waging since the October lows remains short of titanic, let alone resolved, the results could ultimately be very important for investors and the economy. After nearly four months of trading and price gains the major stock market indexes are about where they were in May 2011, plus or minus a little. While the Dow Jones Industrial Average and the NASDAQ Composite index have bettered their May 2, 2011 prices highs, the S&P 500 and the Value Line index have not. Nor has the Russell 2000, or the Dow Jones Transportation or Utility Averages. In fact of the 14 price indexes and indicators we follow, only three have bettered their 2011 levels. Of those three, only the Dow 30 and the NASDAQ remained above 2011 levels last Friday while the third, Daily MAAD peaked on February 8 and has been unable to make another new high since then.

Market Overview – What We Know:

• Stock market as measured by major indexes was positive again last week.
• Dow Jones Industrials and NASDAQ Composite closed above May 2011 highs last week, but S&P 500 and Value Line index did not.
• After rallying above its March 2011 plot high, Most Actives Advance Decline Line (MAAD) was unable to better new high last week, despite market strength.
• Weekly MAAD bettered it short-term high created the week ending February 3 by only two issues while remaining well below 2011 high.
• Trading volume rose last week in the S&P 500 by just under 4%.
• Short and Intermediate-term trends remain “Overbought” based on S&P price, but MAAD Daily Ratio has moved lower from “Overbought” to “Neutral” and possible zone of opportunity on short-term trend.
• Weakness below lower edge of 10-Day Price Channel (1338.59--Tuesday) would suggest beginning of end of Minor Cycle trend in effect since December low (1202.37).
• Short-term Momentum in S&P 500 remains marginally positive, but could easily turn negative.
• Daily MAAD was positive Friday by only one issue, but was higher by 16 to 2 on the week. Daily MAAD continues to hold below its February 8 short-term high and best levels since May 2011.
• Cumulative Volume (CV) in both S&P 500 and S&P Emini futures contract made new short-term highs Friday, but CV in both remains well below 2011 highs.
• Daily CPFL made new short-term high Friday after breaking above late October resistance on Tuesday. But indicator remains substantially below February 25, 2011 plot high.

While there is no denying the fact the major indexes have gained nicely since the October lows, the crux of our analysis and discussion since then has centered around our key indicators that have remained unenthusiastic about the advance. While some will suggest that the 26% rally in the S&P 500 since the October lows on any kind of trading volume, Momentum, and with or without confirmation from a bevy of indicators is still a profitable rally, it is the “nature” of that rally with which we are concerned.

No sane market practitioner would suggest collusion to the extent some organized cartel with nefarious intentions is driving prices upward and through the 2011 highs simply to attract new buyers before closing the lid prior to a major decline. But the fact is that prices have moved higher while many indicators with reliable historical records have not makes us wonder at the staying power of this rally.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

From a purely practical point-of-view the major indexes have reached the outer extremes of upside price targets. Anyone with a ruler can measure the extent of the rally from the early October lows to the late October highs and then add that amount to the late November lows. The result is that all of the major indexes are within range of those “measured move” points we have referred to as the “C” leg of a possible A-B-C rally that has been developing within the context of a possible “ascending wedge” pattern that is classically bearish. The pattern is quite noticeable both in terms of price and Cumulative Volume (CV) on our Weekly CV charts for the S&P 500 and the S&P 500 Emini futures contract. Price has done well since October. CV has not. And that variance is a suggestion that, despite price, all is not well with this market.

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.

There is an old truism at play in this market: “The trend is your friend.” Indeed. To remain short in a rally like the one we have experienced over the past several months is not only silly, but such a strategy can be financially ruinous. In other words, index pricing has experienced a positive move despite the lack of confirmation by many indicators. But at some point pricing will roll over and begin to head south. The status of those indicators at that time will likely determine whether or not the ensuing decline is merely a pullback within an uptrend, or the beginning of a major negative reversal that was preceded by a lack of indicator corroboration.

McCurtain Most Actives Advance/Decline Line (MAAD)

After peaking February 8, the Daily Most Actives Advance/Decline Line (MAAD) failed to better that level despite net higher movement in the major indexes since then. While the small variance in Daily MAAD could be erased with one good up day in the broad market, the fact the indicator has not made a new high over the past several sessions could be an initial sign Smart Money has begun to tire of this rally and that the short-term rally is near an end point.

Given the fact that Weekly MAAD remains well below its 2011 plot highs, the recent short-term upside foray by Daily MAAD has left question marks in this indicator sector. Clearly Weekly MAAD must rally above its 2011 highs to confirm Daily MAAD action. Or Daily MAAD begins to fail, a sign that the broad market could soon follow suit.

The only mitigating factor now in favor of higher prices as reflected my MAAD statistics is that the Daily MAAD Ratio has retraced virtually all of its recent “Overbought” readings and was last holding toward “Neutral” at a level from which further strength could be launched.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL hit a new short-term low on December 19 coincident with the broad market and has been moving marginally higher since then. CPFL then hit a new short-term high February 14 in that it exceeded its October 28 resistance high that was coincident with the broad market.

But CPFL has not come anywhere near its 2-25-11 plot high on either the Daily or the Weekly cycles. While bulls could be encouraged to see the short-term version of CPFL: doing better, the fact the indicator is very much late to the party after four months of broad market gains should be a cause for concern. Put another way, options players have climbed on board to some extent over the past several weeks, but they have not done so in a big way.

Click charts to enlarge

Conclusion

The tug-o-war saga between bulls and bears continues. To some extent the bullish camp can claim they have won the battle since nearly all of the losses in the wake of last spring’s market highs has been erased and also because the major indexes including the S&P 500, Dow 30, NASDAQ, and Value Line index are either at new highs or poised to make new highs.

But whether it’s the stock market or horseshoes, a miss is still as good as a mile. What remains to be seen is how much longer this short-term rally will continue and then to what extent an inevitable pullback will have on an also mature and “Overbought” Intermediate Cycle uptrend.

But from a purely practical point-of-view, the advance since the October lows must reach an end point relatively soon or the character of the rally will take on a new and longer-term positive dimension. Given the non-confirming status of the majority of our indicators, we will continue to suggest that despite marginal new highs, we do not think this market has the makings for a sustained rally as was the case during other time periods over the past 20 years. To negate that view the market, as measured by the major indexes, must make broad new highs and an ensuing pullback must create “Oversold” conditions without seriously damaging the long-term uptrend.

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.