S&P, Dow 30 build key reversal day near price targets

Stock indexes may have tipped their hand for a long-term trend shift

Market Overview – What We Think:

  • With possible Key Reversal Day last Wednesday still unresolved in terms of immediate implications for market, fact that last such KRD pattern occurred at the beginning of second worst stock market decline in history is a cause for concern because the development of that KRD pattern implies the same possible results as those produced after October 11, 2007.
  • If KRD is correct that market has seen a high, very least we could expect from this point forward is a short-term decline.
  • Minor Cycle weakness would then determine staying power of larger intermediate trend that has been underway since October lows. Weakness in Intermediate Cycle would exert pressure on larger major trend that continues to exhibit neutral readings.
  • Fact that Weekly MAAD has not mimicked strength of Daily MAAD is bearish sign since both cycles must be in synch ultimately to confirm positive longer-term move.
  • And fact that CPFL continues to exhibit lackluster performance is not a vote of confidence for bullish cause.

The decline in 2007 began at a relatively leisurely pace. First came the KRD on October 11, then a short-term decline that only lasted for several days, and then a short upside pop. On October 31 the S&P was back to within five points of its close on October 11. But that little pop into the last session of October 2007 was the last time the S&P has seen those price levels in over four years and was last nearly 180 points shy of that level.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

That KRD price pattern when coupled with the other market concerns we have had lately has created some déjà vu. Not only have all of the major indexes moved to within range of upside measured move targets as calculated from the October lows, the “overbought” status of both the Minor and Intermediate Cycles plus failing Momentum on both the short and intermediate trends for weeks give the KRD in the S&P and the Dow even greater credence.

Then there is the status of our indicators. While it’s true that the Daily Most Actives Advance/Decline Line (MAAD) has broken above its 2011 highs, Weekly MAAD that is more trend sensitive on the longer term has not. The Daily MAAD Ratio has moved up from “Neutral” readings to moderately “Overbought” while the Weekly MAAD Ratio was last in “Overbought” territory.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

At the same time, while our Call/Put Dollar Value Flow Line (CPFL) has demonstrated some improvement over the past several weeks, that sentiment indicator has yet to break above a downtrend line stretching back to February 2011 let alone above significant resistance at that same February 2011 high. The options crowd continues to apparently view market price action with skepticism as they have favored a net neutral bias with only a slightly positive tone. That stance means that on a Dollar Value basis, options players are only buying slightly more calls than puts. There was a similar divergence into the 2000 market highs and again in 2007.

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