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

March 4, 2012 10:04 AM
Stock indexes may have tipped their hand for a long-term trend shift

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Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1369.63

+3.89

+.28%

Dow Jones Industrials

12977.57

-5.38

-.04%

NASDAQ Composite

2976.19

+12.44

+.41%

Value Line Arithmetic Index

2985.78

-49.22

-1.62%

Minor Cycle (Short-term trend lasting days to a few weeks) Positive / Neutral

Intermediate Cycle (Medium trend lasting weeks to several months) Positive

Major Cycle (Long-term trend lasting several months to years) Positive / Neutral

While price action in the major indexes last week ended mixed, it was last Wednesday that provided a “how ‘bout that?” kind of session when both the S&P 500 and the Dow Jones Industrial Average put in place possible Key Reversal price action characterized by an Open above the previous day’s close; a high above the previous day’s high; and a close below yesterday’s low.

We say “possible Key Reversal” because it remains to be seen how the “possible” part of the equation is going to play out. Prices did weaken Friday after some weak strength on Thursday and the Value Line index slid downward through the lower edge of its 10-Day Price Channel to suggest the beginning of the end of the Minor Cycle advance in VAY that began after the December 19 low at 2570.52.

Ascending Wedge” Index price targets and attainment – or not

Issue

Last

Target

Recent High

+/- to Target

Above 2011?

S&P 500

1369.63

1376.55

1378.04

+.10%

Yes

Dow 30

12977.57

13111.99

13055.75

-.42%

Yes

NASDAQ

2976.19

2896.03

3000.11

+3.59%

Yes

Value Line

2985.78

3055.67

3051.33

-.14%

No

Russell 2000

802.42

846.92

833.02

-1.64%

No

Dow 20

5160.13

5384.55

5384.15

-.007%

No

But there is something larger at play if the Key Reversal pattern is a precursor of things to come. Not only would we look for an end to the short-term advance begun after those mid-December lows, but the odds would be good that a high on the larger Intermediate Cycle begun after the October lows may have been put in place.

Market Overview – What We Know:

  • Potential Key Reversal Day price pattern that developed last Wednesday in S&P 500 and Dow 30 (Open was above previous day’s close; day’s high was above previous day’s high; and day’s close was below yesterday’s low) could have negative implications on short to intermediate trend so long as neither index makes a new high (1378.04—S&P 500, 13055.75—Dow 30).
  • All indexes remain within range of upside measured move targets as calculated from October 2011 lows and via potential “Ascending Wedge” price patterns.
  • Most Actives Advance Decline Line (MAAD) was positive Friday by 9 to 11, but did not exceed new short to intermediate high hit Tuesday. Weekly MAAD was positive by 15 to 5, but larger cycle indicator has yet to exceed 2011 highs as Did Daily MAAD.
  • Daily MAAD Ratio was last moving toward moderately “Overbought” territory while MAAD Weekly Ratio was near “Overbought.”
  • Weakness below lower edge of 10-Day Price Channel (1354.08 / S&P 500 -- Monday) would suggest beginning of end of Minor Cycle trend in effect since December low (1202.37 / S&P 500).

So you ask, “What’s the reliability of the Key Reversal Day price pattern?” First it’s rare, but when it does develop in indexes or individual issues, it has a very good record of predicting a breakdown in market pricing, especially after a long uptrend. “When was the last time a KRD developed?” It was on October 11, 2007 at the exact day high of the bull move and is now recorded in the financial history books as the second worst decline in stock market history. In fact, the broad market has yet to recover from some aspects of that bear market.

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.

Index Daily/Weekly/Monthly Stops Weekly Monthly
 

3/5

3/6

3/7

3/8

3/9

3/9

3/31

S&P 500 Index

SELL 1354.08

SELL 1356.84

SELL 1358.80

SELL 1360.72

SELL 1362.28

SELL 1270.16

SELL 1189.77

Dow Jones Industrials

SELL 12884.94

SELL 12902.19

SELL 12912.44

SELL 12922.52

SELL 12929.39

SELL 12283.19

SELL 11271.99

NASDAQ Composite

SELL 2932.51

SELL 2939.71

SELL 2945.08

SELL 2951.86

SELL 2956.29

SELL 2675.83

SELL 2517.37

Value Line Index

BUY 3039.97

BUY 3042.13

BUY 3044.05

BUY 3042.95

BUY 3038.91

SELL 2747.77

SELL 2612.10

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.

While it’s possible all of these market statistics are premature, or simply wrong at worst, to prove the point the S&P would have to rally above last Wednesday’s KRD high at 1378.04 while the Dow would have to better 13055.75. If those levels are exceeded on the upside and the KRD pattern is invalidated, further strength would also negate those Rising Wedge price patterns we have recently highlighted with their coincident upside measured move targets. When coupled with the fact that Cumulative Volume (CV) has made new highs in NONE of the key indexes including the Dow Jones Transportation Average, which has been selling lower for the past month, yet again the burden of proof rests with the bulls.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD reached a new short to intermediate-term high last Tuesday and remained above its 2011 highs, but the smaller cycle indicator was unable to better that peak over the remainder of the week. Weekly MAAD was higher last week, but that indicator which is more sensitive to the longer-term trend h as yet to break above its 2011 highs even though the market bellwether S&P 500 has.

Given the fact MAAD Daily and Weekly Ratios have moved back into zones of vulnerability, especially the Weekly MAAD Ratio, we can only once again underscore the suggestion that the Smart Money crowd continues to view this market askance on the longer term. That could change, but nothing less than belated Weekly MAAD strength above that 2011 MAAD high would change the negative bias.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was a touch higher on the week, but continues to look anemic on the longer-term. Not only has the indicator failed to break above a defined trendline stretching back to February 2011, but CPFL remains a marked distance from its actual 2011 high.

The ongoing divergence between CPFL and index pricing is evidence of the fact that options players continue to view this market with skepticism. If they were overtly bullish on the longer term trend, they would be overtly long on a Dollar Value basis and CPFL would be roughly in synch with the market on the upside. The fact that they are not, simply underscores our concern this market may be top heavy.

Click charts to enlarge

Conclusion

The development of a possible Key Reversal Day last Wednesday in the S&P 500 and the Dow Jones Industrial Average occurred as a number of our key indicators have continued to underperform. Not only has Cumulative Volume (CV) failed to better those May 2011 highs in any of the major indexes, but with prices in all of the majors now within range of defined upside measured move targets, the KRD, a very rare price pattern with negative implications, develops.

If the potential Key Reversal Day we observed last Wednesday proves to be bogus, nothing but strength to new highs by the S&P and the Dow 30 will negate it. On the other hand, if the KRD is on target along with most of our indicators, then a negative change of trend on the Minor Cycle may be imminent and the larger Intermediate Cycle would then be threatened.

MAAD Daily data for past 30 days*  

CPFL data for past 30 Days

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

1-20-12

12

7

1-20-12

28217

22777

1-23-12

13

6

1-23-12

21447

40321

1-24-12

9

11

1-24-12

23867

17961

1-25-12

14

2

1-25-12

48455

32170

1-26-12

4

15

1-26-12

35614

34927

1-27-12

7

13

1-27-12

35352

26624

1-30-12

8

11

1-30-12

31907

21965

1-31-12

10

10

1-31-12

22035

19605

2-1-12

19

1

2-1-12

59444

33008

2-2-12

11

7

2-2-12

26098

13336

2-3-12

19

1

2-3-12

75145

15813

2-6-12

8

12

2-6-12

48497

15474

2-7-12

10

9

2-7-12

51427

27147

2-8-12

15

5

2-8-12

40749

15883

2-9-12

8

11

2-9-12

25312

17956

2-10-12

3

17

2-10-12

38202

39263

2-13-12

16

2

2-13-12

45728

13705

2-14-12

5

14

2-14-12

53835

24968

2-15-12

4

15

2-15-12

25980

29720

2-16-12

19

1

2-16-12

55112

23062

2-17-12

10

9

2-17-12

42379

15373

2-21-12

10

10

2-21-12

18235

19137

2-22-12

2

18

2-22-12

16936

31595

2-23-12

14

6

2-23-12

16814

16610

2-24-12

13

6

2-24-12

21904

19290

2-27-12

15

5

2-27-12

28625

15156

2-28-12

15

4

2-28-12

13795

11355

2-29-12

3

17

2-29-12

32060

41398

3-1-12

14

5

3-1-12

25260

18375

3-2-12

9

11

3-2-12

10440

10093

*Note: Unchanged issues are not counted.

 

MAAD Weekly data for past 30 Weeks**

CPFL data for past 30 Weeks

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

8-12-11

3

17

8-12-11

363457

819472

8-19-11

4

16

8-19-11

114485

1084293

8-26-11

17

3

8-26-11

210133

205776

9-2-11

9

11

9-2-11

100923

527315

9-9-11

0

20

9-9-11

90976

390191

9-16-11

18

2

9-16-11

608032

149126

9-23-11

0

20

9-23-11

92354

510428

9-30-11

9

11

9-30-11

90710

478393

10-7-11

14

6

10-7-11

309648

250806

10-14-11

20

0

10-14-11

339756

175315

10-21-11

11

9

10-21-11

472694

170232

10-28-11

17

3

10-28-11

302482

101834

11-4-11

1

19

11-4-11

178793

256034

11-11-11

11

9

11-11-11

175686

161803

11-18-11

2

18

11-18-11

130876

295014

11-25-11

0

20

11-25-11

77212

275984

12-2-11

18

2

12-2-11

299869

114883

12-9-11

16

3

12-9-11

123094

127775

12-16-11

4

16

12-16-11

71745

356446

12-23-11

19

1

12-23-11

220540

55484

12-30-11

2

18

12-30-11

31982

46924

1-6-12

18

2

1-6-12

108235

66920

1-13-12

19

1

1-13-12

119692

78999

1-20-12

18

2

1-20-12

234612

43131

1-27-12

8

12

1-27-12

86473

113029

2-3-12

17

3

2-3-12

254070

47361

2-10-12

4

16

2-10-12

139340

105129

2-17-12

16

2

2-17-12

216140

46807

2-24-12

8

12

2-24-12

54372

58835

3-02-12

15

5

3-2-12

78724

60272

**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.

 

About the Author

Robert McCurtain is a technical analyst/market timer, private investor and financial markets consultant based in New York City. He can be reached at traderbob@nyc.rr.com.