Stock market needs to establish intermediate high

So the bottom-line on this market is pretty simple – either the February 29 highs hold and an Intermediate Cycle high has been put in place. Or not. If they hold selling back below the March 6 index price lows would confirm an end to the Intermediate Cycle uptrend begun in October. If the “not” part of the equation prevails and more buying to new highs for the move follows, currently intact intermediate term Price Channels would move upward until a sell point inevitably develops and bids sink below the lower edges of trailing Weekly Price Channels.

Market Overview – What We Know:

• Price bounce in major indexes continued last Friday and moved bellwethers back toward February 29 prices highs and best levels for move initiated last October.
• Strength above 1378.04—S&P 500 would negate positive Key Reversal Day price pattern and possible top of rally since October.
• Price action at end of last week was in vicinity of upper edges of 10-Day Price Channels in major indexes (S&P 500, Dow 30, NASDAQ, and Value Line).
• Trading volume in S&P 500 rose 2% on Friday and declined nearly 5% on week while remaining toward historical lows.
• Cumulative Volume in S&P 500 and S&P Emini futures contract has recovered about 60% and 40% of cumulative losses respectively from 2011 highs and continues to highlight fact that rally since October has been fueled by notably less volume.
• Recent negativity and subsequent return move developed after major indexes rallied within range of upside measured move targets as calculated from October 2011 lows.
• Most Actives Advance Decline Line (MAAD) was positive Friday (14 to 5) and on the week (12 to 8), but Weekly MAAD is at critical downtrend line stretching back to July 2007. Weekly MAAD Ratio is historically “Overbought.”
• CPFL was positive Friday by 2.83 to 1 and on week by 2.30 to 1, but neither Daily nor Weekly series is anywhere near bettering its 2011 CPFL highs.

Market Overview – What We Think:

• Buying since February 29 index price highs (1378.04—S and P 500) and March 6 lows (1340.03—S&P 500) could prove to be short-covering bounce following creation of Intermediate Cycle high on February 29.
• February 29 peak was also coincident with creation of possible Key Reversal Day in S&P 500 and Dow 30. Last time pattern developed was on October 11, 2007 at exact market high that preceded second worst decline in stock market history.
• Strength in S&P back above February 29 high would not only negate possible Key Reversal Day formed during that session, but it would re-assert Intermediate Cycle uptrend initiated after October lows.
• Coincidence of Weekly MAAD moving right to downtrend line connecting 2007 and 2011 highs at same time KRD develops may be more than mere coincidence.
• Additional fact that price strength in key indexes with reported volume has shown little relation to Cumulative Volume is yet another hint that strength since October lows is unsustainable on the longer-term. 
• Resumption of short-term weakness would determine staying power of larger intermediate trend that has been underway since October lows. And weakness on Intermediate Cycle would exert pressure on larger major trend that continues to exhibit neutral readings.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

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.

McCurtain Most Actives Advance/Decline Line (MAAD)

Price recovery last week in major indexes caused Daily MAAD to continue to flirt with its February 8 plot highs. The Daily indicator was last two issues from equaling that level while remaining just above neutral via the MAAD Daily Ratio.

It is the more important larger Weekly MAAD data that is relevant, however. Not only is the Weekly Ratio as “Overbought” as at any time over the past decade, but the advance/decline component of the indicator has moved back to a downtrend line extending back to the July 2007 indicator plot highs. That trendline and the “Overbought” conditions could congeal at an opportune moment, albeit a negative one, in this market.

Underscoring all MAAD statistics is the fact Smart Money has not participated since the March 2009 lows to the same extent they participated in previous rallies. While the S&P 500 index has recovered nearly three fourths of its losses since the 2007 price highs, Weekly MAAD has only come back about 30%.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL remains lackluster on both the Daily and Weekly cycles. Not only do both time series remain below highs created in February 2011, but neither has yet been able to rise above a defined downtrend line stretching back to those same February highs.

The ongoing failure of CPFL to demonstrate much improvement over the past five months in the face of market strength underscores the obvious fact that options players have remained reluctant to commit to this market on a Dollar Value basis. Why they have continued to buy almost as many puts as calls since last October, despite strong gains in the major indexes, remains a mystery unless they are convinced the rally will not last on the longer-term and they continue to anticipate a negative reversal.

Click charts to enlarge

Conclusion

The choice for the stock market is now relatively simple. If the February 29 highs (1378.04—S&P 500) do not hold, the potential Key Reversal Day price action in the S&P and the Dow 30 will be negated and the uptrend since the October lows will be re-asserted. While we cannot rule out the possibility more positive action will develop, given the proximity of prices to those highs, we find it interesting that daily index prices were last in the vicinity of the defined upper edges of 10-Day Price Channels while weekly MAAD and CPFL statistics were last positioned at long-term downtrend lines that can act as significant resistance to further indicator gains.

If indicator movement is any measure of internal market strength, or weakness, this stock market should be very close to an endgame, at least so far as the rally begun in October is concerned. Considering the fact the Intermediate Cycle is also “Overbought” while Momentum has been failing on the upside for weeks, now would be the time to a put a cap on this market rally that has lacked internal corroboration for some time.

*Note: Unchanged issues are not counted.

**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.