Stock market needs to establish intermediate high

Turning point for indexes

Market Snapshot:



Week Chg

Week %Chg

S&P 500 Index




Dow Jones Industrials




NASDAQ Composite




Value Line Arithmetic Index




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

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

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

Two things about this stock market are evident. First, causing the major indexes to suffer appreciable losses has been a lot like the guy trying to push a basketball under water. Second, the rally begun last October will end. You can count on the second option.

On February 29 price action the S&P 500 and the Dow Jones Industrial Average met all of the criteria for a Key Reversal Day (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). The S&P reached 1378.04 and the Dow hit 13055.75. Subsequent near-term selling resulted in weakness to 1340.03—S&P 500 and 12734.86—Dow 30 on March 6. Since then buying has pushed index prices back toward, but not above, the February 29 highs. In fact, Friday’s movement left all of the major indexes within range of the upper edge of statistical 10-Day Price Channels at 1372.40—S&P and 13012.25—Dow 30. The NASDAQ Composite has been a bit stronger than the “pack,” but even it too has been unable to better its February 29 high (3000.11).

So what’s the point?

If that price action on February 29 is to achieve full credence to the extent the KRD proves to be the top of the rally underway since the October lows, then the intraday highs on that date will not be exceeded and strength since then will prove to be nothing but a “return action” rally. Deterioration in Trading and Cumulative Volume over the past several days could be underscoring the notion strength since March 6 is nothing but short-covering that has about run its course.

But there is little room to play with. Either prices begin to weaken now or further buying will not only cause index prices to rise above the upper edge of 10-Day Price Channels and upside “failsafe” levels, but those February 29 highs could be threatened and exceeded. At that point he KRD price pattern would be negated and the Intermediate Cycle uptrend would resume. It is that Intermediate Cycle that will prove to be the issue. If the short-term trend kicks off negativity after an intermediate high has been put in place, it is the larger and more important intermediate trend that will determine the staying power of the Major Cycle.

On the indicator front, while there has been some improvement in our Most Actives Advance/Decline Line (MAAD), only the Daily series remains completely in synch with recent market action to the extent Daily MAAD has bettered its 2011 highs. And while Weekly MAAD was marginally positive last week (12 to 8), the Weekly MAAD Ratio is decidedly “Overbought.” At the same time, while Weekly MAAD has participated with the market on the upside since October, the indicator is now at a downtrend line (see Weekly MAAD chart) stretching back to the July 2007 Weekly MAAD plot high, a level that developed nearly three months before market price highs in October 2007.

The reason current MAAD dynamics are important is that this indicator has an excellent record of predicting market tops. It did so before index price peaks in 2000, 2007, and at the May 2011 highs. Currently it’s suggesting that while Daily MAAD has been more “enthusiastic” longer trend sensitive Weekly MAAD is indicating that now is the time for this market to capitulate after a powerful rally now several months old AND EVEN THOUGH index prices have done better than Weekly MAAD.

Which brings us to the next part of this market scenario – Market Volume. Simply put, volume has not kept up with the pace of price improvement and is at historical lows on a comparative basis. Given the fact it takes volume to keep prices moving higher, the underpinnings of the rally since the October are manifestly lacking. Our Cumulative Volume charts underscore that truism. While pricing in the S&P 500 and the S&P Emini futures contract has moved back to and exceeded the best levels of 2011, CV in the S&P has only come back about 60% and CV in the Emini has recovered only 40% (see Weekly CV charts). And those numbers are not isolated. The same CV lack is evident in the NASDAQ Composite index and the Dow Jones Transportation Average (Russell 2000 and the Value Line index do not provide volume figures).

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