Intermediate stock cycle is ripe for pullback

Weekly Review: But will buyers buckle?

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1397.11

-7.06

-.50%

Dow Jones Industrials

13080.73

-151.89

-1.14%

NASDAQ Composite

3067.92

+12.66

+41%

Value Line Arithmetic Index

3059.71

-14.78

-.48%

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

Back on February 29 we thought the S&P 500 and the Dow Jones Industrials might have traced out Key Reversal Day formations. And for a little more than a week that possibility had some credence. But then the major indexes spiked to new short term highs to re-assert the larger intermediate trend. What is now true is that we are looking for a top and a reversal on the larger Intermediate Cycle that has been underway since the October 4 lows. It will come. That is a certainty.

Last week’s net failures after new short-term highs on Monday put the Minor Cycle trend in jeopardy. If the lower edges of defined 10-Day Price Channels (1384.06—S&P 500 / Monday) are fractured on further selling, then the larger Intermediate Cycle would become an issue. Currently, however, there is a relatively wide margin (nearly 6%) between current pricing and the lower edge of the 10-Week Price Channel at 1313.50 in the S&P 500 (until March 30). With a new bout of volatility, considering the fact VIX is currently not far from historical low volatility extremes, that margin of safety could be quickly erased.

Market Overview – What We Know:

  • Losses last week in major indexes put a damper on Minor Cycle strength that has developed over past several sessions and, if it continues, could put in jeopardy Intermediate Cycle uptrend begun last October 4.
  • With both Minor and Intermediate Cycles still vulnerable because of “Overbought” statistics, “Overbought” Sword of Damocles continues to hang over market.
  • Intermediate Cycle at lower edge of 10-Week Price Channel would be threatened with price weakness below 1313.50 in S&P 500.
  • Trading volume on NYSE shrank 2.5% Friday while price of average share on NYSE rose 10 cents to $58.36. Highest recent average share price was March 15 at $61.48. On week NYSE volume declined 25%.
  • Short-term Momentum has confirmed none of recent strength in any of major indexes to recent best bids for move. Nor has Intermediate Cycle Momentum.
  • Daily Most Actives (MAAD) was slightly positive Friday with 10 issues up and 9 down. Weekly MAAD was negative by 8 to 12. Daily MAAD Ratio remains marginally overheated with Weekly MAAD “Overbought.”
  • Daily CPFL was positive Friday by 1.15 to 1 while Weekly CPFL was positive by 1.40 to 1. Both Daily and Weekly series remain substantially below February 2011 highs, despite index strength above similar levels.

With both the Minor and Intermediate Cycles resting in “overbought” territory with a degree of market complacency also evident, there is a general market tone that could develop into a pullback. While it’s true “Overbought” readings can persist and do not in and of themselves mean the market is in danger of an imminent decline, when the “Overbought” oscillators do turn lower, that action almost invariably coincides with price weakness. The same is true of an “Oversold” condition – when the oscillators turn higher from persistent “Oversold” readings, so does pricing.

So, while we cannot say that a decline is “Red Zone” imminent, we can say it is inevitable. Fine distinction, but true. Short and intermediate term Momentum is also backing up the notion the market has lost upside steam. Minor Cycle Momentum has yet to better its early January levels while Intermediate Cycle Momentum has failed to surpass the peaks it made in mid-February to suggest that recent new highs for the move are suspect. At the same time, Major Cycle Momentum has been ensconced near neutral for months.

Market Overview – What We Think:

  • Intermediate Cycle that has been underway since last October 4 is certainly due for some corrective action. Question remains as to which short-term top will prove to be peak of advance mature intermediate uptrend.
  • Failure of Momentum on both Minor and Intermediate Cycles to confirm any of strength to new highs for move over past two weeks could be early sign market is becoming increasingly vulnerable.
  • But if pricing corrects “Overbought” excesses on near-term without significant price weakness, possibility exists market could be performing “setup” for further gains. Such action preceded most recent near-term rally following abortive Key Reversal Day on February 29.
  • Fact that Cumulative Volume (CV) remains weak in S&P 500, Dow 30, and NASDAQ Composite underscores fact participation in market over past several months, let alone last decade with historically low trading volume, is abnormal and probably unsustainable, at least as it relates to higher index prices on long-term.

Then there is Trading Volume and Cumulative Volume. Activity on the NYSE remains at the lowest levels in nearly a decade. When price is added into the equation, and despite the fact index pricing has bettered 2011 highs, Cumulative Volume (CV) has not. Even CV in the NASDAQ Composite Index has failed to underscore strong price gains in the underlying NASDAQ index.

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