Index prices, indicators battle for trend supremacy

Market Overview – What We Think:

• Short-term price action looks as if it could be beginning of near-term pullback, but with Daily MAAD Ratio correcting recent excesses back into “Oversold” territory, possibility another short-term setup prior to strength could be developing.
• More strength cannot be ruled out so long as prices hold above lower edges of 10-Day Price Channels and so long as larger Intermediate Cycle remains positive.
• If buyers remain eager to pick up “bargains” on weakness, short to intermediate trend will remain viable.
• Just the same, intermediate Cycle that has been underway since last October 4 is mature, historically, and is due for a correction.
• Possible clue to future market direction may rest in price of average share on NYSE. Despite recent short to intermediate new highs, highest recent average price ($61.48) was hit back on March 15. Divergence could be sign fewer and fewer issues have been leading market to new highs.
• Additional fact that Cumulative Volume (CV) remains anemic relative to 2011 highs in S&P 500, Dow 30, and NASDAQ Composite underscores lack of strong participation in market over past several months, despite price gains.

But that knowledge does not make picking the top of this six-month-old rally any easier except in the knowledge that the longer the advance continues, the closer it is getting to a top. In other words, all mountains have tops. We do know that the advance is several months old, that Momentum has confirmed none of the strength for weeks, that volume continues to lag as notably measured by our Cumulative Volume (CV) numbers, that the Minor and Intermediate Cycles based on price are “Overbought,” and that while our Most Actives Advance/Decline Line (MAAD) data remains generally unimpressed by market strength, the market as measured by the major indexes has continued to work higher.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

So, what do we do?

The peak of the rally that began after the October 4 lows will begin with a downside break on the Minor Cycle. Weakness could be decisive, or not. No matter, the end result would be that index prices will sink below the lower edge of defined 10-Day Price Channels (1394.57—S&P 500 / Monday). And they will stay below those price channels as pricing succumbs to further selling. At that point, the larger Intermediate Cycle Price Channels will come under threat at their lower boundaries (1325.12—S&P 500 / through April 6). If intermediate Price Channels are then fractured, it would then be likely the uptrend in effect since early last fall would be over. Then, the extent to which the Intermediate Cycle weakens would determine the staying power of the major trend.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

Underscoring all price action, however, is the extent to which our key indicators react. Currently, if oscillators in the MAAD Daily and Weekly Ratios quickly correct back into “Oversold” territory as short and intermediate-term Momentum fades to similar levels, the market could experience a relatively shallow correction within the context of the major trend which remains positive. If, however, “Oversold” conditions do not stimulate a round of new buying as oscillators move back to “Neutral” or moderately “Overbought” territory with little net improvement in price action relative to the highs that preceded the pullback, the odds would increase that more selling could follow. As cryptic as the deciphering of the top of this months-old rally is proving to be, in retrospect it will be marked, ironically, as nothing particularly exceptional. Truth is, real time always moves slowly in the market, mirages do appear, and this rally is no exception to the rules.

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.

In sum, divergences between index price action and the majority of our key market indicators continue. While the world of stock market opinion has covered a spectrum from “new bull market” to “the market has the makings for a 90% decline,” fact is downside sell levels are in place and our key indicators continue to warn that while this rally continues to lack the underpinnings of previous moves, new highs above the 2011 levels notwithstanding, surprises will prove to be merely historical and not exceptional.

McCurtain Most Actives Advance/Decline Line (MAAD)

In something of an about face, Weekly MAAD rallied to its best levels since last October last week while Daily MAAD did not. In fact the Daily series continued to hover below the short to intermediate-term peak hit back on March 20. Even so, the Daily MAAD Ratio has corrected back into “Oversold” territory while Weekly MAAD has yet to better its 2011 high.

Given the fact the Daily MAAD Ratio is back toward “Oversold” levels, there is a possibility the market could be setting up for yet another short-term upside thrust since that same action preceded the most recent near-term rally after the March 6 lows.

Also, while Weekly MAAD has punched above the downtrend line stretching back to the October 2007 highs with a connecting point at the 2011 indicator peak, Weekly MAAD remains below a primary trend line stretching back to 2000 and is still nowhere near breaking above the 2007 resistance high, let alone the 2000 indicator peak. Put another way, those deficiencies highlight the fact the Smart Money has not participated in the rally since March 2009 to the same extent they bought equities previously.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL has demonstrated some signs of marginal life over the past few weeks to the extent both Daily and Weekly CPFL are currently back above a defined downtrend line stretching back to the February 2011 indicator highs. Neither time series, however, is anywhere near breaking above the actual resistance high made February 25, 2011.

As a consequence, strength since the mid-December lows in CPFL is reason for some optimism, but the fact CPFL appears to be very much late to the Intermediate Cycle party that began last October is a cause for concern. In other words, options players have begun to demonstrate some net buying on a Dollar Value basis, but compared to previous rallies, their enthusiasm remains tepid.

Click charts to enlarge

Conclusion

The major indexes posted marginal gains last week, but despite the best gain of the week at 1% in the Dow Jones Industrial Average, it was the S&P 500, NASDAQ Composite, and Value Line index that rallied to their best levels for the move while the Dow 30 did not.

At the same time, despite overall index strength, price Momentum on both the Minor and Intermediate Cycles confirmed none of the gains in none of the indexes while the best average price per share on the NYSE remains stuck at $61.48, a level hit back on March 15. Those facts remain coupled with the fact that both the Minor and Intermediate Cycles are “Overbought” on a price basis.

But it is also true this market has continued to defy bears. And despite a lack of corroboration by most of our key indicators, all cycles remain positive. Until there is a decisive downside break on the Minor Cycle as confirmed by a break below the lower edges of 10-Day Price Channels, this market will remain in a defined uptrend.

*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.