Stock market minor cycle weakens amid uptrend

Market Snapshot:

Over the past two weeks the major stock market indexes have found it progressively difficult to make any headway on the upside. Each attempt has been followed by a small pullback and then another failed attempt. The end result has created a “stair step” effect with a slight upward bias as in the S&P 500, or the same effect with a downward tendency in the Value Line index. Contrary to both, the Dow Jones Industrial Average has moved up and down laterally.

Short-term pullbacks have not been particularly exceptional within the framework of the Intermediate Cycle advance that has been underway since last October’s lows. In fact there have been four or five short-term peaks since then with as many near-term lows. But every rally, great or small, eventually reaches an end. That certainty has caused to focus, for a number of reasons, on the potential importance of this short-term trend that has begun to succumb to selling pressures as they relate to the larger intermediate trend.

Market Overview – What We Know:

• Losses last week in major indexes put larger Intermediate Cycle in jeopardy.
• Minor Cycle underway for nearly a month is on verge of turning negative.
• S&P 500 would have to better 1422.38 at April 2 intraday high to create new high for move and best levels since October 2011 lows.
• Trading Volume declined 23% last week due to shortened trading week. Volume on NYSE was down 14% last Thursday.
• Short-term trend is flirting with negativity as “Overbought” readings based on price correct toward “Neutral.” Intermediate Cycle based on Weekly index pricing remains “Overbought.”
• MAAD Daily Ratio remains in “Oversold” territory (.80) and toward level that can coincide with short-term low.
• To re-assert Intermediate Cycle, buying would now be required above upper edge of 10-Day Price Channel (1412.52—S&P 500 / Monday). Intermediate Cycle at lower edge of 10-Week Channel would be threatened with weakness below 1331.26 in S&P 500 (through April 13).
• MAAD was negative Thursday with 9 issues positive and 11 negative.
• Daily CPFL was negative Thursday by 2.17 to 1 and was holding just below new short-term high created April 3. But neither Daily nor Weekly series is anywhere near overcoming major resistance at February 2011 highs.

First, our Daily Most Active Advance/Decline Line indicator (MAAD) declined below a defined uptrend line last Wednesday stretching back to the mid-December lows. After peaking back on March 20, Daily MAAD failed to confirm any strength to slightly higher highs in the S&P 500. And while last Wednesday’s downside break was not decisive in terms of signaling a short-term reversal that will inevitably lead to a challenge of the Intermediate Cycle, it was nonetheless a warning.

Market Overview – What We Think:

• Failure of market indexes to gain traction on upside over past two weeks is likely suggestion near-term trend is failing.
• Extent to which Minor Cycle weakness will determine staying power of larger Intermediate Cycle that remains positive, but historically “mature.”
• If buyers once again pick up “bargains” on weakness, however, as short-term “Overbought” conditions are eliminated, intermediate trend will remain viable and new highs for move could remain a possibility.
• 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 are leading market upward.
• Failure of Weekly MAAD to better 2011 highs, despite strength in major indexes above similar levels, is ongoing suggestion that internal strength of market has not been and is not what it should be.
• Fact that Cumulative Volume (CV) remains weaker than index pricing relative to 2011 highs in S&P 500, Dow 30, and NASDAQ Composite underscores lack of strong participation in market over past several months.

Second, one of the two short-term Trading Oscillators we regularly follow is now negative with a second poised to follow suit. Underscoring the negative bias of those oscillators, short-term Momentum has dipped into negative territory for the first time since early March when the most recent near-term advance began.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

Sixth, the noticeable lack of volume for months is bothersome. While prices can certainly rise on less activity, such an upside tendency is usually because there has been no concerted selling action. But when coupled with price as we have done historically via our Cumulative Volume (CV) computations, divergences such as those evident in the S&P 500, S&P 500 Emini, Dow 30, and NASDAQ Composite become notable – prices have been able to make new highs above the 2011 highs, but CV has stubbornly refused to confirm that action. In a nutshell, the lack of CV strength in the face of higher prices suggests that market strength since last October has been fueled by weaker hands than during previous rallies.

And last, the price of an average share on the NYSE peaked on March 15 at $61.48 per share. That level has not been exceeded since then. In fact, last Thursday’s end of week close left the average price at $58.20 to suggest that while buyers have been able to offset selling pressures somewhat over the past few weeks, the price of an average share on the NYSE has been deteriorating more than has pricing in the major indexes.

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, the short-term trend of this stock market looks vulnerable. If the Minor Cycle succumbs in the sessions just ahead, the extent to which index pricing moves lower would then determine the staying power of the larger Intermediate Cycle that has been underway since last October 4. If, however, short-term weakness proves to be merely a lull in which “Overbought” near-term excesses are eliminated prior to a resumption of the larger trend, then nothing but strength above the most recent highs (1422.38—S&P 500) would be good enough to re-assert the larger Intermediate Cycle uptrend.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD reached a minor high back on March 20 and has yet to surpass that level, despite coincident strength in the S&P 500 to a new high on April 2 (1422.38). That failure by MAAD could be an underlying sign the internal momentum of this market is under pressure and that concerted short-term weakness is imminent. Moreover, since the price of an average share on the NYSE peaked on March 15 at $61.48, the fact that MAAD has followed suit is not surprising.

There is another truth at work, however. The Daily MAAD Ratio has moved back into deeply “Oversold” territory and has corrected all of the recent “Overbought” tendencies since that March 20 indicator high. But offsetting that Minor Cycle MAAD bias, the Weekly MAAD Ratio remains moderately overheated at 1.44 (range is .25 to 2.50) and vulnerable. The only way to correct those excesses in Weekly MAAD is for net negative MAAD numbers to be entered into the Ratio equation.

Bottom line on MAAD, Daily and Weekly, is that while the Daily series has demonstrated weakness lately and has become “Oversold,” it is the status of the larger Weekly series that will determine the staying power of the Intermediate Cycle.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily CPFL rallied to a new short-term high last Tuesday and then backed off over the remainder of the week. Both Daily and Weekly CPFL have broken above defined downtrend lines stretching back to the February 2011 highs. But neither series has come anywhere near exceeding actual CPFL highs put in place the week ending February 25, 2011.

While CPFL has posted small gains recently, the lingering existence of the 2011 CPFL highs underscores the notion that options activity as measured on a Dollar Value basis has remained lukewarm for more than a year. Until that tone changes, the underpinnings of this stock market remain suspect on a longer-term basis and despite the gains since last October.

Click charts to enlarge

Conclusion

The Minor Cycle advance that began after the March 6 lows (1340.03—S&P 500) may be about to capitulate via a round of selling. The extent to which such weakness evolves would then determine the staying power of the larger Intermediate Cycle that remains positive until the lower edge of a defined 10-Week Price Channel (1331.26—S&P 500). If that level holds as recent short-term excesses are eliminated, and some already have been in our MAAD Daily Ratio, it’s possible yet another short-term low within the context of an otherwise positive Intermediate Cycle uptrend would be created.

But this Intermediate Cycle has just entered its seventh month and it is mature. Unfortunately, “mature” in the stock market is not a condition that lasts indefinitely. As a consequence, for the moment it’s important to closely monitor the status of the short-term trend relative to its recent advance and then relative to the underlying Intermediate trend.

*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.