Uptrend since October increasingly vulnerable

Chart, market, volume, indicator

Market Snapshot:

Best guess? The April 2 intraday highs in the S&P 500 (1422.38) and Dow Jones Industrial Average (13297.11) and the March 27 intraday highs in the NASDAQ Composite (3134.17) and Value Line Index (3117.85) may prove to be the highest levels of the Intermediate Cycle rally that began after the intraday lows of last October 4. Since then the S&P 500 has gained 32.3% while the Dow 30 tacked on 27.8%, the NASDAQ Composite added 36.3%, and the Value Line index rallied 39.4%.

If we are correct that the high for the intermediate advance has been seen, the most we would look for over the next several sessions in the face of short-term “Oversold” conditions would be for index pricing to work back toward the March 27/April 2 highs. Bids would not exceed those levels. But since the Minor Cycle remains negative, we also cannot preclude the possibility that more near-term selling could develop to not only extend short-term losses, but to also put renewed pressure on the Intermediate Cycle by bringing prices toward, and perhaps below, the lower edge of defined 10-Week Price Channels (1340.58—S&P 500) and our downside “failsafe” levels on the intermediate Cycle.

If we are wrong and intermediate-term highs have not been put in place, nothing but strength back above recent highs would suffice to re-assert the intermediate positive.

Some will argue that we’ve been “down this road before” to the extent the short-term trend weakened and quickly moved into “Oversold” territory before staging another healthy rally within the context of the Intermediate Cycle positive. True, but some things are different this time around. First, our Daily Most Actives Advance/Decline Line (MAAD) peaked back on March 20 when the S&P 500 made an intraday high at 1409.59. Daily MAAD has not re-visited its plot high since then, the first such significant divergence since last October. Secondly, the average price of a share on the NYSE peaked on March 15 and more than two weeks before the S&P peaked. That also is the first such significant divergence in NYSE average pricing since October. And third, Momentum on no cycle confirmed any of the strength into the recent highs to suggest that despite incremental gains in pricing, the upside velocity of the market has been fading for some time.

On the sentiment front, we’ve noted the failure of our Call/Put Dollar Value Flow Line on both the Daily and Weekly cycles. While CPFL began to perk high after the mid-December short-term lows and has remained in a short-term uptrend since then, the amount of Calls on a Dollar Value basis as compared to Puts on a Dollar Value basis has remained anemic. At the same time, neither the Daily nor the Weekly CPFL series is anywhere near the February 25, 2011 indicators highs with both series having only recovered about one third of their losses since the 2011 peaks. On a Dollar Value basis options players have only been buying marginally more calls than puts and apparently remain skeptical of this market’s long-term prospects.

There is also the performance of MAAD on the Weekly Cycle. While Daily MAAD was recently able to overcome its early March 2011 highs by a little more than 8%, Weekly MAAD failed by a couple of percentage points to suggest that despite some marginal enthusiasm by Daily MAAD, the longer term indicator remains unimpressed, especially considering the fact the S&P 500 bettered its 2011 highs by nearly 4%. Although the variances are small, there is no denying the fact that Weekly MAAD has remained in the doldrums for months to suggest yet again that Smart Money has not participated in the rally since October 2011, let alone since March 2009, to the same extent they bought securities during previous rallies, especially during the great bull than ended in early 2000.

Next page: Volume's role

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.

Next page: Indicator report

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily and Weekly MAAD declined last week. Weakness followed Daily strength to a marginally higher high above its 2011 peak on March 15. On the other hand, Weekly MAAD has been unable to better its 2011 highs. The Daily MAAD Ratio was last back into “Oversold” territory while Weekly MAAD has moved back to “Neutral” from recently “Overbought” territory.

If we are correct the broad stock market has put in place an Intermediate Cycle peak via the April 2 (S&P 500, Dow 30) and March 27 (NASDAQ Composite, Value Line) highs, we would look for Daily MAAD to be unable to better its March 15 high as a result of any reflex rallies with Weekly MAAD confirming such failure.

While the near-term “Oversold” condition in the Daily MAAD Ratio could allow for some recovery in index pricing in the sessions just ahead, any reading at or near “Neutral” would be good enough to set the market up for another round of selling within the context of an Intermediate Cycle pullback. Until the Weekly MAAD Ratio is fully “Oversold” if Intermediate Cycle “failsafe” levels (10-Week Price Channel at 1340.58 / S&P 500) are fractured, we would view market pricing as vulnerable.

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McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily CPFL peaked on the Minor Cycle on April 9 with confirming action from Weekly CPFL. While the indicator has been doing better since its December 19 short and intermediate-term lows, the fact that CPFL has only recovered about one third of its losses since the highs of February 2011 is an ongoing indication options players, as measured on a Call/Put Dollar Value basis, have remained unenthusiastic about the stock market for months.

While such a lack may not preclude higher index pricing, on the longer term history suggests that a lingering failure of CPFL to confirm higher prices has usually been a harbinger of market weakness. Put another way, nothing but market weakness or higher CPFL readings will eliminate the current divergence between the indicator and the broad market.

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Next page: Conclusion and what to expect

Conclusion

Despite marginal stock market recovery last Wednesday and Thursday following Monday’s sharp losses, more selling on Friday brought the major indexes back toward the lowest levels of the week. That net negative action when coupled with indicator divergences preceding the April 2 prices high in the S&P 500 and the Dow Industrials is a strong hint the Intermediate Cycle uptrend begun last October may be over. Nothing but strength back above those April 2 highs (1422.38 / S&P 500 and 13297.11 / Dow 30) would re-assert the 6 ½-month-old advance.

If the rally since last fall is finished the next shoe to drop would be weakness below the lower edge of defined 10-Week Price Channels (1340.50 / S&P 500) with follow on price deterioration and confirming negativity by MAAD and CPFL. While “Oversold” conditions would inevitably develop, such readings on the Minor Cycle during the early stages of a decline can be deceptive and often are merely a confirmation of overall market negativity and should be viewed as such rather than as a buying opportunity.

*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.