Stock indexes target intermediate cycle highs -- or death knell rings

Market Overview – What We Think:

• Until short-term “Oversold” conditions are eliminated with at least “Neutral” readings developing in our key oscillators, we cannot rule out possibility market will move higher.
• Big question remains, however, whether or not index pricing would be able to better recent highs (1422.38--S&P 500 / April 2). We suspect not.
• New highs would simply reassert uptrend in effect since last October while break below recent lows (1357.38--S&P 500 / April 10) would suggest resumption of selling in what could turn out to be early stages of Intermediate Cycle decline. In other words, recent “backing and filling” could prove to be lull in larger Intermediate Cycle negative.
• Best guess is that any near-term “return action” will fade this side of April 2 highs and that April 10 lows (1357.38 / S&P 500) could soon be breached on downside.
• More short-term selling would seriously challenge lower edge of 10-Week Price Channels (1340.58 / S&P 500) while threatening to turn larger Intermediate Cycle negative for first time since last fall.
• Key measure of market’s “Oversold” condition rests with our Daily MAAD Ratio that was last plotted at .72. Any readings toward “Neutral” (at or above 1.00) would be good enough to put statistical cap on near-term price improvement.

As the Three Dimensional aspects of this market begin to coalesce in the sessions and weeks just ahead, we suspect the variances in trending could become more negative to the extent the Minor Cycle could re-assert a downtrend after a lull. That weakness could then have an effect on the Intermediate Cycle which in turn would then affect the Major Cycle. In other words, movement in every cycle would have consequences on the other cycles, because all cycles are constantly adjusting to a “context.” When the short-term cycle rallies, there are consequences on the Intermediate Cycle. When the Major Cycle is decisive, its action affects the Intermediate and Minor Cycles.

Daily S & P 500 Index with Cumulative Volume

Weekly S & P 500 Index with Cumulative Volume

Keeping in mind recent index pricing variances, simply add in some indicator conflict and the “game” really gets interesting. In that vein, we have been noting for some time the marked lack of volume which remains toward 10 year lows. That deficiency has been underscored by our Cumulative Volume (CV) measurements that have continued to reveal that CV in none of the major indexes has surpassed plot highs put in place in 2011. That bearish action highlights the fact that the move since last October has been fueled by weaker hands than those that inspired previous rallies.

“Smart Money” as reflected in our Most Actives Advance/Decline Line (MAAD) has performed somewhat better on the Daily Cycle since mid-December, but on the longer term Weekly MAAD has yet to break above its March 2011 highs. That action is an indication more sophisticated investors have not liked this rally to the same extent they liked previous rallies. They bought equities into the October lows, but not with as much enthusiasm as previously.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

On the psychological front, and given the tendency since October of prices to simply pull back before reloading for another move up, many think this time around will be the same—that the market is merely in a near-term correction prior to rallying to new highs for the move. We must remain open to that possibility, but we suspect that any price deterioration below the April 10 intraday lows (1357.38—S&P 500) will not only reassert near-term weakness, but such action would decisively put S&P prices below a defined uptrend line stretching back to those October lows. Such selling would underscore weakness in CV in the cash S&P, a tone that has been extant for months but, more importantly, would almost certainly cause weakness below the lower edge of the 10-Week Price Channel in the S&P 500 (1351.61), a level that coincides with a defined downside “failsafe” level, so suggesting a move to negative on the larger intermediate trend.

While it’s also true that the short-term trend has become “Oversold,” at least as measured by our Daily MAAD Ratio (last at .72), as the Weekly MAAD Ratio has already corrected back toward “Neutral” (last at 1.21), it is also true that “Oversold” in the early stages of a decline can be deceptive. Conditions can remain ‘Oversold” for some time as prices deteriorate further.

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 key to the markets direction in the sessions just ahead will be the ability of the Minor Cycle to hold firm. If more weakness develops and those April 10 lows are penetrated on the downside, we would feel comfortable in suggesting that the intermediate-term rally launched last October is likely over. Then, the extent to which index pricing falters in conjunction with underperforming market indicators would determine the staying power of the Major Cycle trend.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD has begun to look more negative than index pricing to extent Daily series has faded back to recent low made April 10 while S&P 500 was last a little over 2% above its April 10 low at 1357.38. While the variance between the two is relatively small, the fact that Daily MAAD has begun to deteriorate again could be a sign the market could be in for another round of selling even though the Daily MAAD Ratio remains toward “Oversold” territory. That contradiction could be an indication the larger Intermediate Cycle that is not “Oversold” is gaining dominance.

Also, given the fact that Weekly MAAD, has been unable to better its 2011 highs, despite index price strength above 2011 highs, there is a lingering hint the underpinnings of this market continue to lack the internal power necessary for the sustenance of buying on the longer-term trend.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Options activity as measured by CPFL remains anemic. While the indicator on both the Daily and Weekly cycles improved after the mid-December lows, the indicator only feebly fractured in late March a longer-term downtrend line stretching back to the February 2011 highs before pulling back.

If it turns out the broad market is in the vicinity of an Intermediate-term high and that price action since the October lows is about to be corrected, the fact that CPFL has substantially underperformed the broad market is yet another sign the underpinnings of this market remain weak. While it has taken months to arrive at this point, in retrospect it could prove to be clear that the failure of CPFL was merely another sign that buying since the October lows, let alone since March 2009, has not been equal to strength that was evident in the decades-long bull market that terminated in early 2000.

Click charts to enlarge

Conclusion

There are times in a stock market cycle when the confluence of many factors leads to a larger correction than many expect and even though in the early stages of the pullback the short-term trend dips quickly to “Oversold” territory. In fact, in the early stages of such a decline “Oversold” is simply an indication the market is weak. “Oversold” conditions then persist as does more selling.

While it’s too early to suggest recent short-term weakness is a current big clue to larger Intermediate Cycle deterioration, we would view selling below the April 10 intraday low (1357.38) in the S&P 500 as a step toward a reversal of the positive intermediate trend that has persisted since October.

A resumption of short-term selling, a break below the defined uptrend line stretching back to those October lows (1365.00—S&P 500), and then a break decline the lower edge of the 10-Week price Channel (1351.61—S&P 500) would likely ring the death knell on a mature rally.

*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.