Stock market intermediate cycle uptrend likely over

Stock index, chart, technical analysis

Market Snapshot:

After several weeks of vacillation and apparent indecision, the stock market moved markedly lower last week and probably initiated the first leg down of an intermediate-term correction. Not only is the move since last October probably over, but corrective action will likely determine the staying power of the Major Cycle trend that has been toying with “Neutral” readings for months.

Although last week’s losses in the major indexes ranged from -1.43% in the Dow Jones Industrial average to -3.67% in the NASDAQ Composite, it is the setup into the recent highs that we find the most revealing. Not that the preliminary to the larger cycle top and subsequent weakness was necessarily typical, but the run-up had many of the characteristics of market topping action that has resulted in other healthy declines.

The first warning signs came with ongoing deterioration in Momentum. Weekly Momentum peaked mid-February and was unable to keep pace with prices in spite of new highs for the move in the S&P 500 and the Dow 30 on April 2. Unfortunately, those peaks were unaccompanied by any of the key major U.S. or world indexes. The Dow reached another short-term high in May 1, but, despite media fanfare, the move was strictly solo and proved to be unsustainable. Short-term Momentum peaked mid-March and never regained its upside footing.

Market Overview – What We Know:

• Major indexes suffered modest losses last week. NASDAQ Composite index lost most (-3.67%) while Dow Jones Industrials lost least (-1.43%).
• On negative market action, NYSE exchange volume rose nearly 3% last week.
• Short-term trend in all indexes is now negative with Intermediate Cycle uptrend in effect since last October under serious threat.
• Break below minor support in S&P 500 (1357.38) would suggest negative confirmation of Intermediate Cycle, but if that level is hit S&P would already have declined below lower edge of 10-Week Price Channel (1369.70) and downside “failsafe” point of intermediate trend.
• Daily MAAD was negative Friday by 18 to 2 with Weekly MAAD negative by 18 to 1 and 1 issue unchanged. Daily MAAD was last plotted at new short-term low and was back to levels not seen since late January when S&P 500 was bid near 1300.
• Average Price per Share rose 21 cents to $57.30 Friday, but highest recent average price level occurred March 15 at $61.48.
• Daily CPFL was sharply negative Friday by 3.40 to 1 while indicator remains below April 9 short-term high. Both Daily and Weekly CPFL remain well below indicator resistance high put in place February 2011.
• Cumulative Volume (CV) in S&P 500 Emini futures contract declined to new short-term low Friday while cash S&P 500 CV is not far behind. Both indicators remain well below 2011 highs.

The price of an Average NYSE share hit a high on March 15 at $61.48, a level that was not surpassed in subsequent action. Our Daily Most Actives Advance/Decline Line (MAAD) peaked March 20 and has been deteriorating ever since. In fact, Daily MAAD was last back to levels not seen since the end of January when the S&P 500 was quoted just above 1300. In other action, our Call/Put Dollar Value Flow Line (CPFL) hit a high on April 9 and also did not surpass that level, let alone the highs of February 2011.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

Weekly MAAD did not like the rally and did not overcome its peak made in early 2011. Nor did CPFL on either the Daily or Weekly cycles. At last plot Daily and Weekly CPFL hadn’t even retraced 50% of the indicator’s losses since late February 2011. Also, Cumulative Volume (CV) in none of the major indexes has been able to better the plot highs made in 2011 to suggest that the market’s underpinnings, despite price strength over the past several months, has not been stellar. And on the charts, it looks like it’s only going to be a matter of short time before the major indexes break below minor supports (1357.38—S&P 500) hit on April 10 (the NASDAQ Composite on April 23).

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, our near-term outlook calls for further market weakness. While it’s a certainty there will be some rebounding action, we suspect the larger and newly negative Intermediate Cycle ought to persist for a matter of weeks. And the extent to which that weakness develops will determine the staying power of the Major Cycle. The move will play out in one of two ways – either the Intermediate Cycle drawdown will prove to be merely a corrective phase within the context of a long-term trend that has further room to go on the upside with possible strength to new highs, or Intermediate Cycle selling will develop few expect and the major trend could be seriously affected.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD declined to a new short-term low last Friday and to its worst level since January 31 when the S&P 500 closed at 1312.41 and more than 4% above current levels. That variance suggests Smart Money has become more negative on the market.

When coupled with the fact that Weekly MAAD recently failed to better its 2011 highs, despite a momentary push above similar levels by Daily MAAD, there is yet another suggestion informed buyers and sellers have begun to view price action with renewed skepticism.

It’s true the Daily MAAD Ratio remains in “Oversold” territory but, as we noted earlier, “Oversold” and negative readings in the early stages of a larger cycle decline may mean little more than, in fact, that the market is negative. So long as the Weekly MAAD Ratio remains “Neutral” or above as prices weaken, there is a suggestion more selling could follow.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL hit a short-term high back on April 9 and was unable to better that level before renewed selling developed on the Minor Cycle. The ongoing failure of CPFL relative to its April 9 peak and the fact the indicator is nowhere near bettering its late February 2011 highs is ongoing evidence options players not only remain skeptical of the market’s short-term prospects, but that they still don’t think much of the market’s positive prospects on the major trend.

Put another way, for a little more than the past 14 months, options buyers have been purchasing on a Dollar Value basis only marginally more calls than puts. Compared to the extent of the advance since October (nearly 32%), something is clearly askew.

Click charts to enlarge

Conclusion

The April 2 high in the S&P 500 index (1422.38) was probably the peak of the Intermediate Cycle rally that began last October 4 (1074.77—S&P 500). The 32.3% gain in the bellwether index was a healthy advance, but what is now relevant is the extent weak market underpinnings and market weakness could have on a new intermediate-term negative and the larger Major Cycle that has remained “iffy” for months, despite price gains.

*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.