Stock market negative, but oversold on minor, intermediate cycles

Stock index, chart, technical analysis

Market Snapshot:

Helped along by a reported $2 billion trading loss at J.P. Morgan last week (“Dude, are we long or short? Oops.”), the bloom came off of the stock market rose last week. The Minor Cycle gained more legs on the downside via weakness to new short-term lows. And selling below the lower edge of the 10-Week Price Channel in the S&P 500 negatively roiled the next larger Intermediate Cycle that has been positive since last October (1074.77—S&P 500). The S&P has been trending lower since April 2 (1422.38).

So, given a trend reversals on both the Minor and Intermediate Cycles, what can market players look forward to?

First, it’s important to note that the short-term trading ratios based on both price and varied indicator inputs have moved into “Oversold” territory. It’s also important to note that in the early stages of an Intermediate Cycle reversal, “Oversold” on the short-term cycle can stay that way for an extended period of time. In other words, the implied opportunity of the Minor Cycle is merely an illusion – the trend toward statistically negative readings, and “Oversold,” is merely reflecting the correct nature of the market that is heading lower and which is being propelled downward by the selling pressures from the larger Intermediate Cycle. The reverse can happen in a new intermediate uptrend –short-term “Overbought” conditions can persist and such readings do not necessarily suggest a selling opportunity.

Market Overview – What We Know:

• Major indexes lost ground again last week as S&P 500 closed last Friday at its lowest level since short to intermediate-term selling began after April 2 high (1422.38).
• Trading volume on NYSE increased just over 3% last week as prices sold lower.
• Short-term trend is negative with Intermediate Cycle largely confirmed on negative front depending on index. Value Line remains weakest with Dow 30 the strongest.
• All indexes were last below lower edge of 10-Week Price Channels, a very strong indication that trend since last October is over.
• Normal 40% to 60% pullback of advance since October in S&P 500 could put index toward 1283-1213. If lower boundary is approached and holds as intermediate trend becomes “Oversold,” long-term trend since March 2009 would remain intact. Break below lower boundary and long-term uptrend line would be long-term bearish.
• Weekly MAAD was negative last week with five issues higher and 15 lower. Weekly MAAD Ratio was toward Oversold” territory at .72. Daily MAAD was “Oversold” at .53 after Daily MAAD slightly fractured on Friday uptrend line stretching back to October low. Daily MAAD was last at S&P price equivalent of 1295.
• Average Price per Share lost 89 cents last week to $57.02. Highest recent average price level occurred March 15 at $61.48.
• Weekly CPFL was negative last week by nearly 2 to 1 with the indicator holding well below its April 9 short-term high. Both Daily and Weekly CPFL remain below long-term indicator resistance high put in place February 2011.
• Cumulative Volume (CV) in both S&P 500 and S&P 500 Emini futures contracts declined to new short-term lows last week and to lowest levels since early February. Both CV indicators remain well below 2011 highs.

If, however, that uptrend is fractured via more concerted selling and if Momentum on the Major Cycle dips into negative territory while an Intermediate Cycle “Oversold” condition occurs, the odds would not favor strength to new highs during the next Intermediate Cycle advance. That could mean the high put in place a month ago at 1422.38—S&P 500 cold prove to be the top of the bull move initiated in March 2009.

Daily S & P 500 Emini Futures contract with Cumulative Volume

Weekly S & P 500 Emini Futures contract with Cumulative Volume

Why is that latter possibility still possible in spite of the rally the market has experienced over the past several months? Because of the ongoing laggard status of most of our key indicators. With the exception of our Daily Most Actives Advance/Decline Line (MAAD) that marginally exceeded its 2011 highs in February highs, none of our other indicators confirmed price strength by any of the major indexes. Weekly MAAD failed as did our Daily and Weekly Call/Put Dollar Value Flow Line (CPFL), Daily and Weekly Momentum, and Daily and Weekly Cumulative Volume (CV). If the current price pullback proves to be shallow and indicator weakness is also minimal, current weakness might be viewed in retrospect as merely a hesitation within the context of the longer-term advance initiated just over three years ago.

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.

There is another possibility. Shortly after the rally began in October we suggested we could see prices rally to new highs, which they did, but that we were skeptical that there would be indicator corroboration. That is the scenario that has played out. Some might suggest that the indicators are simply wrong this time around. That would be a first. Undoubtedly the market will resolve this issue in the not too distant future. But in the meantime, we believe it’s important to keep in mind that none of our longer-term indicators have confirmed price strength in any of the key indexes to their recent highs. That, in addition to current weakness, is a cause for caution at least at worry at worst.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD declined to a new short-term low last Friday and was last plotted at a level equivalent to an S&P 500 price of 1295. Weekly MAAD also moved lower last week and was last at a level not seen since the end of January when the S&P was near 1300. What we find interesting about the coincidence of the two indicators using two sets of data is that while Daily MAAD perked to a marginally higher high above its 2011 highs in early February with a final high on March 20, Weekly MAAD did not. Yet both indicators have gotten back in synch via recent market weakness and were both at levels equivalent to an S&P 500 price of about 1300.

There is another similarity developing between Daily and Weekly MAAD that bears watching. Both have quickly moved back into “Oversold” territory. The Daily MAAD Ratio first dipped to deeply “Oversold” back on March 10 when the S&P was at 1358. Clearly that level was premature. Now it’s back toward the same levels. Weekly MAAD, however, has been moving steadily lower and was last plotted at .78. If the larger cycle follows the lead of the smaller, should we presume the Weekly MAAD Ratio is not really “Oversold,” or that the current reading is prematurely optimistic?

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Call/Put data based on Dollar Value remains noncommittal. Daily CPFL made a short to intermediate-term low on December 19 with a short-term peak on April 9. The Daily indicator was last stuck in a range between the two points while still holding well below its 2011 highs. Put another way, options players have only been a bit more bullish since December than bearish while failing to show any real market enthusiasm on the longer-term cycle.

This divergence will be tossed into the historical dustbin just as all others have been. We should note, however, that over the 30 years of this indicator’s history, other notable instance where CPFL failed to confirm new highs in the broad market include the 2000 and 2007 bull market highs.

Click charts to enlarge

Conclusion

More selling last week in the major indexes re-asserted short-term negativity while suggesting a reversal of the uptrend in effect since last October. We think the odds of a correction of the 32% advance in the S&P since the fall of last year is under way even though price and indicator ratios have rapidly corrected back toward “Oversold” levels and even though “Oversold” conditions can persist early in a reversal. In other words, while “Oversold” readings may develop, they can be deceptive and may not be giving an accurate reflection of market action except to the extent they remain negative.

*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.