Stock market negative, but oversold on minor, intermediate cycles

Weekly analysis: Bloom comes off the stock market rose

Second, and despite all the negative variances we have highlighted in previous weeks between price and our key indicators, the power of the uptrend since the October lows must be honored. There is no denying the fact the S&P 500 rallied just over 32% since the cash index made an intraday low last October 4. That being said, however, power up does not necessarily mean that there will necessarily be proportionate power down to correct the excesses of the previous move. That is to say, the Intermediate Cycle excesses that have accrued since last fall must be eliminated before the market will exhibit some signs of statistical health preparatory to a new advance.

Market Overview – What We Think:

  • More weakness on short-term trend and developing negativity on larger Intermediate Cycle last week seem to have ended uptrend in effect since last October.
  • We say “seem to” because “Oversold” conditions have developed relatively quickly on Minor Cycle and are already modestly “Oversold” in our Most Active Weekly Ratio. Admittedly “Oversold” conditions can be deceiving in early stages of a decline, so price must be the arbiter with upper edges of trailing Price Channels acting as good “failsafe” points for upside reversals (see accompanying table).
  • Question is how far weakness will carry if pullback proves to be more than “normal,” given lingering indicator weakness, and what will be the implications for larger Major Cycle that has been hovering near “Neutral” for months? Preliminary best guess is that weakness on order of 40% to 60% of gain in S&P 500 since October (1283-1213) could develop.
  • But given “reluctance” of the majority of our key indicators to confirm market strength into recent highs, next presumption could be that selling could carry on downside further than many market practitioners expect. 
  • Three indicators, MAAD, CPFL, and CV that measure Smart Money bias, sentiment, and the power of buying continue to indicate market underpinnings remain problematic and that price action could adjust accordingly.

The big question now is “where will that Intermediate Cycle low develop, and when?”

Presuming that the S&P 500 remains a valid representation of the broad market and that a “normal” correction of the previous advance would call for a 40% to 60% pullback from the recent high at 1422.38—S&P 500, weakness toward 1283.33 to 1213.81 could be possible. Coincidentally, a long-term uptrend line stretching back to the March 2009 price low in the S&P 500 (666.79) comes into view over the next several weeks in the 1200 to 1225 area at the outside limit toward 60%. Simply put, the index could sink to the lower zone of the price projection while still keeping the bull trend initiated in March 2009 intact.

Daily S & P 500 Index with Cumulative Volume

daily, s&p, cumulative volume

Weekly S & P 500 Index with Cumulative Volume

weekly, s&p, cumulative volume

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