Stock market gains, but strength still looks like reflex rally

Larger intermediate cycle remains negative

Market, chart, analysis Market, chart, analysis

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1342.84

+17.18

+1.30%

Dow Jones Industrials

12767.17

+212.97

+1.70%

NASDAQ Composite

2872.80

+14.38

+.50%

Value Line Arithmetic Index

2813.58

+2.21

+.08%

Minor Cycle (Short-term trend lasting days to a few weeks) Positive

Intermediate Cycle (Medium trend lasting weeks to several months) Negative

Major Cycle (Long-term trend lasting several months to years) Neutral / Negative

Now things get interesting….

Following the April 2 short and Intermediate-term high in the S&P 500, prices in the bellwether declined 155.64 points into the June 4 intraday low at 1266.74. Since then the S&P has recouped nearly 49% of that two month decline. Coincident with the recent rally, deeply “Oversold” conditions have been replaced by newly created “Overbought” readings, as measured by our Most Actives Advance/Decline Ratio (last at 1.84) and our price-based short-term Trading Oscillators.

In the background in the wake of recent strength, the larger Intermediate Cycle remains negative and could still exert influence over the short-term trend once the near-term rally has exhausted itself. Since history suggests that once the Minor Cycle begins to register “Overbought” conditions, a short-term high may not be far off. We suspect current readings may be telltale signs the near-term rally that began after the June 4 lows could quickly move to a high, a reversal, and then a resumption of the larger Intermediate Cycle down trend.

Market Overview – What We Know:

  • Major indexes rallied last week on increasing trading volume. Activity on NYSE rose nearly 14% and Average Price per share gained 61 cents to $56.73.
  • Short-term trend was last positive while next larger Intermediate Cycle remains negative.
  • To suggest new short-term negative, S&P 500 would have to drop below lower edge of 10-Day Price Channel at 1295.87 (through Monday).
  • To suggest a positive reversal of Intermediate Cycle S&P 500 would need to rally above upper edge of 10-Week Price Channel at 1392.33 (through June 22).
  • Minor Cycle as measured by MAAD Daily Ratio and our short-term Trading Oscillators has returned to “Overbought” territory, so reversing “Oversold” characteristics that prevailed in market prior to June 4 low and short-term advance.
  • Intermediate Cycle stats were last holding toward “Oversold.”
  • On week, MAAD registered 17 issues higher and 3 lower. Weekly MAAD Ratio was last plotted at .66.
  • Weekly CPFL was positive last week at 2.83 to 1.
  • Cumulative Volume (CV) in both S&P 500 and S&P Emini futures contract has continued to reflect price improvement in bellwether S&P 500, but neither has performed as well on upside over past two weeks as has S&P.

Why do we remain bearish?

There are several reasons, but one of the most important is related to volume. For most of the move since the June 4 low, strength was accompanied by diminishing activity while selling witnessed an increase in participation. That relationship began to change somewhat late last week when gains produced an increase in up volume. But considering the fact this short-term rebound could begin to look mature with only a bit more strength, the increase in activity could also have to do with sellers stepping into the market as prices have reached toward the 50% recovery point. In fact, a near-term upside measured move calculates to 1360 if the S&P recovers 60% of its recent losses, the outside level of a “normal” 40% to 60% rebound. That point is within range of the upper edge of our 10-Week Price Channel at 1392.33 (good through June 22).

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