Stock market gains, but strength still looks like reflex rally

Larger intermediate cycle remains negative

Market Overview – What We Think:

  • While short-term trend following June 4 lows (1266.74—S&P 500) has resulted in just under a 50% recovery of losses sustained following April 2 S&P 500 high (1422.38), rapid change in market stats from “Oversold” to “Overbought” on Minor Cycle suggests this rally could prove to have limited staying power.
  • We could see short-term peak anywhere this side of upper edge of 10-Week Price Channel (1392.33 through June 22), a high that could be followed by a resumption of selling on Intermediate Cycle.
  • While some measurements of intermediate trend are currently registering “Oversold,” it’s important to remember that Overbought/Oversold measurements are a rough indication of market “temperature” and can persist in one direction or another for extended periods of time. In fact, current Intermediate Cycle “Oversold” measurement may simply be indication of market’s larger cycle negative bias.
  • Nonetheless, any near-term price improvement should be viewed with skepticism. We do not think March/April highs (1422.38—S&P 500) will be exceeded via rebounding. Short-term strength should merely serve to eliminate recent deep statistical negatives.
  • In event larger Intermediate Cycle resumes downward course, there could be weakness in S&P 500 toward 1283-1213 if “normal” 40% to 60% pullback develops as calculated from April S&P 500 high at 1422.38.

On the indicator front, MAAD has rallied with market pricing, but on a bearish note has not rallied as much as has the S&P 500 since June 4. While the bellwether price index has recovered just under 50%, MAAD has only come back about 25%. That variance suggests that while the Smart Money crowd has bought marginally and may have additionally covered some shorts, it has not been as enthusiastic as has index pricing. In fact, if the market experiences another downdraft like the one recently ended, Weekly MAAD could break below its March 2009 plot lows even though the S&P 500 remains well above similar levels. That relationship of MAAD to its 2009 low is especially worrisome, because another round of selling like the one the market experienced after the April high would almost certainly force MAAD back below the March 2009 low.

Daily S & P 500 with Cumulative Volume (CV)

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Weekly S & P 500 with Cumulative Volume (CV)

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