Price action, negative indicators push market to edge

Stock index, chart, technical analysis

Market Snapshot:

The 30 point loss in the S&P 500 index last Thursday, with a coincident decline of more than 250 points in the Dow Jones Industrial Average, could prove to be the defining moment of the short-term advance that followed the June 4 Minor Cycle lows (1266.74—S&P 500). We say that not only because index pricing faded sharply after reaching our upside measured move target (1360—S&P 500) twice last week, as calculated from that same June 4 bottom, but because it also underscored apparent weakness on the larger Intermediate Cycle which may still take center stage in the weeks just ahead. In other words, there are once again bearish rumblings in the wings.

If the Minor Cycle trend turns negative as defined by a drop below the lower edge of the 10-Day Price Channel in the S&P 500 (1316.12 through Monday) as short-term Momentum and our Trading Oscillators dip into negative territory, we would look for a break below that near-term support point at the June 4 low (1266.74—S&P 500). But also, if that level is fractured, there are larger issues that could come into play. Not only would index pricing be back below 200-Day Moving Averages, but in the case of the S&P 500 a three-year-old uptrend line stretching back to the March 2009 lows could be at risk. If the S&P sinks below 1225 the next point of major support in the index would not come into focus until 1074.77 at the October 2011 lows. But even if support might be found at that major level, the damage to the uptrend stretching back to March 2009 would already be a fact.

Market Overview – What We Know:

• Major indexes closed mixed last week, but overall market tone was negative even though NASDAQ Composite and Value Line index eked out small gains.
• Short-term trend remains positive, but threatened on downside, while larger Intermediate Cycle remains negative.
• Weekly trading volume rose by nearly 5% and Average Price per Share declined 2 cents to $56.71.
• To suggest short-term negative, S&P 500 must decline below lower edge of 10-Day Price Channel (1316.12—through Monday).
• To suggest reversal of Intermediate Cycle negative to positive, S&P 500 pricing must rally above upper edge of 10-Week Price Channel (1379.34 through week of June 29).
• Minor Cycle, as measured by MAAD Daily Ratio remains in “Overbought” territory and was last plotted at 1.64 last Friday. Weekly MAAD Ratio was last plotted toward “Oversold” at .80 for week ending June 22.
• Daily MAAD was negative last Friday with 16 issues positive, 2 negative, and 2 unchanged. Weekly MAAD registered 11 issues higher and 9 lower.
• Daily CPFL was negative Friday by 1.73 to 1. Weekly CPFL was negative by 4.06 to 1.
• Cumulative Volume (CV) in S&P 500 and S&P Emini futures contract remains in synch with underlying S&P 500 pricing, but is somewhat weaker on cumulative basis.

If we are correct that the advance from October 2011 (1074.77—S&P 500) to the late March/early April highs (1422.38—S&P 500) will be followed by a “normal” 40% to 60% retracement, then we would look for an eventual bottom in the 1283-1213 area. But if more selling does develop, that earlier problem with that long-term trendline in the S&P 500 at 1225 surfaces. Put another way, if the June 4 lows are terminated, the S&P 500 MUST hold above 1225 to keep the uptrend since March 2009 intact. But then what’s to be done about 200-Day Moving Averages that were last plotted toward 1300 and which were fractured modestly via the June lows? Selling back below the June lows would once again put pricing well below those long-term averages.

There is also the lingering problem with Cumulative Volume in the S&P 500, the Dow 30, and the NASDAQ Composite (see accompanying CV charts of S&P 500 and S&P 500 Emini). Despite strength in all three to price levels above their May 2011 price highs, none created new highs in CV via price strength from the October 2011 lows. That negative variance suggests buying since last fall into the March/April highs was spurred not by strong bulls, but was fueled by weaker hands. The last time such a divergence of major proportions occurred was into the highs in the fall of 2007.

Daily S & P 500 Emini Futures contract with Cumulative Volume (CV)

Weekly S & P 500 Emini Futures contract with Cumulative Volume (CV)

CV disparities have also been underscored by the lack of enthusiasm by our Most Actives Advance/Decline Line (MAAD). MAAD on the weekly cycle also failed to better its 2011 plot highs into the recent intermediate peak to suggest the Smart Money crowd has remained skeptical of market price action since last October, let alone since the March 2009 lows. In that latter instance, while MAAD did participate on the upside after the spring 2009 bottom, the indicator only recovered about 50% of its 2008 bear market decline while S&P pricing came back about 75%. More troubling is the fact the Weekly MAAD was last holding about 50% of the way between its March 2009 low and its recent April high whereas S&P pricing on a relative basis has given back only marginal ground acquired since October 2011 and now holds toward the upper edge of the range built after March 2009. Which block of data is correct? MAAD? Or the S&P? History suggests MAAD will eventually win the battle because it measures “internal” market health.

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, we think a nail has been driven into the heart of the short-term advance begun after the June 4 lows. How much more life is left in that uptrend remains to be seen, but if the 10-Day Price Channel in the S&P is cracked on the downside (1316.12 through Monday), if a new intermediate low (below 1266.77—S&P) is created, and if volume picks up on weakness, we could seen not only serious selling below 200-Day lines, but possibly a serious challenge to the Major Cycle uptrend in the S&P 500 stretching back to March 2009.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD toyed with a downtrend line stretching back to its March 20 high last week, and was last plotted just above that line. In the face of “Overbought” conditions in the Daily MAAD Ratio, there is a lingering negative tone to Daily MAAD that will be played out in the sessions just ahead. There is also the fact that MAAD looks much weaker on the charts than does the bellwether S&P 500, an indication that while Smart Money participated in the larger Intermediate Cycle rally since last October and in each short-term advance in that move, including the rally since June 4, they have not been enthusiastic about index pricing to the same extent they were optimistic in other bullish periods.

There is also the prolonged negative tone of Weekly MAAD that significantly failed on the upside into the early S&P 500 price high. That negative variance is another indication the internal dynamics of this market are not all they should be.

Click chart to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL was net negative last week and was last plotted about midway between last December’s CPFL intermediate lows and a short-term high created April 9. The shallow range encompassing those two points occurred in the wake of a notable failure by CPFL to better its February 2011 highs, despite index price strength to new highs in late March and early April. Clearly, that disparity underscores the fact the options players, as measured by CPFL, remain in conflict as options trading is measured on a Dollar Value basis. In fact, for the better part of the past seven months, there have only been marginally more calls purchased than puts on a Dollar Value basis. Ultimately, that stalemate will end, but if history is any guide, the current negative divergence is not bullish.

Click chart to enlarge

Conclusion

Major index pricing closed mixed last week to the extent the S&P 500 and the Dow 30 were negative while the NASDAQ Composite and the Value Line index were positive. But when last Thursday’s sharp negative and increasing volume on the week are added to the mix, there is a developing negative tone in market action. Also, given the fact that the S&P 500 reversed to the downside on the Minor Cycle after hitting our upside measured move target (1360—S&P 500) two sessions in a row with coincident near-term “Overbought” conditions, there is a strong hint this market has become vulnerable again on the near-term cycle. That tone will likely be played out this coming week and will determine the staying power of the larger and still negative Intermediate Cycle.

*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.