Stock market, like summer, is heating up on all cycles

The intermediate negative is also important to the short-term trend from a price perspective since it is at the upper edge of the 10-Week Price Channels in all of the major indexes at which resistance developed last week. Subsequent selling resulted in last Friday’s sell off. In other words, while an upside target to 1405 in the S&P 500 was visible via a measured move, it could be that larger Intermediate Cycle selling and resistance will bring that smaller cycle advance to an abrupt end.

Market Overview – What We Think:

• With prices, as measured by S&P 500, continuing to hover within range of upper edge of 10-Week Price Channel and first decision point for positive reversal of Intermediate Cycle, status of intermediate trend remains in doubt. 
• Selling last Friday may have tipped balance in favor of negative resolution of not only Minor Cycle, but also of larger and still negative intermediate trend.
• With upside confirmation from intermediate Momentum, our Trading Oscillators, and Weekly MAAD Ratio needed for intermediate reversal to positive, we cannot preclude possibility short-term gains since June 4 low could prove to be no more than reflex rally within context still negative Intermediate Cycle.
• Last Friday’s downside break below rising trend line in MAAD could be further evidence strength since June 4 lows will prove to be nothing but failed reflex rally in Intermediate Cycle negative.
• While MAAD Daily Ratio continues to hover near “Neutral,” short-term “Overbought” conditions continue to persist in our short-term Trading Oscillators. Variance between MAAD and oscillators will soon be resolved.
• Status of Intermediate Cycle will ultimately determine outcome of larger and more important Major Cycle trend that has been underway since March 2009, but which has had weaker statistical underpinnings than long-term rallies over the past decade and since March 2000 price highs.

But there are other issues…

First, the failure of Weekly MAAD to better its 2011 plot highs into the intermediate-term rally that peaked in late March/early April (see Weekly MAAD chart) is a bigger failure than the negative divergence that developed into the 2007 market highs. Currently, while S&P pricing has retained just over 90% of its gain since March 2009, Weekly MAAD was last sitting at the 55% recovery point. That disparity means that while Smart Money bought off of the March 2009 lows, their enthusiasm has been tempered on the upside while accelerating on the downside.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Second, there is another issue with long-term MAAD. On the Major Cycle, MAAD made its all-time high in May 1999 when the S&P 500 was quoted at 1330. While the S&P rallied another 16% into the March 2000 high at 1552.87 before a 50% drop into October 2002 (772.82), since then MAAD has come nowhere near recovering to that 1999 high. In fact, while the S&P was last holding about 75% into its advance from the March 2009 low as compared to the April 2012 high, MAAD was sitting at the 15% level. Put another way, if MAAD sinks more than 15% it will make a new Major Cycle low.

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

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

What is relevant and remarkable about the condition of MAAD on the longer term is that the current status of the indicator is the reverse of the accumulation phase that preceded the bear market lows in the mid-1970s. That period was preceded by nearly a decade of accumulation, as measured by MAAD, that was followed by the greatest bull market in history. The present relationship of MAAD to index pricing is the opposite of what it was four decades 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.

We’ve also talked of late about the ongoing deterioration of our Call/Put Dollar Value Flow Line (CPFL), the poor performance of Cumulative Volume (CV), both using entirely different sets of data, and the proximity of Major Cycle Momentum to negative territory. The point is, the rally from March 2009 until the recent highs has had even weaker statistical underpinnings than the bull move from October 2002 until October 2007. How the current short-term move plays out within the context of the current, and still negative intermediate move, will ultimately play out on the Major Cycle, and will determine the accuracy of our key indicators in the weeks and months just ahead.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD had a schizophrenic week last week. After rallying to a new short-term high last Tuesday, MAAD gave back most of the gains last Thursday and Friday while also sinking below a defined uptrend line stretching back to the June 4 indicator low. The MAAD Daily Ratio continues to hover near “Neutral” at variance with our short-term Trading Oscillators, but a neutral reading in the current near-term context is simply noncommittal.

Of more importance is activity with Weekly MAAD which, as we suggest in our Market Summary, has continued to underperform index price action for months, if not over the past decade-plus and since the March 2000 highs. While the indicator has mirrored market strength to the extent it has moved up when the market rallied and declined when the market was weak, on an overall basis Weekly MAAD has demonstrated a series of lower highs and lower lows, especially since the 2007 market highs, to indicate diminishing enthusiasm for the market by Smart Money.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL continues in its summer vacation mode. The indicator remains locked between last December’s lows and the indicator’s April highs. It confirmed virtually none of the advance since last October and remains well below its February 2011 highs.

The failure of CPFL to advance, despite price strength in the major indexes, is yet another concern we have for the longer term viability of this market. With options players so clearly reluctant, on an adjusted Dollar Value basis for Calls and for Puts, to commit to the long side of this market, there is a markedly negative undertone in evidence. There is historical precedent via negative CPFL readings on the longer term and the outcome favored the indicator.

Click charts to enlarge

Conclusion

Although last week’s trading was abnormal to the extent it occurred during a holiday week and was off by nearly 40%, we wonder if price action could prove to be a watershed event nonetheless. No doubt inconsistencies will be rectified in the coming week as trading returns toward normal. But the fact that pricing in all of the major indexes we follow failed at the upper edges of 10-Week Price Channels, a suggestion the short-term rally begun after the June 4 lows could be in an endgame. Friday’s selling amplified that notion as did Friday’s weakness in MAAD that sank below an uptrend line stretching back to early June.

It is a certainty, however, that the evolution of the short-term trend will determine the outcome of the Intermediate Cycle that will determine the staying power of the Major Cycle trend. Considering the status of most of our longer-term indicators, a near-term stumble could easily develop into a long-term fall.

*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.