Short-term stock market trend positive, but still precarious

Stock index, chart, technical analysis

Market Snapshot:

A veteran trader once told us, “When the market gets locked between a definable high and low, draw two horizontal lines – one across the top boundary and once across the bottom point. When the market breaks above one or the other boundary, take a position. In the meantime, go fishing.”

Welcome to market price action since late March. On April 2 the S&P 500 rallied to a new short to intermediate high at 1422.38. It then corrected Intermediate Cycle excesses by pulling back nearly 45% and 155.64 S&P points, or just a touch over what is considered a “normal” correction, 40% to 60% of the previous gain. That would be since last October’s lows (1074.77—S&P 500). Since June 4 (1266.74), however, the S&P has been locked in a staccato-like advance consisting of four small moves up with three countertrend corrections. That movement has taken up the better part of the past six weeks and has retraced just under 62% of the decline from April 2 through June 4, or what is also a “normal” corrective phase. In other words, after the normal pullback of the October/April advance the market may be completing a smaller, normal reflex bounce.

Market Overview – What We Know:

• Major indexes with exception of Value Line index posted small gains last week.
• Trading volume on NYSE rose about 5%, but Average Price per Share only advanced 3 cents to $58.64,
• As measured by S&P 500, short-term trend is now positive, but “Overbought.” Next larger Intermediate trend is threatening on upside.
• Contradicting movement by our short-term Trading Oscillators toward “Overbought,” Daily MAAD Ratio remains “Oversold” and was last plotted at .79. Weekly MAAD Ratio was near “Neutral” at .96. Both MAAD time series continue to substantially underperform broad market. Daily MAAD remains near S&P equivalent price of about 1310 while Weekly MAAD is near S&P price of about 1290.
• Daily MAAD was negative Friday by 3 to 17 while weekly data was favorable by 11 to 9. Whichever cycle is used, Smart Money remains unenthused by recent rally.
• Daily CPFL was negative Friday by 1.11 to 1 while Weekly CPFL was higher by 1.46 to 1. Also, CPFL on both cycles remains weaker than index pricing and continues to remain well below highs of May 2011.
• CV in S&P 500 and S&P Emini have moved above July 3 resistance highs, but both remain well below late March/early April plot highs, let alone major resistance put in place May 2011..

Underscoring both actions is the fact that while the Minor Cycle has flipped back to positive, the larger Intermediate Cycle was last toying with the upper edges of 10-Week Price Channels in the S&P 500 and the Dow Jones Industrials. Pricing in the NASDAQ Composite and Value Line index remains weaker.

It is the status of ALL of these indicators, however, since the late March/early April highs that could ultimately prove to be the clincher since NONE rallied to new highs and above the May 2011 indicator highs with prices. In fact, the only major index that also failed to better its spring 2011 high was the Value Line index.

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

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

What the upside failure of MAAD, Cumulative Volume, Momentum, and CPFL has continued to suggest since last October’s lows is that while there has been market participation for the better part of the past year, the internal mechanics of the market have been poor. To use a military metaphor, the campaign since last October has not been waged by front line troops, but by untrained reserves. This kind of a variance cannot and will not, persist indefinitely. With S&P 500 pricing not far from a long-term uptrend line (1240) in effect since March 2009, and with those June lows (1266.74—S&P 500) only a stone’s throw from current levels, in the face of short-term “Overbought” conditions and with pricing still shy of the April highs (1422.38), we wonder if this market has the horses to pull pricing back above the April price peaks to re-assert he primary bull trend.

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.

With upside failures evident in virtually all of our key indicators, failures calculated on different streams of data, has the market has entered into one of those classic topping phases that is characterized by lower volume and diminishing participation? If we are wrong and the currently sluggish nature of the market is simply attributable to the torpid summer months, it may also be true that nothing but strength back above those March/April highs will suffice to re-assert the long-term uptrend. In keeping with our old trader’s view that nothing but a break above the “upper horizontal line” would suffice to cause him to re-enter the market on the long side, those investors with a more cautious disposition might do well to bode that experienced trader’s advice. In the meantime, get out the fishing creel….

McCurtain Most Actives Advance/Decline Line (MAAD)

The July 3 intraday high in the S&P 500 (1374.81) was also an important short-term event for Daily MAAD that also hit a near-term high. Since then, while the S&P perked to a slightly higher high at 1376.00, Daily MAAD has steadfastly refused to move to the upside and was last holding back toward an equivalent S&P price level toward 1310. Weekly MAAD that reflects the larger Intermediate Cycle is in even worse shape suggesting the S&P should be back near 1290.

Until market pricing breaks to the downside,, we cannot rule out the possibility that MAAD is merely lagging the market. For some time now it has been suggesting that market strength should be viewed with suspicion. But on an historical note, each time MAAD has persisted with such a divergence, the point has ultimately come when the prescience of MAAD proved to be accurate. That was the case into the major highs of 2000 and 2007, and the Intermediate high of May 2011.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL is truly on vacation. Some would elaborate on that theme and say, “Out to lunch.” Whichever point-of-view predominates, fact is the indicator which reflects options buying on a Dollar Value basis remains locked between a resistance high made in April and a support low made last December. Beyond those points, major resistance looms at the February 2011 indicator highs.

If it turns out, in retrospect, that market action over the past 18 months was an endgame into a Major Cycle high and that CPFL was merely reflecting the ambivalence of options players into that high, then they would be proven correct yet again. That was the case in 2000 and 2007 and also into the May 2011 highs, just as was the case with MAAD.

As far as CPFL being proven wrong on the long-term cycle, considering that we have data on this indicator back to the inception of index options trading in early 1983, we have yet to see that happen.

Click charts to enlarge

Conclusion

The short-term trend in the major indexes took on a more positive tone last week, but in the face of “Overbought” Minor Cycle stats and looming major resistance at the March/April highs (1422.38—S&P 500), we can only wonder if this market has the strength to continue higher. In fact, with the noticeable deterioration and lack of upside enthusiasm in our key Daily MAAD indicator, we marvel at the market’s ability to even continue higher to these levels.

The decision point will probably come this side of the highs made several weeks ago. A downside break below the uptrend line stretching back to the June lows (1266.74—S&P 500) that is currently plotted near 1340 would probably ring the death knell on this reflex rally that has not only flirted with short-term positive on three occasions, but has also kept the larger Intermediate Cycle teasing favorable readings. In the case of the latter cycle, we suspect those flirtations will soon be resolved in favor of selling back toward the June lows.