Stock market has spring highs in sight with recent gains

First, last week’s strength put the S&P right back at a trend line stretching back to its April high with a midway connecting point made May 1 (1415.32). Strength above that trendline would be bullish, but that action alone would not be good enough to suggest a resumption of the bull market initiated after the March 2009 lows, because that April 2 high at 1422.38—S&P 500 would remain.

Second, While the NASDAQ and Value Line index also gained last weak, their noticeable failure to also break above first resistance is a suggestion net market strength was more “blue” than secondary. In other words, the advance wasn’t as deep as action in the S&P and the Dow would suggest.

Market Overview – What We Think:

• We were admittedly surprised by the power of last Friday’s rally in S&P 500 and Dow 30, but not by failure of NASDAQ and Value Line indexes to follow suit. Market continues to look more “blue” than secondary.
• And while some of market undercurrents like improvement of CPFL data and strength in face of near-term “Oversold” conditions might be good enough to extend short-term gains within context of erratic rally since June lows, will tentative positive be good enough to cause prices to better late March/early April highs (1422.38—S&P 500) and major resistance? We will no doubt learn answer to that question soon.
• If prices do fail to follow through on upside, that failure would take on long-term implications since it would suggest market, as also reflected in lingering negativity by MAAD on both Daily and Weekly cycles, had lost upside steam. All that would be required then would be new short-term negative and downside break to turn Intermediate negative (below 1304.85—S&P 500).
• Hanging in balance is resumption of bull trend begun in March 2009.

Third, short-term Momentum and our trading oscillators, already positioned near “Neutral” prior to last week’s net gains, won’t need much more pushing before they are in “Overbought” territory. At the same time, the MAAD and CPFL Daily Ratios have already moved back to 1.12 and 1.77, respectively, after having rested in “Oversold” territory for a time. Similarly, MAAD and CPFL Weekly Ratios were moderately “Overbought” at 1.25 and 1.50.

Fourth, MAAD Daily and Weekly statistics continue to underscore the fact that Smart Money remains unimpressed with this market. While the S&P has recouped all but 23% of its losses, as measured from the April 2 high through the June 4 low, Daily MAAD remains nearly 75% below its April high. With Daily MAAD still hinting the S&P 500 ought to be closer to 1325 than 1385, we wonder just how much more buying can be engendered before the erratic rally began the first week of June will be over.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

But there are also some bullish signs that need reporting.

First, Cumulative Volume has begun to pick up a bit in both the S&P 500 and S&P Emini to the extent activity has kept abreast of pricing and a bit more. While there are still longer-term divergences to the extent CV has given more on the downside when selling set in than when there were rallies, it has nonetheless keep pace with S&P pricing since at least the June lows.

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

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

Second, after weeks if not months of reflecting abject boredom, CPFL has begun to show some signs of life. Since July 1, of the 19 trading sessions, 12 were net positive as reflected by Call Dollar Volume compared to Put Dollar Volume. More importantly, on the net positive days, Call Dollar Volume was ahead by 4.5 to 1. On the other hand, on those days that were net negative, Put Dollar Volume was ahead by only 1.73 to 1. In other words, on a net basis, Call Dollar Volume was positive by more than 2.6 to 1 for nearly all of July. That action suggests options buyers have become somewhat more enthusiastic about the market.

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, strength last week developed in the face of near-term “Oversold” conditions that apparently provided enough opportunity for buyers. The net positive tone of both the Minor and Intermediate Cycles gave that buying impetus. And market internals like options data provided some upside impetus. What remains to be seen, however, is how much follow through can develop off of that momentum and, more significantly, if it will be enough to overcome the upper edge of that lateral line our trader friend would have drawn across the tops of the March/April highs.

McCurtain Most Actives Advance/Decline Line (MAAD)

Simply put, while S&P 500 has recouped all but 23% of its decline since April 2 high (1422.38), Daily MAAD has only recovered just over 25% of same decline. Put another way, while S&P was last trading near 1385, MAAD suggests index should be trading closer to 1325.

Clearly that divergence will not last and, given the overt negativity displayed by MAAD relative to the S&P, we wonder if the rally at the end of last week could turn out to be more fluff than stone. That major resistance in the S&P will decide the point. But even beyond that immediate issue, there is the longer-term negative divergence in Weekly MAAD that has steadfastly refused to better the May 2011 indicator highs, but also the recent peak made March 30. Those lingering failures in the face of developing “Overbought” conditions on both the Daily and Weekly cycles will bear close watching as pricing relates to those recent highs.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

While party favors aren’t yet warranted for recent action in CPFL over the past few weeks, just the same it’s true there have been some new sparks of life in the indicator to the extent that 12 of the last 19 trading sessions have favored Call Dollar Volume. More than of those sessions when CPFL took the day, it was positive by 4.5 to 1. On the other hand, when Put Dollar Volume had a winning session, it was only ahead by 1.73 to 1.

Clearly, options players have been buying, net, on a Call Dollar Value basis of late.

But in the face of major CPFL resistance as defined by the April 9 high, CPFL is either staging a mere rally within the context of a still negative longer-term trend, or it is beginning a surge that could have larger implications in pricing, One worry is the fact that both Daily and Weekly CPFL Ratios have begun to work noticeably higher with both reaching toward “Overbought” levels with only marginally more improvement.

Conclusion

The lines are drawn and it remains to be seen if the broad market will break above the upper boundary of the three-month-old trading range (1422.38—S&P 500), or below it as defined by the June lows (1266/74—S&P 500). A break above the upper edge would re-assert the long-term advance begun in March 2009 while a downward break could begin a serious correction of that same move since a downside move would also cause S&P 500 prices to penetrate an uptrend line in effect since those March 2009 lows.

We continue to see long-term negative divergences as they relate to price action, especially in MAAD, CPFL, Cumulative Volume, and Major Cycle Momentum, but as is always the case, price remains the final arbiter.

*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.