Stock market has spring highs in sight with recent gains

Stock index, chart, technical analysis

Market Snapshot:

In last week’s Market Summary we alluded to advice we once received from a trader in which he suggested that when the market becomes range bound, the astute investor should draw a line across the topmost price and then a line across the bottom bids. When there’s a break above or below one of the two lines, action is taken. True to the trading range theme, the stock market made a lot of noise last week complete with a downside feint on the Minor Cycle and then strength into the end of the week that pushed the S&P 500 above its July 19 first resistance at 1374.81. The Dow Jones Industrials behaved similarly, but performance in the NASDAQ Composite and the Value Line index was more tepid.

Simply put, after a week’s hue and cry and smoke and flame, the stock market as measured by the major indexes remains locked between highs (1422.38—S&P 500) put in place made in late March and early April and the early June lows (1266.74—S&P 500). While it’s true last week’s net strength left the S&P a mere 23% from equaling that April high, it’s also true the bellwether index must also travel that 23% plus a but to make a new high. That’s the issue now.

Will it?

Market Overview – What We Know:

• Major indexes gained last week as trading volume on NYSE rose more than 9% and Average Price per Share gained $1.04 to $59.19.
• Despite strength, however, major resistance remains at late March/early April price highs (1422.38—S&P 500).
• Short-term trend has flipped back to positive after downside feint during first part of trading week, while next larger Intermediate Cycle has moved back to positive after also threatening on downside.
• To suggest reversal of more positive tone on Minor Cycle, S&P would have to sink below lower edge of 10-Day Price Channel (1349.98—S&P 500 through Monday). Larger Intermediate Cycle remains positive until lower edge of 10-Week Price Channel (1304.95—S&P 500).
• Short-term Momentum was last moving toward moderately “Overbought” levels along with our proprietary Trading Oscillators and Daily MAAD and CPFL Ratios.
• Weekly MAAD was positive last week by 15 to 5 while Weekly CPFL was decidedly favorable by 8.5 to 1.
• While Daily and Weekly MAAD remains unimpressed by market price action as measured by their negatively divergent tones, CPFL also faces a problem with major resistance at the April 9 indicator high.

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.