Volatility bailed out S&P, Dow, but stats remain questionable

Stock index, chart, technical analysis

Market Snapshot:

Volatility was the name of the game last week. After eroding to a weekly low last Thursday (1354.88—S&P 500), the S&P and the Dow Jones Industrial Average powered higher to record one of the best daily gains of the year while eclipsing all of the earlier weekly losses. Those two broke above near-term resistance at the July 3 intraday highs (1391.74—S&P) and to their best levels since May 3. But while the NASDAQ Composite and the Value Line index also gained on the week, neither broke above near-term resistance to underscore the fact recent market strength has been more “blue chip” than not.

The S&P 500 continues to face resistance at the May 1 high (1415.32) and then the April 2 peak (1422.38). While both levels could be eclipsed on further buying, strength that would re-assert the major uptrend initiated in March 2009, a failure would highlight the deficiencies a number of our indicators have continued to highlight.

Market Overview – What We Know:

• Market volatility last week was eventually resolved on upside with S&P, Dow 30, and NASDAQ Composite posting small gains. Value Line index was a small loser.
• Trading volume on NYSE gained fractionally on week while Average Price per Share was up 21 cents to $59.27.
• Short-term trend was back in positive territory at end of week and would need to sink below 1352.16—S&P 500 (through Monday) to suggest Minor Cycle negative. Uptrend line for advance since June 4 lows (1266.74—S&P 500) was last drawn near 1355.
• Intermediate Cycle that has been challenged on downside recently to extent Minor Cycle was equivocating was reinvigorated last week. To suggest an intermediate negative prices would need to sink below lower edge of 10-Week Price Channel at 1311.00—S&P 500 (through August 10).
• Momentum on both Minor and Intermediate Cycles was last toward “Neutral” while Major Cycle Momentum after months over hovering near “Neutral” was last back into moderately “Overbought” territory.
• Daily MAAD has refused to confirm any of rally in market since peaking back on July 3 and had last only recovered only about 17% of its losses since April highs even though S&P has come back about 80%.
• Daily CPFL has performed somewhat better over past month, but indicator continues to holding between April resistance high and low made Last December. Indicator is nowhere near overcoming major resistance made in May 2011.
• Cumulative Volume (CV) in S&P 500 and S&P 500 Emini futures contract remains weaker than prices on long-term.

hen there’s Cumulative Volume (CV) that has also put on a lackluster performance on the intermediate and long-term cycles. Peaking in the spring of 2010, CV in the S&P 500, like MAAD, refused to revisit the high it made in May 2011. While MAAD does less to reflect market volume than it does to mirror the direction of market activity, both MAAD and CV have been suggesting for the past two years that while S&P pricing and the broad market have been able to post gains, the underpinnings of those gains have become increasingly tentative. Chart action in S&P CV since the March 2009 lows is almost an inverted picture of S&P price action – CV has traced out a series of lower lows while pricing has been a series of higher highs. At least until recently, and that issue will soon be decided relative to the April peak in the S&P 500 at 1422.38.

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

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

There are other areas we have discussed including our Call/Put Dollar Volume (CPFL) indicator that has shown some improvement recently and Momentum on all cycles. But the fact is that the rally since the March 2009 lows has been one of the weakest bull trends, from a purely statistical point-of-view, that we have witnessed in years. While that observation may be little consolation to an investor who has been sitting on the sidelines for the past three-plus years, the fact is when this longer-term advance finally ends, the noise it makes could be more of a boom than a pop.

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.

Near-term the April 2 high in the S&P 500 (1422.38) will remain important, but we continue to think that the market’s underpinnings will remain front and center. Given the truth the market rarely satisfies all comers, we expect this uptrend will be no exception, because the longer a move continues, especially one with weak internals, the harder the ensuing fall will be. In the historical context, a case in point was the proliferation of an attitude in 2000 that a “new paradigm” was in place and that finally it was “different this time.” Ultimately, market tops are all pretty much the same and the ensuing results are similar in that somebody loses.

McCurtain Most Actives Advance/Decline Line (MAAD)

The marked divergence between MAAD on both the Daily and Weekly cycles and the broad market continues. While S&P 500 has retraced nearly 80% of its decline from April 2 high (1422.38) through June 4 low (1266.74), Daily MAAD has only come back about 17%. On the larger Weekly cycle, while MAAD has recovered just over 55%, the indicator has failed to confirm any of the strength to new prices highs in late March/early April in the wake of the move begun in March 2009. That is the first significant divergence for the indicator during the past three years and is notable for its failure.

Put another way, EVEN IF Weekly MAAD betters its peak made three months ago it would still have to overcome resistance at that high of May 2011 to suggest full confirmation of market strength in the event the broad market rallies to new highs from current levels. For more strength in Weekly MAAD to follow, it would have to rally in the face of a Weekly MAAD Ratio that is already moderately “Overbought” at 1.33.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL has been showing some signs of life over the past month, but while the indicator has rallied higher on the Daily cycle, the indicator has also failed to overcome first resistance put in place back on April 9. At the same time, the CPFL Daily Ratio has moved back into moderately “Overbought” territory at 1.72, while Weekly CPFL has become moderately overheated at 1.63.

In the background, neither cycle is anywhere near its major resistance high put in place the last week of February 2011. That action simply highlights the fact that while options players may have been a bit more interested in the market recently as measured by Call Dollar Volume, on the long-term cycle their actions do not reflect a decidedly bullish attitude as was the case in other market rallies.

Conclusion

Volatility in the major indexes last week ultimately resulted in higher prices in all except the Value Line index. But the gains were small. And while the Minor and Intermediate Cycles were taken off life support once again and for fifth time on the short term since the market put in place an Intermediate Cycle two months ago on June 4 (1266.74—S&P 500), the fact there have been so many near misses on the downside may be a sign this market is not particularly healthy.

Nothing but strength to new highs above April’s best bids (1422.38—S&P 500) would re-assert the Major Cycle uptrend begun in March 2009.

*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.