Market continues higher with persistent indicator divergences

Stock index, chart, analysis, bull shadow

Market Snapshot for session ending 08-02-12

Market Overview – What We Know:

• Follow-on gains Tuesday propelled indexes toward major resistance (1422.38—S&P 500) put in place in Late March/early April.
• Short-term trend remains positive and would need to sink below lower edge of 10-Day Price Channel (1360.53 through Wednesday) to suggest reversal of Minor Cycle to negative.
• Intermediate Cycle was last positive and would need to sink below lower edge of 10-Week Price Channel (1311.00--S&P 500 through August 10) to create Intermediate Cycle negative.
• Momentum on both Minor and Intermediate Cycles was last toward “Neutral.” Major Cycle Momentum after months of hovering near “Neutral” was last back into moderately “Overbought” territory. Our Minor and Intermediate-term Trading Oscillators remain “Overbought.”
• Daily MAAD has refused to confirm any of rally in market since peaking back on July 3. Indicator was nonetheless positive by 16 to 4 Tuesday with MAAD Daily Ratio moderately “Overbought” at 1.37.
• Daily CPFL was positive by 2.08 to 1 Tuesday with Daily CPFL Ratio moving toward “Overbought” territory at 1.87.

Market Overview – What We Think:

• More strength in major indexes Tuesday and movement by “bluer” chips toward major resistance may be setting market up for serious test of long-term uptrend initiated after March 2009 lows. Strength above 1422.28 in S&P 500 could re-assert that uptrend even though NASDAQ and Value Line indexes continue to lag.
• Price strength in face of indicators that have continued to lag price action only underscores potential negative setup on longer term.
• But higher prices do not a decline make. If rally is legitimate, however, and if the market rally is for real, then where’s indicator corroboration? We simply cannot remember an instance where market powered higher indefinitely without confirmation from key indicators
• Lingering negative divergence of Daily MAAD, that has verified none of market strength since peaking July 3, is ongoing suggestion Smart Money has been doing more selling into strength over past several weeks than buying.

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.