Will stock market bear accompany arrival of Fall Equinox?

Markets closed higher last week, but on noticeably lower volume

Market Overview – What We Think:

  • We cannot rule out possibility S&P 500 and will overcome resistance high (1422.38) put in place April 2. But we doubt October 2007 high (1576.09) will be surpassed.
  • Strength above 2007 high in face of long-term indicator divergences that have persisted since 2000 highs flies in face of historical norms.
  • Given remarkable failure of Daily MAAD since July 3, and despite market strength to new short-term highs since then, we continue to wonder if price strength since June 4 lows could prove to be end game prior to more serious decline. Lingering negative divergence by Daily MAAD is ongoing suggestion Smart Money has been doing more selling into strength over past several weeks than buying.
  • If market fails short of March/April highs (1422.38--S&P 500), turns negative on Minor Cycle, and then threatens reversal of Intermediate Cycle positive, long-term uptrend stretching back to March 2009 lows would almost immediately become an issue since that trendline is now approximately coincident with June lows (1266.74—S&P 500).
  • Ongoing failure of NASDAQ, Value Line index, and Russell 2000, to confirm recent gains in S&P 500 and Dow 30, is another indication breadth of market has been limited to bluer chips.
  • If recent rally is legitimate and has more room to go on upside, then where’s indicator corroboration? We simply cannot remember an instance where market powered higher on long term indefinitely without confirmation from key indicators.

In a nutshell, it is the broad market that remains a giant question mark as we approach a potentially lethal and historically unsettling time of the year. That potential flux is underscored by indicators that have continued to throw out warning signs for months.

At the top of that indicator list is our Most Actives Advance/Decline Line (MAAD) that has performed poorly on the Daily Cycle since peaking back on July 3. While the S&P 500 was last holding toward 1405, Daily MAAD was plotted on an equivalent basis toward 1325 to suggest the S&P is probably overextended on the upside. While short-term MAAD kept up with the broad market nicely from the October 2011 lows until the March/April highs of this year, the decline in the market after April hurt Daily MAAD badly and the indicator has yet to recover.

Daily S & P 500 with Cumulative Volume (CV)

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Weekly S & P 500 with Cumulative Volume (CV)

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On the longer term, movement in Weekly MAAD has also remained weak (see the August issue of Futures magazine, print and Online, provides a monthly chart of MAAD). What is noticeable about long-term MAAD data is that after peaking several months before the broad market topped out in early 2000, MAAD has yet to better its late 1999 high. It failed into the 2007 market highs relative to both the 2000 MAAD peak and also to the 2007 price highs. It also failed to move above its 2011 highs into April 2012, despite price strength. All of those negative divergences are evidence that while Smart Money participated in the market on the upside since 2000 when required to, it did so with increasing reluctance. Since 2000 MAAD has simply traced out a series of lower highs and lower lows, an indication of long-term distribution.

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