Stock majors close to resistance, but key indicators lacking

But despite strength, index prices moved higher on noticeably weaker volume. In fact, trading last week was running 40% to 50% below normal with a couple of sessions recording numbers well below a trailing, and falling, 10-day moving average. Clearly, participation has been diminishing as prices have moved back toward major resistance.

Market Overview – What We Think:

• It remains to be seen if S&P 500 will be able to overcome resistance high (1422.38) put in place April 2 to re-assert major advance begun in March 2009. 
• Noticeable and negative divergence by Daily MAAD in face of market strength since MAAD peaked July 3, is indication Smart Money has recently been exiting this market on strength. Unless negative disparity is erased, odds will continue to increase that short-term high, and possibly Intermediate peak, are imminent.
• 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 trendline is now approximately coincident with June lows (1266.74—S&P 500). In other words, if June lows are fractured on renewed selling, odds would be good major advance since March 2009 would be finished.
• If recent rally is legitimate and has more room to go on upside, we continue to wonder where’s indicator corroboration? We cannot remember instance where market powered higher on long term indefinitely without confirmation from key indicators.

There is also the problem with our Most Actives Advance/Decline Line (MAAD). After peaking back on July 3, the breadth indicator has confirmed none of the price advance since then to the extent MAAD rallied with prices to new short term highs. In fact, while the S&P 500 was last quoted toward 1420, Daily MAAD was suggesting the S&P ought to be closer to 1330. And even if Daily MAAD is able to better its July 3 high in the sessions just ahead, it would still remain 60% below its major resistance high put in place March 20 when the S&P was quoted near 1405. When coupled with the fact the Daily MAAD Ratio was last moving back toward moderately “Overbought” territory, there are indications the underpinnings of the rally underway since June 4 are weak and that Smart Money has been selling into strength.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

Highlighting the shorter-term presumptions of Daily MAAD, Weekly MAAD continues to look anemic on the long-term trend. We alluded to the performance of Weekly MAAD last week and will merely point out again that the indicator has exhibited a series of lower highs since making a significant high in May 1999. Negative divergences have been especially noticeable since March 2009 with the indicator failing three times to confirm new highs made by index pricing.

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

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

On the options front, our Call/Put Dollar Value Flow Line (CPFL) via both Daily and Weekly stats has been moving higher over the past several weeks. But neither cycle has been able to overcome plot resistance put in place in early April. At the same time, CPFL Ratios on both the Daily and Weekly Cycles have moved back into “Overbought” territory at 2.09 and 2.22, respectively.

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, all trends remained positive into the end of last week. But all trends are also “Overbought” and the dynamics that reflect the internal strength of this market continue to act at variance to price action. Can those negative divergences persist? Perhaps. It’s obvious that’s been the case for awhile. But when viewed from a bird’s eye view aside from market myopia, it seems obvious to us that this market continues to live on borrowed time.

McCurtain Most Actives Advance/Decline Line (MAAD)

Despite broad market strength to best levels since June lows last week, Daily MAAD continued to hold below July 3 resistance high. Such a negative divergence for this bellwether market indicator is a likely sign that the rally over the past few weeks could be in an end game. Also, given the fact the divergence is so large on the heels of other MAAD negative action since the May 2011 market highs, we can only wonder at the staying power of this market.

Considering the fact the S&P 500 was last just 3.4% above its peak of May 2, 2011 (1370.58) near the last major MAAD peak made the week of April 29, 2011, the levels of risk after more than 16 months have not dissipated as the broad market has struggled higher. In fact, those risk levels have only increased as a series of higher prices have led to a series of lower, non-confirmed indicator highs, as demonstrated by MAAD.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL gained on both the Daily and Weekly cycles last week, but neither time series has been able to break above resistance highs put in place in early April at levels synchronous with the major resistance highs the major indexes are struggling to overcome.

At the same time, Daily and Weekly CPFL Ratios have moved back toward “Overbought” territory (2.09 and 2.22, respectively) to suggest that in spite of general CPFL improvement, upside improvement in the indicator could become increasingly problematic. In addition, any improvement on the Minor and Intermediate Cycles does not even come close to addressing the fact neither series is anywhere near major resistance put in place back in February 2011.

Conclusion

The stock market rallied a bit more last week. And the S&P 500 Emini futures contract and the tech-weighted OEX 100 were even able to better resistance highs made in early spring. But the heavy-lifting indexes like the S&P 500 and the Dow Jones 30 have yet to break first resistance. Underscoring those failures is the fact that key indicators like Daily MAAD and short-term Momentum have liked none of the rally over the past couple of weeks, let alone since the June lows. When short-term “Overbought” stats are added into the equation, we would not be surprised to see this market begin to start rolling over sooner than later. Whether that fade occurs before or after new short to intermediate-term highs are made could prove to be academic.

*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.