Stock market near highs without key indicator confirmation

Weekly Review: Predominant risk may be on downside

Market Overview – What We Think:

  • Tuesday’s price reversal may have signaled an end to rally in effect since June 4 lows. While Key Reversal Day was signaled in only Dow Jones Industrial Average, all major indexes were negative on week.
  • Ongoing negative divergence by Daily MAAD in face of market strength since MAAD peaked July 3 reflects fact Smart Money has been exiting, if not simply avoiding, market. With disparities in place, odds will continue to suggest short to intermediate-term highs could be imminent, if they have not already been reached via last week’s highs.
  • If market 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 those 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 could be finished.
  • If recent rally is legitimate and has more room to go on upside, we continue to wonder about indicator corroboration? We cannot remember instance where market powered higher on long term indefinitely without confirmation from key indicators. Tuesday’s reversal may have finally resolved that problem.

A few weeks ago we summarized the status of one of our key indicators, the Most Actives Advance/Decline Line (MAAD). In fact, in the August and September issues of Futures, we provide an in depth analysis of MAAD on the Monthly Cycle stretching back to 1961 with a trading algorithm comparing MAAD to the more traditional, and in our opinion highly flawed NYSE A-D Line.

Following a super cycle bull trend in the stock market that began in the late 1970s, equity prices made a significant top in 2000 that has yet to be surpassed statistically over a wide range of indicators, and specifically MAAD. Although the indicator moved with equity prices off of the 2002 and 2009 lows, it has never regained the tactical luster it experienced prior to 2000. A series of lower highs and lower lows have predominated, action that suggests that the Smart Money crowd, that group which MAAD reflects, has not been buying equities to the same extent they bought prior to that 2000 high.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

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