Market locked between near-term highs, downside sell levels

Market Overview – What We Think:

• With Minor Cycle stats now ranging from “Neutral” to “Oversold,” it remains to be seen whether or not market action over past two weeks will prove to be yet another corrective phase in Intermediate Cycle advance initiated after June lows, or something more negative on larger Intermediate Cycle.
• To resolve issue, S&P 500 must sell below rising uptrend line (last near 1410) with follow through weakness below lower edge of 10-Week Price Channel (1374.62). Weakness below latter point would almost certainly terminate four-month-old rally.
• In meantime, nothing but strength back above September 14 intraday high (1474.51) would re-assert Intermediate Cycle advance. Between here and there (uptrend/Price Channel and resistance) coin will continue to flip.
• Indicators such as Daily Most Actives Advance/Decline Line (MAAD) still suggest market has gotten way ahead of itself. Daily MAAD has come nowhere near overcoming March 20 resistance high even though indicator participated, albeit feebly, on upside after June lows.
• MAAD failure hints Smart Money has only been buying a bit more than it has been selling over past few months, even though index pricing has made new highs for move initiated in March 2009.
• Fact none of our key indicators is anywhere near making new cumulative highs is evidence character of market has changed since May 2011.
• In background it’s important to keep in mind fact market is entering time of year that has proven to be historically vulnerable -- think 1929, 1987, and 2007.

There is another larger question than can crop up? What is the market? Some believe that the large cap S&P 500 is the “real” market. Others contend that the Value Line index better represents the “true” stock market. We suspect they’re both right to the extent ALL indexes tend to rally in the same direction at the same time, whatever the cycle. It’s merely a matter of degree. The S&P 500, Dow Jones Industrial Average, and the NASDAQ Composite made Major Cycle lows the week ending March 6, 2009. The following week the Value Line index made its low. Ironically, of the four, it was the Value Line that rallied to a new all-time high (3171.84) on September 14.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

If the Value Line index represents the “real” market, does that new high tell us anything about the staying power of equities on the long term? Not really. In 2007 the S&P 500 and the Dow 30 peaked in October at new all-time highs. That was a few months after the Value Line made a high back in July 2007. The NASDAQ Composite peaked in October 2007 with the S&P and the Dow, but was nowhere near making a new all-time high, remained well below its peak in March 2000, and still remains well below that level.

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

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

Our point? Price levels, as such, bear little relationship to market “health” except insofar as those price points are reflected in coincident indicators and measurements such as “Relative Strength” that gauge how a particular issue or index has been performing relative to all other investments. Relative to the S&P, Dow, NASDAQ, and Value Line, the latter was the best performer, net, since the 2009 lows. But does that information necessarily tell us where the market will make a final long-term top? No. It does not. In fact, during the 2007/08 bar market the Value Line index lost more than 60% while the Dow Jones Industrial Average declined only 54%. In that context which was the worst investment? And which was the best investment subsequently?

What really counts is trend identification. Once that problem has been solved, then other methods such as Relative Strength, Cumulative Volume, Support and Resistance levels, and so on can be used to identify the strongest issues in a bull trend and the weakest (for short sales) in a bear market.

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.

That is our objective now. We know that the Major Cycle is positive with modest cracks in its façade. We know that the Intermediate Cycle is positive, but awaiting resolution of price action on the smaller Minor Cycle. And we know that that Minor Cycle confirmed a negative tone within the past two weeks and following the September 14 intraday highs (1454.71—S&P 500). What remains to be seen is if preliminary “Oversold” readings on the short-term trend are now as “Oversold” as they might become, a bias that could result in lower index pricing. Or if market weakness over the past two weeks will prove to be yet another corrective phase in the advance since the June 4 Intermediate Cycle lows. Our indicators continue to suggest this market is on borrowed time. Ultimately, it must be the market that calls the bet. It is a certainty it will do just that.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD reflected net negatives last week, but in so doing also dipped into “Oversold” territory. What remains to be seen is whether that near-term “Oversold” condition is as extreme as the Daily Ratio might become. There have been instances where further price weakness on the smaller cycle simply eroded the Daily MAAD Ratio so that it became even more “Oversold.” The status of index price action will be the determining factor.

At the same time, Weekly MAAD pulled back from a defined downtrend line begun at the end of April 2011. There are now three points of contact with that line, the most recent hit the week ending September 14. The failure not only underscores the validity of the trend line, but also the fact that Smart Money has failed to participate on the upside to the same extent as has index pricing since the spring of 2011. That negative long-term divergence, unless eliminated, will not work in favor of the market.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL pulled back on both the Daily and Weekly Cycles last week following strength above first resistance the week ending September 14. Improvement in CPFL over the past few months is an indication options buyers have been purchasing, on a Dollar Value basis, somewhat more calls than puts, relative to the February 2011 major resistance highs. Like MAAD, however, CPFL is nowhere near making new highs to confirm index price action since the spring of 2011.

Also, in conjunction with CPFL strength since the June lows, the Daily and Weekly CPFL Ratios have moved from deeply “Oversold” conditions back into “Overbought” territory to indicate the potential for market vulnerability.

Conclusion

Like the proverbial glass that’s either “half full” or “half empty,” it remains to be seen if short-term corrective action in the major indexes over the past two weeks will morph into something more negative, or if the pullback was merely an hesitation in a still positive Intermediate Cycle advance begun after the early June lows.

If our indicators are any measure of what the market ought to be doing from here on, there would be more selling on the Minor Cycle that would result in a confirmed reversal of the larger Intermediate Cycle to negative. Minor Cycle “Oversold” conditions would become even more “Oversold.” A near-term recovery would then be followed by more Intermediate Cycle selling to fully “correct” the advance that has been underway since June. Intermediate-term “Overbought” conditions would be eliminated and replaced by intermediate-term “Oversold” readings.

In sum, negative downside boundaries are defined by rising uptrend lines and the lower edges of 10-Week Price Channels. Nothing but new highs above the September 14 intraday highs would re-assert the bull trend.

*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.