Market locked between near-term highs, downside sell levels

Stock data, bull, bear

Market Snapshot:

All trends, no matter the cycle length, inevitably come to an end. The Major Cycle bull trend in effect since March 2009 will be terminated. The Intermediate Cycle rally initiated after the June 4 index lows will also end. What remains to be seen is whether those index highs hit September 14 (1454.71—S&P 500) will also prove to be intermediate-term highs.

Fact is, after two weeks of corrective action, our short-term indicators are mixed. Over the past four months since the June lows, we’ve seen similar configurations. Short-term Momentum moves back to, or just below, “Neutral” and our proprietary Trading Oscillators dip into “Oversold” territory. That’s where those indicators are currently. Coincidentally, the MAAD Daily Ratio has corrected rapidly from an “Overbought” (2.06) reading at the September 14 high down to “Oversold” (.63). In addition, each short-term advance since the June 4 S&P 500 low (1266.74) was preceded by an “Oversold” condition in the Daily MAAD Ratio.\

Market Overview – What We Know:

• Major indexes were net negative last week, as Minor Cycle trend continued to unravel recently “Overbought” conditions.
• Nonetheless, Intermediate Cycle remains positive until lower edge of 10-Week Price Channel (1374.62 through October 5), as does Major Cycle. Both larger cycles remain historically “Overbought,” however.
• NYSE trading volume declined nearly 19% last week and Average Price per Share lost 83 cents to $61.20.
• To suggest Minor Cycle positive, S&P 500 must rally above upper edge of 10-Day Price Channel (1462.89 through Monday).
• Weekly MAAD was negative again last week with 6 issues positive and 14 negative. Weekly MAAD Ratio at 1.31 was toward moderately “Overbought” levels. Daily MAAD rose above July 3 resistance high on September 14, but remains well below March 20 high. Daily MAAD Ratio was last into “Oversold” territory at .63.
• CPFL on both Daily and Weekly cycles pulled back last week, but CPFL Ratios in both remain toward “Overbought” levels (1.67 and 2.98, respectively).
• Cumulative Volume (CV) in both S&P 500 and S&P Emini remains weaker than index pricing on both Daily and Weekly trends.

But the short-term trend operates within the context of the next larger Intermediate Cycle that remains moderately “Overbought” to “Overbought” across the pricing and indicator spectrum. That suggests there could still be more room to go on the downside via short-term weakness, given currently mixed readings. It’s also true that so long as the Intermediate Cycle remains positive, a trend that is still underscored by favorable Major Cycle Momentum, we cannot rule out the chance weakness on the Minor Cycle is simply another pullback prior to further gains. Initial strength above the upper edge of the 10-Day Price Channel in the S&P 500 (1462.89 through October 1) with follow-on strength above the September 14 intraday high (1474.51) would re-assert the Intermediate Cycle uptrend.

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.