S&P 500, teetering, fails at September resistance

It’s true the Intermediate Cycle in all of the major indexes remains positive. Intermediate Cycle Momentum has yet to turn negative just as intermediate-term uptrend lines remain intact. As a consequence, two possible conclusions about price action over the past month could be reached. First, the major indexes could be correcting near-term excesses developed into the mid-September highs and current “Oversold” to “Neutral” conditions are preliminary to another move to the upside. Ensuing strength could conceivably overcome those September resistance points.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

There is another possibility. Price action over the past month with two upside failures following the September highs is an indication of deteriorating buyer enthusiasm. Failure of Daily MAAD to better its March 20 highs is another indication of the unwillingness of Smart Money to get “on board.” In addition, last week’s deterioration in Daily MAAD back to a level equivalent to an S&P 500 price of 1390, while the S&P remains 40 points higher, is a sign of internal market deterioration. There is the added fact Daily MAAD has broken below its uptrend line stretching back to its June low and could make a new low below the June bottom without a great deal more net market weakness. That potential weakness does not leave us with a particularly sanguine feeling about this market. There is also the marked deterioration in the NASDAQ Composite index that has lost 6.1% since mid-September compared to an S&P loss of 3.3%.

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

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

Using weekly statistics, after it peaked the week ending April 29, 2011, Weekly MAAD has yet to revisit that key resistance level even though the S&P 500 rallied another 7.5% into the September 2012 highs. Weekly MAAD failed to better its 2011 highs in March 2012 and again in September a month ago. That movement is a longer-term suggestion Smart Money, while half-heartedly participating in this market during rallies, has done so with increasing reluctance. And history suggests such hesitancy does not bode well for the bullish cause on the longer-term cycles. For those inclined to point out to us that the Weekly MAAD Ratio is currently near “Neutral,” we must suggest in return that just prior to the last big decline in the 2007-2009 bear market in September 2008, the MAAD Weekly Ratio was plotted at .90 and merely eroded down to .54 as the S&P 500 lost nearly 50% of its value by March 2009.

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, for us to become more bullish on this market and to “believe” that higher index pricing over the past 18 months has genuine longer-term staying power, we would first need to see the S&P 500 rally back above its September high (1454.71) with indicator confirmation back above the highs made in 2011. Strength above major resistance would be required of CPFL, MAAD, Cumulative Volume (CV), and Major Cycle Momentum. As for the odds of new price highs, we can only say “Maybe” with a lukewarm hint. But as for our indicators making new highs, we must say, “Nope.” And without both price and our indicators getting in synch to confirm bullish price action, the odds of this bull trend going out for a second date are about as good as making romantic music on a keyless piano.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD declined below uptrend line stretching back to June low last week via sharp selling on Friday. Indicator was last at lowest levels since the end of August when the S&P 500 was quoted nearly 40 points lower near 1390. While it’s also true the Daily MAAD Ratio remains in “Oversold” territory, we suspect that reading may be more a reflection of the fact the market is in the early stages of shifting from a net positive tone on the Intermediate Cycle to net negative. In that environment, “Oversold” conditions can become deceptive and are not so much a measurement of opportunity as they are of market negativity.

What is most troubling about MAAD on the daily cycle, however, is the fact the indicator could sink below the June lows with relative ease. Not only did Daily MAAD fail to participate on the upside from early June until mid-September, but the failure to get anywhere near its March highs, as the broad market rallied until a month ago, is a suggestion the quality of the rally since June has been steadily deteriorating.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Options on a Dollar Value basis lost ground last week with the Weekly CPFL Ratio negative by nearly 5.4 to 1. It is not so much the overall performance of CPFL that has been relevant recently, but the LACK of performance since early 2011 when the indicator peaked February 25. There was some feeble upward movement following the October 2011 lows and then again after the June 2012 bottom, but CPFL remains nearly 50% below its 2011 highs, even though the broad market as measured by the S&P 500 rallied to new highs in early March 2012.

As a consequence, we continue to suspect market movement without confirmation from CPFL is yet another sign equities are living on borrowed time. And given the current proximity of CPFL plots to the October 2011 indicator lows, concerted selling in index pricing and new lows in CPFL would be a bearish long-term development.

Conclusion

We suspect an intermediate-term high may have been put in place via the mid-September highs (1474.51—S&P 500). Marked deterioration in the NASDAQ Composite, movement by the S&P 500 and the Dow Jones Industrial Average back to rising trend lines in effect since the June lows, failure by Daily MAAD on the upside since June with subsequent deterioration below a rising uptrend line in effect since June last week, and an overall sense of complacency in this market, make us wonder if we could be at the cusp of an Intermediate Cycle downdraft of some importance.

If our key indicators that have been signaling negative divergences for the past 18 months are any measure of market health, we can only wonder at the staying power of this market. Considering the fact the S&P 500 has only rallied 7.5% (compared with 106% from March 2009 until May 2011) from May 2011 (1370.58) until September 2012 (1474.51) and was last ahead just 4.5%, the risks would seem to far outweigh the potential rewards for those holding equities.

*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.