Stock market searches for near-term low

One of the inconsistencies of the stock market is that “Oversold” is not always “Oversold.” In the early stages of a next larger and negative trend reversal, what appears to be “Oversold,” and a buying opportunity on the smaller cycle, may not be. We are currently witnessing one of those instances when an “Oversold” short-term price decline continues even though experience over the past several months suggests some rebounding should have developed before this point. Since early June each time the Minor Cycle dipped into “Oversold” territory, and there have been several instances of that, the market rallied to new Intermediate Cycle highs. At least until recently.

What’s different this time around is that the larger Intermediate Cycle appears to be taking over and is reversing the bias from a net positive to a net negative. As a consequence, short-term statistics that were operating within the positive framework of that larger cycle are now being overwhelmed by the forces of the bigger trend. And what is happening to apparent near-term “buying” opportunities is that the momentum of the Minor Cycle is simply reflecting the developing negative tone of the larger intermediate trend.

Market Overview – What We Know:

• Major indexes were hit with another round of selling last week with Dow Jones Industrial Average suffering largest loss at -1.77%. NASDAQ Composite was smallest loser at -.59% following sharp selling previous week.
• NYSE trading volume declined 6% on week and Average Price per Share lost $1.75 to $60.05.
• While Intermediate Cycle looks increasingly negative, S&P 500 has yet to decisively decline below lower edge of 10-Week Price Channel relative to October 26 levels. But a break below 1413.38 through November 2 would suggest, by default, an intermediate negative in bellwether index.
• Nothing but strength back above September 14 intraday high in S&P 500 (1474.51) would indicate a resumption of Intermediate Cycle advance begun last June.
• Daily MAAD declined to new short-term low last week and was not only positioned to threaten June indicator low, but was last plotted at level equivalent to S&P 500 price of 1365 even though index remains more than 45 points higher. Daily MAAD Ratio was “Oversold” at .77
• Weekly MAAD was negative last week with 6 issues positive and 14 negative. Weekly MAAD Ratio was toward “Oversold” at .80.
• Weekly CPFL was negative last week with CPFL Weekly Ratio unfavorable by 3.4 to 1. Indicator is nowhere near major resistance made week of February 25, 2011.
• Cumulative Volume (CV), especially in S&P Emini, continues to reflect broad lack of enthusiasm.

This is not to say that after several weeks of net selling that resulted in a 3.5% loss in the S&P 500 and a 7.3% decline in the NASDAQ Composite, there won’t be any rebounding action. That’s inevitable. What we are suggesting is that the overall tone of the market has changed from offering short-term buying opportunities on weakness to short-term selling opportunities on strength. In all likelihood when rebounding action does develop, it will be followed by movement in our short-term oscillators from “Oversold” levels to “Neutral” levels relatively quickly. In a new intermediate trend negative, “Neutral” can be the same as “Overbought” in a bull phase.

About the Author

Robert McCurtain is a technical analyst/market timer, private investor and financial markets consultant based in New York City. He can be reached at traderbob@nyc.rr.com.

If you would like to read more about how the CPFL is constructed, read a Futures article on the concept. This link will take you to the MAAD article. A two-part series about system development with the MAAD also is available.