Stock market short-term trend oversold, shaky intermediate cycle

Stock index, chart, technical analysis

There comes a time when all cycles, including intraday, daily, weekly, and monthly, come to an end. If the previous Intermediate Cycle, for example, was positive, the trading strategy needs to reflect a more negative outlook relative to the direction of the dominant cycle. Same goes for the major trend. If all intermediate lows were previously followed by buying to new highs on the long-term, the time will come when the reverse will be true and Intermediate Cycle highs will be an opportunity for aggressive selling. We think we have entered one of those periods when buying and selling strategies will need to be modified.

While it may be a bit too early to suggest the major uptrend initiated in March 2009 is over, the odds are increasing that the intermediate advance that began after the June 4 lows (1266.74—S&P 500) is over and that the September 14 short-term high (1474.51—S&P 500) could prove to be the best level the market will see for some time.

Market Overview – What We Know:

• In truncated trading week, S&P 500, Dow Jones Industrial Average, and NASDAQ Composite were little changed after three trading sessions. Value Line index was up 1% and 30.13 points on week.
• Because of shortened week, NYSE trading volume declined 28%, but Average Price per Share rose 60 cents to $60.65.
• S&P continued to tease lower edge of 10-Week Price Channel enough to suggest trend since June is likely over. To indicate more positive Intermediate Cycle outlook, S&P would now have to rise above upper edge of 10-Week Price Channel (1451.21). But nothing but strength back above September 14 intraday high in S&P 500 (1474.51) would indicate resumption of Major Cycle uptrend.
• Daily MAAD declined back toward recent short-term low last week and was last plotted at level equivalent to S&P 500 price of 1350 even though index remains more than 65 points higher. Daily MAAD Ratio was “Oversold” at .66.
• Weekly MAAD was positive last week with 15 issues higher and 5 lower. Weekly MAAD Ratio was near “Neutral” at .97.
• Weekly CPFL was negative last week by 1.24 to 1 with CPFL Weekly Ratio near “Neutral” at .99
• Cumulative Volume (CV), especially in S&P Emini, continues to reflect broad lack of enthusiasm.

Although the 4 ½-month-old rally in the S&P carried prices through the summer and resulted in a 16% gain, we suspect market bias will require that a tuned trading strategy soon changes from buying on strength during each short-term pullback, to selling on strength. In fact, following the creation of the September 14 high in the S&P, prices in the bellwether failed on two subsequent attempts (October 5 and 18) to better than level. Last Friday’s failure to hold the day’s gains could prove to be the third attempt, but in the face of near-term “Oversold” conditions, we would need to see the S&P sink below its October 26 intraday low (1403.28) to confirm that suspicion and to also solidify what could be a new Intermediate Cycle negative.

Unfortunately, MAAD did not confirm strength in the S&P when it broke above 1370.58 in early March 2012. That MAAD failure and then the second non-confirmation in September 2012 underscored the fact Smart Money, which had participated during the first and second legs up from the March 2009 lows had not participated to the same extent in the third and fourth legs of the long-term uptrend. Those variances when plugged into an historical perspective suggest strength in the market since May 2011 has been fueled by weaker and weaker hands. Such weakness does not usually accrue to the benefit of the bulls.

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

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

Our Call/Put Dollar Value Flow Line (CPFL) has also demonstrated negative divergences similar to those exhibited by MAAD. After peaking in early 2011 (week of February 25), CPFL has underscored none of the strength in the S&P 500. Although these indicators are directional in that they move with the market, it is their confirmation of price action, or lack of it, that is the issue. CPFL, like MAAD, has been looking askance at this market for the past 18 months. Similarly, Cumulative Volume (CV) and Momentum on the Intermediate and Major Cycles have also underperformed index pricing.

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, near-term “Oversold” readings could provide an opportunity for some rebounding in the sessions just ahead. In fact, depending on how the presidential election turns out Tuesday, results cold be interpreted by both parties as being bullish and the market could concur – on at least the near term trend. We suspect, however, that the September 14 intraday high (1454.71—S&P 500) could prove to the top of the Intermediate Cycle uptrend that began last June and will not be exceeded if any rebounding develops. If we are correct that the intermediate trend could be shifting toward negativity with trading strategy demanding sales on strength rather than the reverse, how that intermediate trend plays out could then determine the staying power of the still positive Major Cycle.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD faded back toward recent lows on daily reversal last Friday to suggest it wouldn’t take much more selling to create new short-term low in indicator. Weakness could also position Daily MAAD to seriously challenge June 4 plot lows when S&P 500 put in place an Intermediate Cycle low at 1266.74.

Overhanging short-term definition, however, is fact Daily MAAD peaked back on March 20, declined into June 4 low, and then failed to break back above that March 20 plot high even though S&P rallied to new high for move on August 21 with subsequent follow-through on September 6. Into the September 14 intraday S&P high (1474.51), Daily MAAD also peaked, but noticeably below its March high with subsequent downside follow-through since then which could jeopardize uptrend in effect since June lows.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

While Daily CPFL remains “Oversold” with Weekly CPFL near “Neutral,” there is nothing in the indicator on a cumulative basis to suggest a dramatic reversal to the upside. Given the fact the indicator has shown little inclination to move upward with prices over the past 18 months and since CPFL peaked in February 2011, we suspect the lack of upside confirmation could be more indicative of a negative market to follow. Underscoring that notion, nothing but strength above the February 2011 CPFL highs by the indicator would convince us that index price strength since then is anything more than a delayed ending in a bull trend long overdue for a healthy correction.

Conclusion

Given near-term “Oversold” conditions that have persisted for more than a month, logic suggests a Minor Cycle bounce could develop at any time. But, as we’ve suggested before, “Oversold” readings early in a larger cycle trend reversal can be more an indication of overall market negativity than of a solid buying opportunity. With potential sellers waiting to exit, as proved to be the case last Friday after the market rallied, and if we are correct, the market environment could be changing from one of buying on strength to selling on weakness. If so, regarding “Oversold” levels as positive could prove to be Fool’s Gold.

*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.