S&P recoups 50% of losses since September, but overbought in near term

From the bearish point-of-view, there is one thing that noticeably militates against substantially more buying in the sessions just ahead – low volume. Not only did overall market activity diminish just before and into the Thanksgiving holiday, but it has yet to fully recover to more normal levels. And given the fact the market is just a few weeks away from the Christmas and New Year’s holidays, it’s a good bet market activity will be challenged into the end of the year. Since it takes serious volume to drive prices higher in a bull trend, we wonder how bids can be sustained on the upside if volume remains below par and the Intermediate Cycle remains negative. Simply put, nothing but a reversal of the intermediate trend to positive would suffice to underscore the bullish cause.

We have pointed out how, since the spring of 2011, none of our key indicators has confirmed any of the market’s strength. MAAD, CPFL, Momentum, and Cumulative Volume have all failed to better their 2011 indicator highs. During that period the S&P rallied nearly 7.6% from 1370.58, the intraday high reached May 2, 2011, to 1474.51, the intraday high hit September 14, 2012. During the September/November decline virtually all of that advance was erased. The recent short-term rally recouped some of the loss, but net, the S&P was last up only 3.3% after nearly 19 months. Question is, is the risk worth the exposure?

In sum, from a bullish perspective, because the market remains above a long-term trend line stretching back to March 2009, because some Intermediate Cycle stats are apparently “Oversold,” and because the market has recovered more than 50% of recent losses, there is reason to think weakness since the September highs could prove to be another buying opportunity in the ongoing bull market now approaching its fourth anniversary. On the other hand, a bear might argue the lack of confirmation in the advance over the past 19 months is an indication weaker and weaker hands have been fueling higher prices.

Whichever, philosophy wins the argument in the real market, it’s a good bet that how this current short-term trend plays ought will likely have a significant impact on not only the still negative Intermediate Cycle, but also the long-term trend that hangs in the balance.

Market Overview – What We Know:

• Major indexes posted small gains in bluer chip indexes with more modest strength in secondary issues last week.
• Market volume increased over previous week’s activity by 66%, but that is because Thanksgiving week trading only consisted of 3 ½ sessions. Market is on verge of entering another lower volume holiday gauntlet.
• To suggest more negative market tone on Minor Cycle, S&P 500 must sell below lower edge of 10-Day Price Channel (1375.46 through Monday). To suggest reversal of Intermediate Cycle negative to positive, S&P 500 must rally above upper edge of 10-Week Price Channel (1453.21 through December 7).
• Strength above September 14 S&P 500 intraday high at 1474.51 would be required to re-assert Major Cycle uptrend.
• Daily MAAD has rebounded nicely since short-term low made November 14, but indicator has yet to overcome September 14 resistance high, let alone March 20 resistance. At same time, Daily MAAD Ratio has moved back to “Overbought” level (2.61) not seen for months. Weekly MAAD Ratio remains somewhat more optimistic in nearly “Oversold” territory (.80).
• CPFL was positive by 2.54 to 1 last week with Weekly CPFL Ratio “Oversold” at .50.
• On longer-term basis Cumulative Volume (CV) in both S&P 500 and S&P Emini has continued to under perform relative to S&P 500 pricing, especially since November 16 short-term low. 

Market Overview – What We Think:

• Short-term rally in market indexes since November 16 S&P intraday low (1343.35) has eliminated much of near-term “Oversold” conditions with near-term “Overbought” levels now prevailing. Extremely “Overbought” level (2.61) in Daily MAAD Ratio is a sign short-term trend could prove to be no more than reflex rally in negative Intermediate Cycle.
• Ultimately, extent to which September/October highs (1474.51—S&P 500) are seriously challenged will determine whether or not strength is merely a brief upside feint on Intermediate Cycle negative, or if it will develop into full-fledged intermediate reversal to positive. How strength develops, or not, will affect staying power of Major Cycle uptrend in effect since March 2009.
• In face of indicator non-confirmations that have prevailed since mid-2011, we continue to wonder how much longer this market will be able to shake off internal, indicator negativity.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

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

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

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.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD has recovered about three quarters of its losses since the indicator bottom on November 14, as compared to an S&P 500 rebound of just over 50%. But with Daily MAAD strength has come a short-term “Overbought” condition (2.61) not seen in many months and the fact the indicator has not surpassed mid-September resistance and is nowhere near surmounting major resistance made back on March 20.

While weekly MAAD is “bullish” to the extent the Weekly MAAD Ratio has dipped into “Oversold” territory (.80), the last deeply “Oversold” level on the Intermediate Cycle was in October 2011 when the Weekly MAAD Ratio hit .45 nearly 50% below the current “Oversold” level.

As a consequence, we suspect Daily MAAD “strength” will prove to be short-lived in nothing but a decent rebound in an otherwise negative longer-term trend. The fact, that Weekly MAAD remains in a defined downtrend and below resistance with three points of contact stretching back to May 2011 is a suggestion that while Smart Money may have engaged in some bargain-hunting over the past couple of weeks, they are nowhere near pulling out the stops on the upside as they did following the March 2009 lows.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Like the Weekly MAAD Ratio, the Weekly CPFL Ratio appears to be “Oversold” (.51). But with the Daily Ratio already moving higher toward “Overbought” (1.28), we suspect any short-term high in the broad market with subsequent selling would only push Weekly CPFL levels downward and more deeply into “Oversold.” In fact, from May 2011 and for five months into the October 2011 lows, the Weekly CPFL Ratio ranged from .84 down to .32. In other words, “Oversold” early in a trend reversal is often merely a measurement of market negativity rather than of a market opportunity.

Conclusion

If we are correct, recent near-term buying will soon top out on the Minor Cycle. Short-term “Overbought” conditions ought to be roughly coincident with a smaller cycle high that would develop within the context of a still negative Intermediate Cycle trend. Renewed selling could then drive prices back toward the November 16 S&P 500 intraday low (1343.35). Weakness below that level would not only create a new Intermediate Cycle low, but it would put renewed pressure on the Major Cycle advance via an uptrend line (last just below 1330) stretching back to the March 2009 price lows. With the lower edge of the 10-Month Price Channel in the S&P 500 evident at 1293, renewed selling could become increasingly problematic for bulls. In a word, nothing but new highs above the September 14 intraday high (1474.51) will re-assert this bull market.

*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.