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

Stock index, chart, technical analysis

Over the past two weeks and since its November 16 intraday low at 1343.35, the S&P 500 has recovered just over 50% of its losses since peaking on the Intermediate Cycle back on September 14 (1474.51). Given the fact it took nearly two months to get to that November low, recovery has been relatively rapid. But with strength, short-term market stats have moved upward from deeply “Oversold” conditions toward “Overbought” levels.

Accompanying all of this, trading volume has remained below normal.

So, if the market is engaged in a low volume retracement rally within the context of a lingering Intermediate Cycle negative, we would look for a “normal” bounce of from 40% to 60% before the larger cycle kicks in on the downside again. Such a reflex rally would put the S&P anywhere from 1395 to 1422. With Friday’s close in the bellwether at 1416, “normal” is suggesting that a near-term top could soon develop.

That’s unless there’s more power to this short-term rally than we expect. Then we would have to look toward the upper edge of the 10-Week Price Channel at 1453.21 (good through December 7) in the S&P, a point that would be equal to an 84% recovery of losses since mid-September. If the bulls still have it, strength back above the mid-September S&P at 1474.51 would then underscore a resumption of the long-term advance begun in March 2009.

And admittedly there are some points in favor of the bullish cause. First, selling since mid-September forced prices lower toward the uptrend line in effect for the better part of the past four years. Through this coming week that line will be plotted just below 1330. A resumption of selling and a new short-term low would not only position the S&P to re-assert its intermediate-term downtrend, but would also seriously threaten the increasingly mature bull trend.

There’s also the fact that readings on the larger Intermediate Cycle are now holding in “Neutral” to marginally “Oversold” territory in our more conventional indicators while reflecting “Oversold” conditions in the MAAD Weekly Ratio (.80) and in the CPFL Weekly Ratio (.51). Admittedly, however, “Oversold” in a new intermediate trend, just as was the case with the most recent Minor Cycle negative, can stay “Oversold” for an extended period of time. In other words, if the short-term trend flips back to negative and Intermediate Cycle selling resumes, currently “Oversold” intermediate conditions will only get MORE “Oversold.”

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. 

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.