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.”

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.