Stock market approaching critical point on intermediate cycle

Stock index, chart, technical analysis

Over the past three weeks and since the November 16 short-term lows, the S&P 500 has rallied 5.9%, the Dow Jones Industrials 5.5%, the NASDAQ Composite 7.8%, and the Value Line index 7.6%. But with strength has come near-term “Overbought” conditions equal to the “Oversold” levels going into the near-term low nearly a month ago. In addition, the S&P 500, Dow 30, and NASDAQ have all retraced the lion’s share of a “normal” 40% to 60% of the decline since the late September/early October highs (S&P--61.2%, Dow--57.6%, and NASDAQ 56.8%). Only the Value Line index has rallied beyond “normal” limits with a gain of 72.4%.

In addition, the larger Intermediate Cycle, as measured by the relationship between index pricing and the upper edges of defined 10-Week Price Channels, remains negative. Overall market volume should remain lackluster, especially over the next several weeks into the Christmas and New Years holidays. In fact, last week activity was off 7%. There has also been a notable increase in secondary issues over the past few weeks, a tendency that can occur toward market tops. After shrinking after the September/October highs both in terms of dollar amounts offered and numbers of shares sold, the secondary issues indicator has popped back to where it was at the early fall Intermediate highs with some increase in the number of companies offering issues (last at 27 vs. 16 in mid-September).

On the flip and bullish side of the coin, we’ve noticed that our reliable Daily Most Actives Advance/Decline Line (MAAD) has been outperforming the S&P since the indicator made a short-term low back on November 14, a couple of days before the broad market bottomed. Daily MAAD has also not only fractured a defined downtrend line stretching back to its March 20 longer-term resistance high with a midway point on September 14, but the indicator has recovered nearly 93% of its decline since that September 14 peak. While that action may be bullish on the near-term cycle, the indicator must better the September 14 high in the face of a lingering short-term “Overbought” condition (1.62). And there is the additional reality Daily MAAD has recovered only 49% of its decline since making a major resistance high on March 20.

Could Daily MAAD be suggesting the major indexes could rally further? Maybe, but with Weekly MAAD still under performing the market while holding below a defined and solid long-term down trend line with three points of contact in May 2011, March 2012, and September 2012, it could be that a currently “enthusiastic” Daily MAAD is merely reflecting a lively upside pop in a larger and negative Intermediate Cycle trend.

But the defining moment on the Intermediate Cycle pullback that began nearly three months ago is rapidly approaching. Either the short-term advance that began mid-November will prove to be a reflex rally within the context of an intermediate-term negative, or it will be viewed in retrospect as the beginning of yet another upleg in the bull trend that began in March 2009. Upside trigger points would come at the upper edges of 10-Week Price Channels (1449.74—S&P 500) with a long-term re-assertion of the bull move with strength to a new high in the S&P 500 back above its September 14 intraday peak at 1474.51.

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 continued to out perform S&P 500 last week with indicator recovering nearly 93% of its decline since September 14 indicator highs. But with Daily MAAD Ratio holding in “Overbought” territory (1.62) and with Weekly MAAD still looking lackluster on the upside, we wonder if strength in Daily MAAD is sustainable. In fact, with indicator still holding more than 50% below highs made last March 20, a negative divergence is now extant similar to longer-term Weekly MAAD disparity relative to early 2011 highs. Put another way, the proximity of Daily MAAD to its September highs might look bullish, but if the indicator remains unable to overcome that point, the old “miss is as good as a mile” adage would prove correct yet again.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Daily CPFL remains in a slightly rising trend begun nearly a year ago with points of support December 19, 2011, June 25, 2012, and November 15, 2012. A downside break below that line would be long-term bearish. Militating against a continuation of the marginally positive trend is the fact that the Daily CPFL Ratio has moved back toward “Overbought” territory (1.47) even though Weekly CPFL remains “Oversold” (.52) to suggest any near-term weakness could be developing within the context of an intermediate-term negative.

There is also the fact that Weekly CPFL remains well below a major high made back in June 2007 a few months before the 2008-2009 bear market began. That negative divergence is an ongoing suggestion that while options players participated in the uptrend since March 2009, their levels of enthusiasm remain well below points reached in March 2009, let alone in earlier bull trends.

Conclusion

If the short-term rally underway since the November 16 lows (1343.35—S&P 500) is entering into an endgame, it could be viewed in retrospect as nothing but a reflex rally within the context of a larger Intermediate Cycle negative that peaked back on September 14. That’s our suspicion at this juncture.

But if there is more underlying resilience to this market than we are expecting, early bullishness from such indicators as Daily MAAD could be a sign this rally could continue higher. Thing is, however, another 30 points in the S&P 500 and the upper edge of the 10-Weekly Price Channel would be challenged and the bellwether would be well beyond the upper limit of a “normal” 40% to 60% correction, given the fact the S&P has already retraced 61.2% of its decline since that September 14 high (1474.51). Nothing but strength above that September price high will re-assert the bull market begun in March 2009.

*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.