Bulls have thin upside edge in stock market

Stock index, chart, technical analysis

The balancing act in the stock market continues. A few more buyers than sellers and the market goes up. It’s just like politics where a candidate only needs a little more than 50% of the electorate and he wins. From our point of view, we must attempt to gauge the quality of the “votes” coming into the market.

On the plus side of the ledger last week, the Value Line index rallied to a new all-time closing high of 3163.21 to better its previous closing high of 3138.44 made in the spring of 2011 when all of our key indicators peaked out. That’s a gain of 24.77 points. In other words it took the Value Line nearly two years to gain .78%. Is that bullish? And is the VAY representative of the market, considering the fact the S&P 500 remains 4.3% below its 2011 highs, the Dow 4.4%, and the NASDAQ Composite 6.8%. In addition, despite that new high in the VAY, the S&P is still 9.3% below its October 2007 high and the Dow 7.1%.

But bulls will point out that despite last Thursday’s sharp evening selling in futures when the S&P lost nearly 50 points before recovering about one half of the loss, weakness did not turn the Minor Cycle in the cash S&P negative when regular trading began Friday morning. They will say, “That over night recovery is buying demand just below the market.” Yes, there’s no denying the fact the short-term trend begun back on November 16 (1343.35 S&P 500) remains intact.

Market Overview – What We Know:

• Major indexes posted marginal gains last week and Value Line Index rallied to new all-time high.
• Market volume rose 24%.
• Minor Cycle remains positive and S&P 500 must sell below lower edge of 10-Day Price Channel (1414.70 through Monday) to suggest reversal of short-term trend to negative. Intermediate Cycle remains negative until S&P 500 rallies above upper edge of 10-Week Price Channel (1430.56 through December 28).
• Strength above September 14 S&P 500 intraday high at 1474.51 would be required to re-assert Major Cycle uptrend.
• Daily MAAD bettered its September 14 intraday resistance high last Thursday, but remains well below major resistance peak reached back on March 20. Daily MAAD Ratio remains moderately “Overbought” (1.39) while Weekly MAAD Ratio remains “Neutral” at 1.06.
• CPFL was positive by 1.71 to 1 last week with Weekly CPFL Ratio “Oversold” at .64.
• Cumulative Volume (CV) in both S&P 500 and S&P Emini has continued to under perform relative to S&P 500 pricing since November 16 short-term low.

There is also the fact that our Daily Most Actives Advance/Decline Line (MAAD) broke upward and above first resistance on December 11 even though pricing in the S&P 500 has yet to follow suit by rallying above resistance at the September 14 intraday high (1474.51). But there’s a problem. Daily MAAD peaked on the Intermediate Cycle back on March 20, and despite strength since the indicator made a low on November 14, Daily MAAD has only recovered a little more than 50% of that decline. Is the advance in Daily MAAD since November 14 bullish? Yes. Is looming major resistance at the March 20 bearish? Yes.

Market Overview – What We Think:

• Minor Cycle uptrend begun after November 16 lows (1343.35—S&P 500) remains intact, despite sharp downdraft of nearly 50 points in S&P futures last Thursday evening. But near-term trend has begun to look increasingly tired.
• Strength above December 18 intraday high (1448.00—S&P 500) would re-assert short-term advance, but would not be good enough to overcome resistance at September 14 high (1474.51), point that must be overcome to re-assert Major Cycle uptrend begun in March 2009.
• As a consequence, larger issue remains relationship of Minor Cycle uptrend to still negative Intermediate Cycle and those September highs. Market is approaching point at which intermediate trend will be resolved positively or negatively. Failure on the upside would underscore notion strength since November 16 is only a countertrend rally.
• 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 negative indicator divergences.

Then there’s our Call/Put Dollar Value Flow Line (CPFL) that has been moving sharply higher over the past several sessions. Daily CPFL was positive by 6.4 to 1 last Thursday, and despite Friday’s net index losses, was up 4.7 to 1 on Friday. The indicator remains in a shallow uptrend begun a little over a year ago and is “Oversold” on the Intermediate Cycle. But the indicator has only retraced about 50% of its decline since mid-September, is “Overbought” on the Minor Cycle, and is nowhere near bettering its major resistance high put in place in February 2011, a little less than three months before the broad market peaked on the Intermediate Cycle in May 2011.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

There is also market Momentum that can peak about one-half way through a price move. Short-term Momentum in the rally that began after the November 16 lows peaked on December 5. That implies an S&P high for the rally toward 1465. The most recent high in intermediate-term Momentum was back on September 21. No target is suggested and the only information currently available is a negative divergence with price. Major Cycle Momentum peaked in March 2010. S&P pricing at that point toward 1150 suggests a possible upside target on the long-term trend toward 1550. But, in addition to the “distance” part of a measurement, there is also the time factor. Sometimes “distance” can be truncated if the “time” it takes to get to the target is labored.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rallied to its best level last Thursday since the November 14 indicator low. But selling in the broad market Friday and net negatives in MAAD inputs caused the indicator to decline slightly below an uptrend line stretching back to that mid-November bottom. There is also a Momentum problem with the Daily MAAD Ratio that peaked on November 29 as it moved into extremely “Overbought” territory. There has been no return act since then, despite higher S&P pricing. That upside failure is a suggestion the Momentum of the move in the indicator is dissipating. Since it also mirrors price Momentum in the S&P, it’s possible that December 18 intraday high in the index (1448.00) could prove to be the high for the six-week-old rally.

There is also a long-term Daily MAAD problem in that major resistance for the indicator remains back at a peak made March 20. Recent MAAD strength has recovered about 50% of that decline, but there is still a negative divergence in place. Weekly MAAD remains in a downtrend initiated in May 2011.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Options buyers have become a bit more enthusiastic over the past several sessions. On a Daily Dollar Value basis, $3.29 of Calls were purchased last week for every $1.00 of Puts. But the Daily CPFL is about in synch with S&P pricing in that the indicator like the index has recovered about 50% of its decline since the September highs. And while CPFL remains in a marginal uptrend initiated last December, it is still nowhere near overcoming major resistance put in place the week ending February 25, 2011. The CPFL Daily Ratio was last “Overbought” at 2.12 with the Weekly CPFL Ratio “Oversold” at .64.

Net, CPFL has become somewhat more bullish over the past several weeks relative to recent lows. But the issue is not so much tone as it is a solid line of resistance that has remained in place for the better part of the past two years.

Conclusion

The new high in the Value Line index last week and improvement in some of our key indicators like MAAD and CPFL have given the market a slightly more bullish outlook. But a lack of volume on the longer-term, lingering price resistance in the S&P 500, Dow 30, and NASDAQ Composite, and indicator resistance put in place in the spring of 2011 only continue to put the 4% gain in the S&P 500 since May 2011 in proper perspective, considering the fact the S&P rallied 112% from March 2009 through late April 2011. We continue to wonder if the upside risk is worth exposure on the long side.

*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.