Stock market churns through week as momentum falters

Market Overview – What We Think:

• Minor Cycle continues to look vulnerable while losing upside Momentum, a fact that could soon result in downside break of trailing 10-Day Price Channel in S&P 500 and reversal of short-term uptrend begun after December 28 price lows.
• In addition, we suspect marker ascent is unsustainable in face of “Overbought” conditions and Momentum that could turn negative on Minor Cycle with relative ease.
• In spite of bullish price bias since November lows, uptrend initiated in March 2009 is mature. In fact, upside “measured move” targets calculated on variety of cycles suggest S&P, Dow 30, NASDAQ, and VAY could be within range of making long-term highs.
• So long as pricing and indicators are not in synch on upside as they were from March 2009 until May 2011, lingering doubts will persist about long-term viability of uptrend and we will continue to wonder how much longer this market will be able to shake off unfavorable indicator divergences.

Similar logic can be applied to the stock market. Prices have been in an intermediate-term uptrend since the lows made last November 16. Following a short-term pullback, index prices have been moving higher since a short-term low within the context of that intermediate positive since December 28. Those two favorable uptrends operating within the framework of a still positive Major Cycle advance begun after March 2009 are the “sunny day” part of the equation.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

But on the cloudy end, and as we’ve pointed out often and persistently for months, NONE of our key indicators has confirmed market strength to the same extent as have index prices. Momentum on all cycles including Minor, Intermediate, and Major has not underscored new short to intermediate-term highs made over the past several weeks. Our Call/Put Dollar Value Flow Line (CPFL) has been in a gradually rising uptrend since December 2011, but has yet to better resistance created at the ending of February 2011 and just prior to the spring 2011 index price highs. Our Most Actives Advance/Decline Line (MAAD) on the Weekly Cycle recently broke above resistance made in March and September 2012, but like CPFL has yet to move above resistance made in 2011. While the indicator has moved back to and “tapped” a long-term downtrend line stretching back to the pre-2000 bull market price highs, it is still nowhere near its 2007 peak to suggest that MAAD strength since the March 2009 lows has been less enthusiastic than during previous uptrends.

There is also the fact that with the overall decline in market volume over the past decade, Cumulative Volume has also deteriorated. While index pricing has created new short to intermediate-term highs in the S&P 500, Dow Jones Industrials, and the NASDAQ Composite, CV has not confirmed that movement to the same extent in any index.

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

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

Because it will be the short-term trend that will turn lower first when this market does ultimately roll over, we continue to closely monitor the Minor Cycle. One thing that is especially noticeable is that short-term Momentum peaked back on January 17 and has yet to revisit the same upside extremes. Since Momentum can peak out about one-half way through an extant move, a short-term peak on the Minor Cycle soon would be timely. There is also the fact that short-term Momentum could turn negative with relative ease since it is so close to “Neutral” (or zero) levels in ALL of the major indexes. This latter tendency has also been underscore lately with movement by the Daily MAAD Ratio back toward “Neutral” and could quickly flip to negative.

The market on the short-term trend is also historically “Overbought.” While such levels can persist, the time comes when such readings carry weight, especially if intermediate and major cycle readings are also “Overbought” as they are currently.

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.

Overall, we view our current analytical role as little changed compared to other market cycles. The indicators we follow are suggesting this market lacks the underpinnings for the sustenance of remarkably higher prices from here on simply because the lion’s share of the market gains from March 2009 through early May 2011 probably cannot be replicated either in terms of the extent of the gains or the statistical underpinnings to keep the rally going. Investors can use our trailing protective Sell Stop exit levels on the Minor, Intermediate, and Major Cycles as presented in the table that follows.

And in answer to the question at the outset of this commentary, we feel a lot like the fisherman riding in a leaky boat who is asked, “Well, aside from that rotting, sinking vessel you’re sitting in, how’s the fishing?”

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD rallied to another short-term high last Tuesday, but has yet to overcome intermediate resistance nearly a year ago back on March 20, 2012. That upside failure means that while MAAD has been in synch with the S&P 500 since the November lows, it has not confirmed S&P gains to the extent it rallied to new short to intermediate-term highs as did the S&P 500. Put another way, while the S&P was last quoted near 1520, Weekly MAAD was closer to 1360 to suggest that Smart Money has continued to remain less enthusiastic about the uptrend that began in March 2009, let alone over the past three months.

And while Weekly MAAD plots have returned to a very long-term downtrend line begun prior to the 2000 stock market price highs, it has not overcome resistance made in the spring of 2000, nor is it anywhere near overcoming major resistance created in the fall of 2007. In a nutshell, we continue to wonder if this overall MAAD failure will be viewed in retrospect much like “A Bridge Too Far,” the failed airborne operation into Holland (The Netherlands) in September 1944 that allied commanders hoped would lead to an early end to the war in Europe.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Another new short to intermediate-term high was registered by our Call/Put Dollar Value Flow Line last week, but the indicator has yet to overcome critical long-term resistance at the spring 2011 resistance highs.

It’s true that CPFL remains positive and in a gradually rising trend initiated in December 2011, but the advance is nowhere as strong as during previous rallies, especially off of the March 2009 lows, when options buying was notably positive. The best we can say for the current rally is that it is lukewarm and it has moved higher. It has not, however, via Weekly data, overcome resistance made in September even though the daily series has made incrementally higher highs above the September resistance. As a consequence, upside confirmation between the Daily and Weekly series is mixed.

There is also the overriding tone of options buying that has been noticeably absent for the better part of the past two years. That failure suggests to us that call buyers are far from enthusiastic about this market’s long-term prospects while put buyers are only too willing to step in when prices are falling. That combination does not make for a long-term bullish outlook.

Conclusion

Major index prices were mixed last week with all holding within range of even. The Value Line index eked out a new long-term closing high, but that gain was by point 64%. Movement on a weekly net basis in the S&P 500, Dow 30, and NASDAQ Composite barely registered on the price seismometer. Except for those traders adventurous enough for intraday trading, the week was a sleeper.

In other words, the failure of prices to continue powering higher has left a problem with short-term Momentum that could turn negative in a blink. And a little selling in the face of a historically “Overbought” Minor Cycle could soon set up a threat to the next larger Intermediate Cycle that is “Overbought,” and then the Major Cycle that is also “Overbought. Did we also mention that NONE, that’s NONE, of our key indicators has confirmed any of the strength in the major indexes, except marginally and NONE to new highs, since the spring of 2011. So, to use a metaphor or two, we continue to feel as if we are watching an exhausted Sisyphus jockeying for position under the wobbling Sword of Damocles.

*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.