On the flip side, if prices rally to a point this side of previous highs, previous buyers waiting to “get even” sell and prevent price quotes from making new highs. Or, if new highs do evolve as, for example, in the Value Line index and the Dow 30 recently, it would appear that without any resistance left and with only slightly more buyers than sellers, the rally could continue unabated.
Unfortunately, there is another variable that must be added to our 3-D market game – human psychology. While many market players will breathe a sigh of relief if new highs are made, that is also the point at which anxiety creeps into the equation since some of the euphoria is replaced by a nagging question, “Just how high can prices go?” The simplistic answer is “until they don’t,” but the more rational explanation is that “until the anxieties of sellers overwhelm the optimism of buyers.” That latter response has always been the case, and for whatever reasons selling eventually overwhelms buying EVEN IF new highs are made. Call it the ultimate market gravity. That was the case in 1929, 1987, 2000, and 2007, and it will be the case into every significant market high for as long as the stock market lasts.
Market Overview – What We Think:
- While resumption of buying following February 26 lows (1485.01—S&P 500) has resulted in new short to intermediate-term highs in all of major indexes, it is also true short-term trend has moved back into “Overbought” territory.
- With Intermediate and Major Cycles “Overbought,” those cycles will once again defer to health of short-term trend as that cycle then affects larger trends. Weakness on short-term trend could put in jeopardy intermediate advance in effect since November 16.
- While Intermediate Cycle remains positive, we must regard all short-term pullbacks as merely hesitations in larger cycle advance, including major trend that has been favorable since March 2009 lows.
- But 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 bull trend and we will continue to wonder how much longer this market will be able to shake off unfavorable indicator divergences.
For some time we have pointed out that following the index price highs of May 2011 (1370-58—S&P 500), none of our key indicators including long-term Momentum, our Most Actives Advance/Decline Line (MAAD), our Call/Put Dollar Value Flow Line (CPFL), and Cumulative Volume (CV), has been able to better those 2011 indicator highs.
While admittedly we did not know that negative indicator divergences were developing until after the market declined into October 2011 and then recovered and finally made new highs in March 2012, the simple fact is that unless an investor was holding longs from purchases made off of the March 2009 lows, or sometime prior to May 2011, or bought into the October 2011 bottom, the S&P buyer since May 2011 has achieved a capital gain of just 13%.
Daily S & P 500 with Cumulative Volume (CV)
Weekly S & P 500 with Cumulative Volume (CV)