Stock market range-bound with slight advantage to bears

Market Overview – What We Think:

• While last weeks modest rebound in major indexes tempered some of negativity on Minor Cycle since May 22 short-term highs, that same near-term trend remains negative, albeit modestly “Oversold.”
• Lacking strength that will ultimately carry index pricing back above May highs and potential Key Reversal Day (KRD) highs (1687.18-S&P 500), only presumption left is that May highs were also top of Intermediate Cycle uptrend begun last November 16 and that tone of market could remain negative until Intermediate Cycle slips into buying zone.
• How intermediate trend plays out will ultimately determine staying power of Major Cycle advance begun in March 2009.
• Fact sellers have continued to push prices lower after each upside attempt and that market remains “Overbought” on larger cycles is indication of larger cycle vulnerability. Market’s inability to overcome sellers could be a clue environment has begun to shift from one of buying on weakness to one of selling on strength.
• Marked increase in trading volume on downside during recent decline as reflected in Cumulative Volume suggests S&P 500, S&P 500 Emini, and Dow Jones 30 should be trading lower that current bids suggest. Last time such volume losses developed was during 2008-2009 bear market.

There are other pieces to the current near-term puzzle that are evident. Our Most Actives Advance Decline Line (MAAD) and our Call/Put Dollar Value Flow Line (CPFL) Daily Ratios are not far from “Neutral/Oversold” levels (1.25 and .68, respectively) to suggest there could still be some upward bounce in the market. Short-term Momentum in the S&P is near “Neutral” and both of our price-based Trading Oscillators are also “Neutral/Oversold.” In addition, all of the key indexes we follow managed to bounce higher after either penetrating the lower edges 10-Week Price Channels (S&P and Dow).or slightly teasing those points (NASDAQ Composite and Value Line index). That latter evidence underscores the fact statistical support came into play just before last weeks rally.

And from a purely charting point-of-view, price action in the S&P has traced out what looks like a perfect a-b-c pullback from the May 22 high. May 22 (1687.18) to June 6 (1598.23) constituted the “a” leg of the formation. The “b” leg lasted from June 6 to June 18 (1654.19). The “c” from June 18 to June 24 (1560.33) finished the move and completed selling to a downside measured move target at 1565.24.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

So has selling since May 22 been merely a pullback within the context of a still positive, but damaged, Intermediate Cycle? Or is something else developing?

First, we have referred to price action that developed on May 22 as a Key Reversal Day (KRD) – “In an uptrend, prices open above the previous day’s close, make a new high and then close below the previous day’s low.” That is precisely what happened in all of the major indexes. And since KRD days are rare, when they do develop they should not be ignored. In fact, the last such KRD occurrence was on October 11, 2007. But even though the second worst bear market in stock market history ultimately followed that signal, it took nearly three months and until January 2008 for the market to break below defined supports. Even then it wasn’t until late 2008 that the market began to break down in earnest. While we are not suggesting the recent KRD is preliminary to another bear trend of the magnitude of the decline that began nearly six years ago, we do believe the recent KRD bears serious watching to the extent it must be overpowered via new market highs to negate its potential threat.

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

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

Second, we have continued to point out over the past months how MAAD and CPFL on the long term have been unable to muster strength on the upside to the same extent they reflected strong buying in other cycles. While MAAD was able to slightly better its 2011 highs during the April/May short-term rally, the indicator is nowhere near overcoming major resistance made prior to the price highs in 2007. At the same time, CPFL has not even been able to better its 2011 highs. Net, the lack of enthusiasm by both indicators on the long-term, even though they have moved upward with index prices, is indicative of the fact Smart Money and options players have tended to view equity prices for the past couple of years in a different light than in rally phases.

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. 

Third, something that always makes us wonder about the staying power of a bull trend is developing enthusiasm on the part of the investing public that is, unfortunately, usually late to the party. There have been few exceptions to that rule over the decades of bull markets. Recently we have noticed a proliferation of stories highlighting the fact that even after a four year bull trend, some investors decided it was finally time to get into the market for fear they might “miss out.” We suspect, however, that what many of those folks might ultimately “miss” is profitability.

So, once again, the stock market is stuck in a trading range. The May 22 highs and the June 6 lows define the boundaries. While we suspect the advantage rests with the bears, nothing but definition on the downside will underscore that outlook. On the other hand, it is a certainty that nothing but buying back above those May highs will re-assert the Intermediate Cycle advance begun last November 16 and the Major Cycle bull begun in March 2009.

McCurtain Most Actives Advance/Decline Line (MAAD)

Daily MAAD improved marginally last week and indicator remains below May 21 short-term high. From a bullish perspective, the fact that Daily MAAD has not deteriorated as much as has the S&P 500 over past month and remains above an uptrend line stretching back to November lows could weigh in favor of more bullish resolution of indicator and market pricing.

On the other hand, it wouldn’t take much marker selling to push Daily MAAD below its intermediate uptrend that is several months old. There is also the fact that the larger Weekly Cycle MAAD Ratio is moderately “Overbought” and somewhat vulnerable.

Net, like the broad market, Daily MAAD remains ensconced between resistance put in place at the May highs and recent near-term supports and a defined intermediate-term uptrend that, if broken on the downside, would almost certainly signal a new bearish move on at least the Intermediate Cycle.

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL action was lackluster last week. The Daily indicator remains stuck below a new Minor Cycle high created June 11 while also holding below an intermediate-term uptrend line stretching back to the November lows that was broken by way of weakness on June 20. While the indicator is “Oversold” via the Daily CPFL Ratio, the Weekly CPFL Ratio is moderately “Overbought.”.

Underscoring all recent movement in CPFL is the fact the indicator remains below its 2011 resistance highs, despite market strength to new highs, to suggest options players, while participating on the long side since the end of 2011, have not done so to the same extent they bought Calls on a Dollar Value basis compared to Puts in the wake of the March 2009 lows.

Conclusion

The stock market, as measured by major index pricing and most of our key indicators remains stuck between near-term resistance and support. Nothing but new highs will eliminate the resistance part of the equation while weakness below supports would likely confirm a reversal of the Intermediate Cycle uptrend begun last November to negative.

If the former and more bullish scenario develops, new highs would re-assert Intermediate and the Major Cycle uptrends. But if supports are terminated and new short-term lows develop along with a new Intermediate Cycle negative, the extent to which that trend might unfold would determine the staying power of the bull market that is four-plus-years-old, a trend that is mature by all historical standards.

*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.