Market spikes higher on week without volume confirmation

Weekly Review: MAAD & CPFL Analysis

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1680.19

+48.30

+2.95%

Dow Jones Industrials

15464.30

+328.46

+2.17%

NASDAQ Composite

3600.08

+120.70

+3.47%

Value Line Arithmetic Index

3882.94

+124.00

+3.30%

Minor Cycle* (Short-term trend lasting days to a few weeks) Positive

Intermediate Cycle* (Medium trend lasting weeks to several months) Positive

Major Cycle* (Long-term trend lasting several months to years) Positive

* Cycle status is based on S&P 500.

Well… so much for that Key Reversal Day (KRD) that was formed back on May 22 in all of the major indexes. Last week decided the issue when the S&P 500, S&P Emini, NASDAQ Composite, and Value Line index all rallied to new highs. We could add in the Russell 2000 too, because it also made a new high, but that would be overkill. Quite simply, the rally was relatively broad-based. Eighteen of the 20 NYSE Most Actives were positive and our Most Actives Advance/Decline Line (MAAD) on both the Daily and the Weekly cycles rallied to the best levels since March 2009.

Market Overview – What We Know:

  • Major indexes rallied to new highs least week. Biggest gainer at 3.47% was NASDAQ Composite.
  • Trading volume compared to previous week was up nearly 44%, but that was because market was closed July 4. Compared to last five-day week ending June 28, activity was off 21%.
  • Minor Cycle in S&P 500 was last positive. Pricing must decline below lower edge of 10-Day Price Channel (1609.81 through Monday) to suggest negative reversal. Intermediate Cycle must decline below lower edge of 10-Week Price Channel (1606.93 through July 19) to reverse uptrend in effect since November 16 lows.
  • Our short-term volatility indicator based on VIX data has returned to levels of vulnerability not seen since May short-term highs. Long-term volatility indicator that turned positive in late 2011 continues to hold positive, but is threatened.
  • Daily MAAD rallied to new high and best levels since March 2009 last week. Daily and Weekly MAAD Ratios were last moderately “Overbought” at 1.50 and 1.44.
  • Daily CPFL moved higher last week, but was unable to better resistance high made on June 11. Indicator also remains below uptrend line stretching back to November. Daily and Weekly CPFL Ratios were moderately “Overbought” at 1.42 and 1.33.
  • Despite strength to new highs by S&P 500, S&P Emini, and Dow 30 last week, Cumulative Volume (CV) did not confirm new highs in any of three.

Concerns…? Market trading volume recovered nearly 44% from levels surrounding the July 4 holiday the previous week, but that was compared to one less trading session. What is more relevant is that relative to market activity for the week ending June 28, volume was down nearly 20%. Clearly, while many players have returned from vacations, many have not. But what is most troublesome about the lack of volume into last week’s new highs, is that Cumulative Volume (CV) confirmed none of those highs in the S&P 500, S&P Emini, or the Dow 30. Also, while CV did make a slightly higher new high in the NASDAQ Composite, CV strength was less than COMPX price strength on a percentage gain basis.

Market Overview – What We Think:

  • Negation of May 22 Key Reversal Day (KRD), with coincident new highs in major indexes and Most Actives Advance Decline Line (MAAD) last week simply underscored resumption of Intermediate Cycle uptrend begun last November and Major Cycle advance begun in March 2009.
  • Lack of confirming market volume as measured by our Cumulative Volume (CV) indicator in S&P 500, S&P Emini, and Dow 30 is a cause for concern, however, since that failure is the first CV negative divergence via short-term price action on Intermediate Cycle since November and on longer-term since May 2011 highs.
  • Developing negativity in our VIX-based volatility indicator is suggestion that despite market strength, seeds are being sown for at least a near-term top in sessions just ahead.
  • How short-term trend ultimately plays out relative to larger Intermediate Cycle will ultimately determine staying power of Major Cycle advance begun in March 2009.

The market is also “Overbought” on all cycles – Minor, Intermediate, and Major. Granted that those conditions can persist, as has clearly been the case on the intermediate and long-term trends, the short-term is a bit more sensitive to such readings and is clearly suggesting at least a breather might not be too far off. Underscoring that assertion is the fact our VIX-based volatility indicator has moved back into a danger zone. Volatility tends to operate inversely from pricing to the extent that when volatility diminishes, pricing becomes more vulnerable to a downside move. That potential will likely prove to be no exception this time around.

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