But there is a bright side to this market. New highs, by definition, and even though they could prove to be an upside “draw play” lacking further positive confirmation, can attract new buyers. In that is both a potential for a bearish setup and sustenance of buying.
Daily S & P 500 with Cumulative Volume (CV)
Weekly S & P 500 with Cumulative Volume (CV)
While we suggested the KRD that formed on May 22 could prove to be at least the top of an intermediate-term pullback, what ensued was a short-term correction during which the S&P 500 lost 7.5%, the Dow 30 6.7%, the NASDAQ Composite 6.3%, and the Value Line index 6.3%. When that pullback was over, it was evident marginally more selling developed in the S&P and the Dow relative to the chips that were less blue and that chart damage to the 500 and the 30 was more evident in that both broke below uptrend lines stretching back to the November 16 intermediate lows. That was not the case in either COMPX or VAY, both of which merely teased intermediate uptrend lines on the downside before bottoming and then heading higher. It is also true that none of the key indexes closed below the lower edges of 10-Week Price Channels to confirm a more negative market tone.
There was also the fact that Daily MAAD did not sink below its intermediate uptrend line stretching back to November while the indicator dipped into “Oversold” territory early in the short-term pullback after the May highs. In addition, as the market began to rebound off of the June 24 lows, Daily MAAD broke above its short-term downtrend about a week before S&P pricing. It then rallied to a new high and its best level since March 2009 with a new high on July 9.
Daily S & P 500 Emini Futures contract with Cumulative Volume (CV)
Weekly S & P 500 Emini Futures contract with Cumulative Volume (CV)
That action in MAAD, and we alluded to it in our commentaries recently, suggested that first, Smart Money was not selling as much during the short-term negative as during previous periods, and second, they were buying on-balance into the recent lows. In the wake of strength, the Daily and Weekly MAAD Ratios are only moderately overheated at 1.50 and 1.44, respectively. Net, as far as this indicator is concerned, the rally begun last November remains intact. And while we may have misgivings about the nature of the move since June 24, there is no denying that not only did MAAD action predict and pre-date it, but it has yet to set up any series of negative divergences to suggest Smart Money is looking negatively at this market, except to the extent Smart Money has not been buying long-term since March 2009 to the same degree they bought into the 1982, 1994, and 2003 lows.