Stock market is overbought on short term, but indicators contradict

Weekly Review: MAAD & CPFL Analysis


Market Snapshot:


Week Chg

Week %Chg

S&P 500 Index




Dow Jones Industrials




NASDAQ Composite




Value Line Arithmetic Index




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.

After a week of toying with the short-term uptrend that began back on June 24 (1560.33—S&P 500), the major indexes closed within range of even. The Dow Jones Industrial Average and the NASDAQ Composite were up a bit, but those slight gains were offset by small losses in the S&P 500 and the Value Line index. All remain below recent new highs (1698.78—S&P) made July 23. Also, it wouldn’t take much buying to propel all indexes to new highs for the move begun in March 2009 (666.79—S&P 500). The same could be said for our Daily Most Actives Advance/Decline Line (MAAD) that was last only inches below a peak made on July 11 at its high.

Underscoring the potential for higher prices is the fact that all cycles remain positive (Minor, Intermediate, and Major) and, despite relatively lackluster price action over the past several days, short-term Momentum and the Daily MAAD Ratio have corrected from “Overbought” conditions back toward “Neutral” levels. Since neutrality in an uptrend can presage more buying, it’s possible that what we are witnessing is a period like that which developed from mid-February to late April 2010 during which the S&P rallied nearly 16% from 1048 to 1616. Then, near-term “Overbought” conditions proved to be deceptive. Or perhaps like the move from mid-March to early May 2011 when the S&P rallied 5% from about 1300 to 1370.

Market Overview – What We Know:

  • Major indexes closed mixed last week. Dow 30 and NASDAQ Composite were a bit higher while S&P 500 and Value Line index were slightly lower.
  • Market volume rose a little over 3%.
  • All cycles (Minor, Intermediate and Major) remain positive. To turn short-term trend negative, S&P 500 must sell below lower edge of 10-Day Price Channel (1677.77 through Monday). Intermediate Cycle must decline below lower edge of 10-Week Price Channel (1597.77 through August 2) 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. Indicator operates inversely from pricing and is suggesting a short-term negative divergence.
  • Daily MAAD flirted with July 11 high last week, but was unable to better point that was highest level since March 2009. But indicator remains above intermediate-term uptrend line stretching back to last November’s price and indicator lows. Daily and Weekly MAAD Ratios were toward “Neutral” at 1.12 and 1.14.
  • Daily CPFL was net higher last week, but remains below resistance high made June 11. Daily CPFL Ratio was marginally “Overbought” at 1.35 with Weekly Ratio toward “Neutral” at 1.05.
  • Cumulative Volume in S&P 500, S&P Emini, and Dow 30 has continued to underperform pricing since June 24 short-term lows.

Point is, lacking decision on the downside with selling below the lower edges of 10-Day price channels (1677.77—S&P 500 through Monday), we cannot rule out higher prices. In fact, if it turns out the long-term move since March 2009 traces out some degree of chart symmetry in the weeks to come, a target toward 1780 in the S&P could be possible.

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