Stock market is overbought on short term, but indicators contradict

Weekly Review: MAAD & CPFL Analysis

Of course, there is a darker side to this market. As we mentioned, all cycles based on price are “Overbought.” Admittedly, overheated levels can persist in a strong uptrend. There are other times, however, such as toward the end of a move like the Intermediate Cycle that began back on November 16 (1343.35—S&P 500) when “Overbought and vulnerable” means precisely what it says.

Market Overview – What We Think:

  • Fact that all cycles remain positive with some indicator corrective action back toward “Neutral” in Daily MAAD, CPFL, and short-term Momentum is a good sign. But opposite fact that market is also “Overbought” based on pricing in all cycles is a contradiction of positives.
  • There is also our VIX-based volatility indicator that continues to suggest that at least some near-term corrective action could follow. Offsetting that is truth that indicator on larger Intermediate Cycle has moved back into positive territory after taking on more negative tone from May highs to June lows.
  • Ultimately, how pricing plays out relative to defined 10-Day and 10-Week Price Channels should help to clarify whether or not indicator negativity is prescient or premature.
  • History suggests developing “Neutral” readings in defined uptrends can provide launching pad for yet another round of buying. Thing is, such neutrality is only evident in some of our indicators and not pricing.

There is also that nagging divergence in Cumulative Volume (CV) that has plagued the S&P, S&P Emini, and the Dow 30 since those June lows. None of the three has been able to attract enough up volume to cause CV to make new highs with pricing. CV in the cash S&P is not far from making a new high, but with bids in the bellwether trading at new highs for the better part of the last month, the failure of CV in the S&P is all the more glaring. There’s also the failure of the S&P Emini that broke sharply lower via CV into the June 24 lows and to equivalent S&P price levels not seen since last January when cash was trading near 1400. Since June S&P Emini CV has only recovered about 50% of its May to June losses and continues to suggest the S&P 500 ought to be trading a lot closer to 1560 than 1700. CV in the Dow 30 is about in line with the cash S&P.

Daily S & P 500 with Cumulative Volume (CV)

Weekly S & P 500 with Cumulative Volume (CV)

On that CV front, there is the fact that those negative CV divergences are the first to occur since the Intermediate Cycle began back in November. In the wake of that advance, each time a short-term pullback developed and the intermediate-term advance resumed, CV made new highs for the move with prices. That has not been the case since the June 24 lows.

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