Despite contradictions, new highs underline stock market tone

Weekly Review: MAAD & CPFL Analysis

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1709.67

+18.02

+1.07%

Dow Jones Industrials

15658.36

+99.83

+.64%

NASDAQ Composite

3689.59

+76.43

+2.11%

Value Line Arithmetic Index

3984.06

+64.64

+1.65%

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

Neutrality was the operative word in the stock market last week. At least as we saw it. After fiddling around for several sessions just above the lower edges of defined 10-Day Price Channels, all of the major indexes powered higher to their best levels since March 2009.

The setup into the rally was subtle. Because our Trading Oscillators based on index pricing remained “Overbought” prior to strength, the obvious conclusion was that the market was still overheated on the upside and vulnerable to a near-term correction. That’s where the nuances of some of our other indicators crept in. The Daily Most Actives Advance/Decline Ratio (MAAD), the Daily Call/Put Dollar Value Flow Line Ratio (CPFL), and short-term Momentum had all corrected back to “Neutral” levels. That action negated the “Overbought” conditions based on price and posited clues that the Minor Cycle rally begun back on June 24 might not be over. And that the Intermediate Cycle rally begun November 16 might still have some legs left. That was, indeed, the case.

Market Overview – What We Know:

  • New highs and best levels since March 2009 were created by major indexes last week. Biggest gainer was NASDAQ Composite, up 2.11%.
  • Market volume rose 4.2%.
  • 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 (1682.34 through Monday). Intermediate Cycle must decline below lower edge of 10-Week Price Channel (1598.94 through August 9) 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. But that condition can persist.
  • Daily MAAD rallied to new high above July 11 high last week, and has put in place no negative divergence. Indicator remains above intermediate-term uptrend line stretching back to last November’s lows. Daily and Weekly MAAD Ratios were marginally overheated at 1.20 and 1.38.
  • Daily CPFL was negative by 1.05 to 1 last week and remains below resistance high made June 11. Daily CPFL Ratio was slightly “Oversold” at .83 with Weekly Ratio toward “Neutral” at 1.02.
  • Cumulative Volume (CV) made new high in S&P 500 last week with pricing, but continues to fail in S&P 500 Emini and Dow30.

What will become an increasing issue if more new highs follow is complacency. That is always the issue into the top of a bull move and will probably be no exception this time around either. With many unsophisticated public investors continuing to enter the market because they finally feel comfortable enough to “take the plunge,” we think it’s a good bet that pricing is much closer to a longer-term top than it is to another long-term buying opportunity.

Market Overview – What We Think:

  • All cycles remain positive in wake of last week’s strength by all of major indexes to new highs and best levels since March 2009. Because of that positive tone, uptrend could persist for a time.
  • While Trading Oscillators based on pricing are also “Overbought” on Minor, Intermediate, and Major Cycles, more sensitive measurements in Daily MAAD and CPFL remain toward “Neutral,” or were only marginally overheated. That positive flavor could also accrue to benefit of extant uptrends.
  • On flip side, indicators like our short-term VIX-based volatility indicator continue to suggest potential for some near-term corrective action. But that tone is offset by fact same indicator on Intermediate Cycle via Weekly data has moved back into positive territory after brief negative flurry after May highs. That bias is bullish.
  • Ultimately, how pricing plays out relative to defined 10-Day and 10-Week Price Channels will clarify whether or not indicator tonality is prescient or premature.
  • Underscoring all is fact history suggests developing “Neutral” readings in defined uptrends can provide launching pad for yet another round of buying.

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